EDUCATION DEPARTMENT RELEASES BORROWER DEFENSE PROPOSED RULES

The U.S. Department of Education released a new set of proposed rules to govern the Borrower Defense to Repayment process; effectively replacing the 2016 final rules imposed by the Obama Administration. Although students have multiple options for seeking discharge of loans, for example, when a school closes before a student can complete their educational program, the Borrower Defense rules enacted in 2016 outlined a standardized procedure which put the Department at the of the adjudication process. Since 2015 more than 100,000 claims have been filed and the Department has taken over the processing borrower defense claims. From 2015 to 2016, the Department engaged in negotiated rulemaking on borrower defense. On November 1, 2016, the Department published final regulations, certain provisions of which have been delayed until July 1, 2019.

According to a summary of the “Institutional Accountability Regulations” proposed by the Department, The proposed regulations would:

  • Provide students with a balanced, directed process that relies on a single Federal standard rather than many different state standards to ensure that borrower defense to repayment discharges are handled swiftly, carefully, and fairly;
  • Encourage students – including those who pay cash or use other forms of credit to pay for college – to seek remedies directly from institutions that have committed acts or omissions that constitute misrepresentation and cause financial harm to the student;
  • Provide students with an additional 60 days (from 120 days to 180 days) to qualify for a closed school loan discharge and incentivize closing institutions to engage in an orderly teach-out process rather than suddenly shutting their doors;
  • Ensure that institutions engaged in misconduct, rather than taxpayers, bear the burden of losses from borrower defense to repayment loan discharges;
  • Enable institutions to respond to borrower defense to repayment claims and provide evidence to support their response;
  • Discourage institutions from committing fraud or other acts or omissions that constitute misrepresentation;
  • Enable the Department to properly evaluate institutional financial risks in order to protect students and taxpayers;
  • Provide students who cannot obtain an official high school transcript or diploma the opportunity to receive federal financial aid and enroll by attesting, under penalty of perjury, that they completed high school, but disallowing such a borrower from later making a false certification student loan discharge claim if the borrower misrepresented the truth in their attestation;
  • Provide time for the Department to consider engaging in negotiated rulemaking to update the Composite Score methodology to reflect changes in FASB accounting standards; and
  • Maintain a strong, responsible Federal student aid system that can continue to provide redress for students who fall victim to misrepresentations by institutions.

The Department is seeking comment on the best and most fair process to students and taxpayers for loans disbursed on or after July 1, 2019.

In this request for public comment, the Department proposes two possible options for when a borrower can submit a borrower defense claim: 1) That the Department only accept “defensive” claims in response to a collection action, similar to the process described in the 1994 regulation; or 2) at the initiation of the borrower, similar to what has transpired since 2015, accept “affirmative” in addition to “defensive” claims.  Because the implications of this determination are far-reaching for taxpayers and borrowers, the Department is seeking specific public comment on these alternatives and the conditions that would apply in each case, including elements of adjudication, such as the evidentiary standard and time limitations on a borrower to submit a borrower defense.

The department has published the proposed rules in the federal register and public comment is open for 30 days until September 1, less than the usual 60-90 day comment period. Final regulations will be published by November 1, 2018 and will likely take effect on July 1, 2019.

You can read the full summary of the Institutional Accountability Regulations here.