Tuesday, July 19, 2022
U.S. Department of Education Proposes New Regulations on Borrower Defense to Repayment and Other Loan Provisions
On July 13, 2022, the U.S. Department of Education (“ED”) published a Notice of Proposed Rulemaking (“NPRM”) in the Federal Register announcing proposed regulations regarding federal student loans. This publication followed an earlier release of an unofficial draft of the NPRM, along with a press release from ED and a fact sheet summarizing the key points of the NPRM.
The NPRM is open for public comments for 30 days, with comments due no later than August 12, 2022. Republican leaders in Congress have asked the Secretary of Education to extend the comment period for at least 30 additional days, but it is not known as of this writing whether the Secretary will agree to this request. Comments must be submitted through the federal regulations.gov portal here.
The NPRM once again revises the Borrower Defense to Repayment (“BDR”) regulations, which currently comprise three different sets of rules and have been the subject of a fair amount of regulatory tussling extending across three consecutive Administrations. The BDR regulations address the right of borrowers to seek relief of any obligation to repay their federal student loans if they were subject to substantial misrepresentation or other alleged misconduct by their institution and for ED to seek recoupment of the cost of discharged loans following approved BDR claims from institutions. The proposed regulations standardize and streamline the various current rules into a single set of new regulations that would apply to all BDR claims pending on or filed after July 1, 2023.
The NPRM also reintroduces rules that would prohibit institutions from requiring students to agree to mandatory pre-dispute arbitration agreements or class-action waivers or to complete internal dispute resolution processes before filing BDR-related complaints with accrediting agencies or government regulators. In addition, it revises regulations addressing other federal student loan issues such as closed school discharges, total and permanent disability discharges, false certification discharges, the Public Service Loan Forgiveness program, and interest capitalization.
Borrower Defense to Repayment
The first set of basic BDR regulations became effective in 1995. In 2016, the Obama Administration adopted new rules that significantly expanded the rights of borrowers to seek discharge of their loans on the basis of alleged bad acts by their institutions. These new rules, which replaced but did not rescind the 1995 regulations, were supposed to take effect for all new federal student loans made on or after July 1, 2017.
The new regulations, however, were challenged in court, and the newly elected Trump Administration subsequently issued several decisions delaying their effective date. The court eventually determined that the delay was improper, and the 2017 BDR regulations became effective in October 2018.
In the meantime, the Trump Administration initiated a new rulemaking process to amend the BDR regulations. It ultimately adopted new BDR regulations in 2019 that became effective for all federal student loans made on or after July 1, 2020.
Thus, there are three different sets of BDR regulations in effect today that apply based on when the borrower’s federal student loan was first disbursed. The NPRM proposes to establish a single set of regulations and procedures that would apply to all BDR claims pending on or made on or after July 1, 2023, no matter when the underlying loan was disbursed.
The NPRM proposal to a large degree resembles the 2016 Obama Administration rule, including eliminating the statute of limitations for filing a claim, but it also makes some significant changes. For example, it establishes an expanded set of five categories of alleged misconduct by an institution that could form the basis of a BDR claim:
- Substantial misrepresentation
- Substantial omissions of fact
- Breaches of contracts with students, such as an enrollment agreement
- Aggressive and deceptive recruiting
- State or Federal judgments or final ED actions, such as Final Program Review Determinations and Final Audit Determinations, that make findings related to BDR issues
The proposed rule defines a misrepresentation or omission of fact as substantial if it is one on which a borrower reasonably relied or reasonably could be expected to rely to the borrower’s detriment. Detailed examples of misrepresentation and omissions of fact are provided in proposed §§ 668.72-668.75. ED notes that it will presume that a borrower reasonably relied on the misrepresentation or omission when considering BDR claims.
The proposal also defines aggressive and deceptive recruiting, which can be engaged in by the institution, any of its representatives, and any individuals or entities with which the institution has an agreement to provide educational, marketing, advertising, lead generation, recruitment, or admissions services. Examples of aggressive and deceptive recruiting include:
- Demanding or pressuring an applicant or student to make enrollment or loan decisions immediately, including on the first day of contact with the institution.
- Falsely claiming that enrollment opportunities are limited.
- Taking advantage of an applicant’s or student’s lack of knowledge about postsecondary institutions, postsecondary programs or financial aid to pressure the applicant to enroll or take out a loan.
- Discouraging a student or applicant from consulting an advisor, family member or friend prior to making enrollment or borrowing decisions.
- Failing to provide cost and financing information requested by an applicant.
- Obtaining an applicant’s contact information through improper means, such as falsely appearing to provide government benefits, falsely advertising employment opportunities, or presenting false rankings about the institution or its programs.
