Monday, November 21, 2022
U.S. Department of Education Publishes New Regulations on Borrower Defense to Repayment, Pre-Dispute Arbitration and Class Action Waivers, and Loan Discharge and Forgiveness Programs
On November 1, 2022, the U.S. Department of Education (“ED”) announced the issuance of new and amended Final Regulations (“Regulations”) regarding a host of student loan topics, including borrower defense to repayment, pre-dispute arbitration and class action waivers, closed school discharges, total and permanent disability discharges, false certification discharges, and public service loan forgiveness. ED issued a press release stating that the Regulations represent “a monumental step forward in the Biden-Harris team’s efforts to fix a broken student loan system and build one that’s simpler, fairer, and more accountable to borrowers.” ED also provided a Fact Sheet that summarizes the key provisions of the Regulations. These new Regulations are effective as of July 1, 2023, and they apply to all eligible institutions.
All references herein to a specific regulatory section are to the new and revised Regulations in Title 34 of the Code of Federal Regulations unless otherwise specified.
Borrower Defense to Repayment
The Regulations addressing borrower defenses to repayment (“BDR”) are the latest development in a subject with a convoluted history. The first BDR regulations were adopted in 1994 and provide a defense to repayment of federal loans on the basis of an act or omission by the borrower’s institution that would give rise to a cause of action under applicable state law. The 1994 regulations currently apply to all federal student loans disbursed prior to July 1, 2017.
The Obama Administration promulgated expansive new BDR regulations in 2016 that replaced the state-law borrower-defense standard with a new federal standard. Although the effective date of the 2016 regulations was delayed by legal challenges and the change of administrations following the 2016 presidential election, they ultimately became effective in October 2018 and currently apply to all federal student loans disbursed on or after July 1, 2017, and prior to July 1, 2020.
The Trump Administration developed an alternative set of BDR regulations in 2019 that was based on a narrower federal standard and that included some limitations as compared to the 2016 regulations. The 2019 regulations currently apply to all federal student loans disbursed since July 1, 2020.
The new Regulations aim to streamline and simplify the regulatory framework and will apply to all borrower defense applications received by ED on and after July 1, 2023. Section 685.401(b) provides that the processes and procedures outlined in the new Regulations also will apply to all borrower defense applications pending with ED on July 1, 2023, no matter when the loan was disbursed. Importantly, however, Section 685.409 clarifies that any potential recovery from institutions for the cost of successful applications will continue to be determined under the various existing rules based on the loan disbursement date.
Bases for a Borrower Defense Claim
Section 685.401(a) defines a Borrower Defense to Repayment as “an act or omission of the school attended by the student that relates to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was provided and that cause the borrower detriment warranting relief.” The acts or omissions on which a borrower defense claim can be based are outlined in Section 685.401(b):
- A substantial misrepresentation “that misled the borrower in connection with the borrower’s decision to attend, or to continue attending, the institution or the borrower’s decision to take out a covered loan.”
- A substantial omission of fact “in connection with the borrower’s decision to attend, or to continue attending, the institution or the borrower’s decision to take out a covered loan.”
- A breach of contract in which the school “failed to perform its obligations under the terms of a contract with the student and such obligation was undertaken as consideration or in exchange for the borrower’s decision to attend, or to continue attending, the institution, for the borrower’s decision to take out a covered loan, or for funds disbursed in connection with a covered loan.”
- Aggressive and deceptive recruitment by the school “in connection with the borrower’s decision to attend, or to continue attending, the institution or the borrower’s decision to take out a covered loan.”
- Either (a) state or federal judgments based on the institution’s acts or omissions “related to the making of a covered loan, or the provision of educational services for which the loan was provided;” or (b) sanctions or other adverse actions by ED to deny an institution’s application for recertification or to revoke an institution’s provisional Program Participation Agreement as a result of acts or omissions that could give rise to any of these borrower defense claims.
Substantial misrepresentation and substantial omission are defined in current Section 668, Subpart F (§§ 668.71-668.74). These existing regulations explain that misrepresentation encompasses a broad range of false, erroneous, or misleading statements by an institution or its representatives regarding the nature of the educational program, financial charges, and the employability of graduates, including the omission of information that makes statements on these matters false, erroneous, or misleading. A substantial misrepresentation is any misrepresentation on which a person relies or could be expected to rely to that person’s detriment.
