Armageddon: Borrower Defense 

A meteor becomes a meteorite when an asteroid survives its passage through the atmosphere and strikes the earth. Often this impact is unnoticeable and occasionally, well, there are big ones. Sometimes really big ones. Devastating ones. And the bigger they are, the further away you can see them coming. You’d have to be living on another planet if you didn’t see this one coming…

  The U.S. Department of Education announced final “Borrower Defense” regulations earlier this month, a windfall for thousands of borrowers affected by the closure of Corinthian colleges seeking debt relief from their federal student loans.   According to the headlines, the new rules “protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct.”

Key Provisions:

Early Implementation of Automatic Closed School Discharge

Borrowers whose school closed on or after Nov. 1, 2013, and have not re-enrolled in another Title IV participating institution within three years will automatically have their loans discharged. The Department intends to designate this provision for early implementation as soon as operationally possible before July 1, 2017. Corinthian borrowers will, therefore, benefit from this streamlined process sooner.

 Banning All Pre-dispute Arbitration Agreements

Under the final regulations, Pre-dispute Arbitration agreements have been permanently banned regardless of whether such clauses are a condition of enrollment. These provisions allow students to choose where to pursue claims against an institution after claims arise but also prohibit institutions from banning class action lawsuits by students.

Determining Borrower Defense Loan Relief

The Department will determine in a reasonable and practical way the appropriate relief for a borrower defense claim, taking into account any educational benefit received.

It doesn’t sound so bad does it? No problem helping Corinthian students, and although arbitration agreements were originally intended to save everyone a little money, they were abused. No big deal losing them. I’m even okay with the Department adjudicating borrower defense claims. But what’s contained deep within the 927 page unofficial Fed Register Notice scares me. And it should terrify you if you’re in the school biz.

Now we aren’t talking an extinction level event here, but there is no question that some institutions aren’t going to survive the impact of these new provisions.

 The regulations that scare me the most:

 Triggers for Automatic Letter of Credit of at least 10% of the institutions revenue:

    •  Include failing 90/10,
    • Cohort Default Rate greater than 30%,
    • Failing Composite Score

Borrower Defense Claims can be filed by borrowers because of:

    • Contractual Breach –failing to deliver any service students have contracted for
    • Misrepresentation – including omissions defined as “any statement that omits information in such a way as to make the statement false, erroneous, or misleading”
    • State and Federal Court judgments against a school
    • Investigations by the Department of Ed and others

Debt-Relief Process still to be determined by separate “procedural rule”:

    • No timeline specified for “procedural rule”
    • Schools are already responsible for forgiven loans
    • Expected to define “substantial misrepresentation”
    • Rule will explain how schools will be permitted to defend themselves against allegations of fraud

  As we demonstrated in our Misrepresentation & Qui Tams webinar back in September, recent court cases have set new precedents for misrepresentation. Although these new regulations have not yet fully defined misrepresentation, you can bet that these recent court cases will help to inform the coming conversation. The discussions in the preamble to the new regulations already state that borrower defense claims can be made when a school fails to deliver any number of specific obligations to students. As such, almost anything is fair game for a borrower defense claim when a school makes specific misrepresentations. Mislead students about instructor qualifications, appropriateness of equipped laboratories, facilities, financial charges, programs or the employability of your school’s graduates, or otherwise breaches its contract and you risk possible BD claims. And then there’s outcomes, licensure pass rates, Gainful Employment, Default Rates, accreditation, Title IX…the list goes on. And although the for-profit model has been the one in the spotlight, these issues touch every college campus in the country.

Schools from ranging from the local mom and pop career school to the private liberal arts colleges with online degrees should begin discussing misrepresentation their staff on campus while taking time to review current processes. 

The appearance of compliance will not be enough to survive this asteroid.