- Using threatening or abusive language toward the applicant.
- Repeatedly contacting an applicant who has requested not to be contacted any further.
The NPRM reestablishes a process for consideration of group claims, which was removed in the 2019 amendments. A group claim process can be undertaken by the Secretary based on relevant information known to the Secretary or in response to a documented request from a State Attorney General or state authorizing or approving agency alleging institutional conduct that would support BDR claims.
ED reviews BDR claims on a “preponderance of the evidence,” or “more likely than not,” standard. If ED denies a BDR claim, the proposed regulations provide the borrower with an opportunity to seek reconsideration, including on the basis of an applicable state-law standard rather than the federal standard. Notably, there is no opportunity for an institution to seek reconsideration of an approved BDR claim.
The NPRM imposes adjudication timelines applicable to ED’s consideration. Group claims initiated at a state’s request will be adjudicated within two years, and individual claims will be adjudicated within three years. The adjudication period for group claims initiated by the Secretary is not clear. Loans covered by claims that ED does not adjudicate within the established timelines are unenforceable.
Loans applicable to an approved BDR claim will be discharged. The NPRM provides a presumption that the borrower is eligible for full rather than partial discharge, but ED may rebut the presumption based on facts and circumstances. The NPRM also specifies that ED may seek recoupment of discharged loan amounts from the institution, generally within six years after the borrower’s last date of attendance at the institution.
Arbitration and Class-Action Waivers
The NPRM reimposes prohibitions on requiring borrowers to agree to mandatory pre-dispute arbitration agreements or class-action waivers that were first introduced in the 2016 amendments and removed in the 2019 amendments. These prohibitions apply to any aspect of a BDR claim, which covers most student interactions with an institution. Institutions will be required to include specific language in their enrollment agreements and other documents that discuss pre-dispute arbitration agreements or class-action waivers advising that these provisions are unenforceable with regard to BDR claims.
Institutions also will be required to submit to ED all relevant records regarding arbitration and judicial proceedings in connection with any BDR claim. The NPRM obligates ED to publish these records in a central database accessible to the public.
Closed School Discharge
The NPRM amends the closed school discharge provisions in several significant ways. A borrower may seek discharge of all federal student loans related to enrollment at a school at which the borrower is unable to complete the program because the school closed. A borrower is eligible for discharge if the school closed while the borrower was enrolled or within 180 days after the borrower ceased enrollment.
The applicable definition of school includes the main campus and any branches and additional locations. The closure date is the date ED determines the school ceased to provide instruction in most of its programs.
The proposal clarifies that a borrower is eligible for closed school discharge if the borrower elects not to agree to a teachout plan to complete the program at the borrower’s school or to a teachout agreement with another school that was approved by the school’s accrediting agency and, if applicable, state approving agency. Any borrower who agrees to but does not complete a teachout plan or teachout agreement also is eligible for closed school discharge. The NPRM reestablishes rules allowing ED to discharge loans automatically without an application from the borrower based on information available to ED, and it eliminates the limitation that automatic discharges are available only if the borrower does not enroll in another Title IV eligible school within three years.
Total and Permanent Disability Discharge
The NPRM expands and clarifies the applicable disability statuses that will support a total and permanent disability discharge. It also eliminates the income monitoring period following an approved discharge, and it streamlines the application process by expanding the types and sources of acceptable documentation regarding the borrower’s disability status. Finally, it authorizes ED to approve a discharge automatically without application from the borrower based on information available to ED from the Department of Veterans Affairs or the Social Security Administration.
False Certification Discharge
Borrowers today may seek discharge of their federal student loans if their school falsely certified their eligibility for the loans. ED proposes to streamline the discharge process by removing distinctions based on loan disbursement date and expanding the types of documentation that would support the application. The NPRM also adds a provision authorizing ED to accept an application for group discharge submitted by a State Attorney General or a nonprofit legal services representative.
Public Service Loan Forgiveness Program
Current law allows a borrower to seek forgiveness of the remaining balance of the borrower’s federal student loans after the borrower has made 10 years of payments while working full-time in a public service job. The NPRM proposes to relax several provisions governing this program, including expanding the types of employment that would satisfy the public service requirement and what is meant by full-time employment. These changes are intended to address ED’s belief that current regulations are “too restrictive,” causing too many borrowers not to receive benefits that the law intended to provide.
The Higher Education Act gives ED the authority, but not the obligation, to capitalize interest in various situations, such as when a borrower enters repayment following a deferment or forbearance or when a borrower defaults. ED proposes to eliminate capitalization in all circumstances except where it is required by statute.
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