The Regulations add a new Section 668, Subpart R to define aggressive and deceptive recruitment (§§ 668.500-668.509). It describes prohibited practices directed at students or applicants, such as:
- pressuring the applicant to make immediate enrollment or borrowing decisions;
- taking advantage of the applicant’s unfamiliarity with postsecondary education or borrowing;
- discouraging the applicant from consulting family or friends about enrollment or borrowing decisions;
- obtaining the applicant’s contact information through improper means;
- using threatening or abusive language or behavior toward the applicant; or
- repeatedly contacting the applicant after the applicant has requested no further contact.
Individual and Group Claims
The Regulations permit the ED Secretary (“Secretary”) to process BDR claims for groups of students, in addition to claims by individual students. Group claims were first authorized in the 2016 BDR regulations, then eliminated in the 2019 regulations. Section 685.402(a) provides that BDR claims can be processed in groups where there are either common facts and claims by borrowers, or pervasive or widely disseminated actionable acts or omissions by an institution or a group of institutions affiliated through common ownership.
A group claim process can be initiated by the Secretary based on relevant information available to ED, or the Secretary can decide to create a group claim based on a request from a designated third party. The “third-party requestor” must be either (a) a “State requestor,” including a state attorney general, the state licensing or authorizing agency, or other state oversight or regulatory agency, or (b) a “legal assistance organization,” defined as a nonprofit organization that provides free full-time legal assistance on civil matters to low-income individuals.
If the Secretary receives a materially complete group claim application from a third-party requestor, the Secretary will notify the institution, which will have 90 days to respond to ED. The Secretary then will notify the third-party requestor and the institution within two years whether ED will open a group claim and whether it requires any additional information from the third-party requestor. If the Secretary declines to initiate a group claim process, the third-party requestor may request that the Secretary reconsider the decision based on new information not previously provided to ED.
A BDR claim by an individual borrower is initiated by the filing of a materially complete application. An application is materially complete under Section 685.403(b)(1) if the borrower provides a description of the institution’s actionable acts or omissions and the institution or representative to whom the prohibited action is attributed; an indication of when the prohibited action occurred; an explanation of how the prohibited action impacted the borrower’s decision to enroll, continue attending, or take out a loan; and a description of the detriment suffered by the borrower as a result of the acts or omissions.
Prior to adjudicating an individual or group BDR claim, ED will notify the institution, which will have 90 days to respond and to provide documentation supporting its response. If the institution fails to respond timely, ED will presume that the institution does not contest the claim.
Section 685.401(b) provides that an individual borrower’s defense to repayment is contingent upon ED’s finding “by a preponderance of the evidence that the institution committed an actionable act or omission and, as a result, the borrower suffered detriment of a nature and degree warranting the relief provided by a borrower defense to repayment.” In other words, ED must conclude that it is more likely than not that an institution took a prohibited action that caused harm to the borrower that would justify a borrower defense remedy.
ED has adopted a different standard for reviewing group claims. Under Section 685.406(b)(2), “there is a rebuttable presumption that the act or omission giving rise to the borrower defense affected each member of the group in deciding to attend, or continue attending, the institution, and that such reliance was reasonable.” This lower standard means that individual borrowers in a group claim will not be required to show reliance on or detriment as a result of an institution’s impermissible acts.
Adjudication of Claims
An ED official reviews the available evidence and information related to an individual or group BDR claim and makes a recommendation to the Secretary regarding the adjudication of the claim. The Secretary then issues a written decision on the claim.
If the BDR claim is approved, the written decision provides the determination and the relief granted. If an individual or group claim is denied, the decision describes the reasons for the denial and the evidence on which Secretary based the decision, and ED resumes collection activities on the loans. When a group claim is denied, the decision advises borrowers in the group of their right to file individual claims. If an individual claim is denied, the decision advises the borrower of the opportunity to request reconsideration under Section 685.407. Borrowers of loans that were first disbursed prior to July 1, 2017, whose initial BDR claims are denied also may seek reconsideration under a state-law standard, as provided in Section 685.401(c).
The Regulations require the Secretary to issue a decision on group claims within one year after notifying the third-party requestor of the initiation of a group claim. The Secretary must issue a decision on an individual BDR claim by July 1, 2026, or three years after the Secretary determines that the application is materially complete, whichever is later. If the Secretary fails to meet the deadline, those loans are no longer enforceable, and the institution will suffer no liability for the discharged amount.
Recovery from Institutions
The Regulations give the Secretary the discretion to seek recovery from the institution of discharged amounts on loans first disbursed on or after July 1, 2023. If the institution is closed, the Secretary could seek collection from affiliates of the closed school as described in current Section 668.174(b).
The Regulations also limit the Secretary’s ability to seek recoupment from the institution for discharged loans first disbursed prior to July 1, 2023. The Secretary will not collect discharge liabilities from the institution for these earlier loans unless the BDR claim would have been approved under the applicable 1994, 2016 or 2019 regulations, depending on the loan disbursement date.
The Secretary must initiate any recoupment proceeding within six years after the borrower’s last date of attendance at the institution. This limitation does not apply, however, if the Secretary has notified the institution of the pending BDR claim at any point prior to the end of the six-year period or if there is legal action or a state or federal investigation related to a potential BDR claim.
Prohibition on Mandatory Pre-Dispute Arbitration and Class Action Waivers
In another return to the provisions of the 2016 rules, the Regulations re-establish a prohibition on mandatory pre-dispute arbitration and class action waivers regarding any aspect of a BDR claim. Sections 685.300(e) and 685.300(f) add terms to an institution’s Program Participation Agreement confirming that the institution will not enter into mandatory pre-dispute arbitration agreements and class action waivers with students and will not enforce any such agreements or waivers entered into prior to July 1, 2023.
If an institution’s current or prior agreement with students contains a mandatory pre-dispute arbitration agreement or a class action waiver, the institution must either amend the agreement or provide students with notices advising them that these provisions are no longer enforceable with respect to any aspect of a BDR claim. Sections 685.300(e)(3) and 685.300(f)(3) provide specific language that institutions must use verbatim to make the required notices to students.
Section 685.300(h) also establishes a new reporting requirement. Beginning on July 1, 2023, institutions must notify ED about any lawsuit in connection with a BDR claim filed against a school by a student or any other party and provide ED with copies of the complaint, any counterclaim, dispositive motions and rulings thereon, and any judgment. All required records must be submitted within 30 days of filing or receipt. The Secretary will publish these records in a database available to the public.
Total and Permanent Disability Discharge
The Regulations expand the opportunity to seek the discharge of federal student loans when a borrower experiences total and permanent disability. Section 685.213 outlines the various medical certifications that can support an application for discharge and broadens the categories of conditions under which a borrower may be eligible for discharge. Section 685.213(d) authorizes the Secretary to grant a discharge without an application from the borrower on the basis of relevant information obtained from the Department of Veterans Affairs or the Social Security Administration.
Closed School Discharge
Section 685.214 revises the existing rules for the discharge of federal loans when a school closes. A borrower is eligible for a closed-school discharge if the borrower either was enrolled at the time the school closed or was enrolled at any point in the 180 days prior to the school’s closure, so long as the student did not complete the program at the school or did not complete the program at another location of the school or at a different school under an approved teachout agreement. A student seeking discharge must submit an application to ED and make the required factual assertions under penalty of perjury.
The Regulations also restore automatic closed-school discharges for eligible borrowers. Once ED determines that a borrower qualifies for an automatic discharge, the Secretary discharges the borrower’s loans one year after the school closure date without requiring an application from the borrower.
Importantly, the Regulations provide a new definition of “closure date” for the purpose of the closed-school discharge. Section 685.214(a)(2) specifies that a closed school’s closure date is the earlier of “the date, determined by the Secretary, that the school ceased to provide educational instruction in programs in which most students at the school were enrolled, or a date determined by the Secretary that reflects when the school ceased to provide educational instruction for all of its students.” “School” is the “main campus or any location or branch of the main campus, regardless of whether the school or its location or branch is considered [T]itle IV eligible.”
This subjective standard gives ED the discretion to decide when a school has “closed,” even if the school has not made that determination. ED’s Fact Sheet states that this language “addresses past practices the Department has observed, where a college may try to drag out its closure to avoid liabilities from closed school discharges.” Institutions are advised to consider carefully any plans to reduce program offerings or to significantly restructure operations given these new provisions.
False Certification Discharge
The Regulations modify the policies for the discharge of falsely certified loans. Section 685.215(a) notes that a loan is falsely certified if an institution (a) certified the eligibility of a student who reported not being a high school graduate or the equivalent, (b) falsified a student’s high school graduation status, (c) signed the borrower’s name on a loan application without the borrower’s authorization, (d) certified the eligibility of a student who was not qualified to obtain employment in the state, or (e) certified the loan eligibility of a student victim of identity theft.
Public Service Loan Forgiveness
The Regulations relax certain provisions related to the Public Service Loan Forgiveness (“PSLF”) program in order to allow more borrowers to benefit. Borrowers are deemed eligible for the PSLF program if they are employed full-time by a qualifying employer or serve full-time in AmeriCorps or the Peace Corps and have made 120 acceptable monthly payments. Qualifying monthly payments are expanded to include various late and installment payments and certain periods of deferment or forbearance. ED provided a new PSLF Fact Sheet that describes the revised PSLF program in some detail.
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