Students have always had the right to seek a discharge of federal Direct Loans they took out to attend a higher education institution if that school committed fraud. Prior regulations never established a process for doing so. State laws were uneven and complicated and often burdensome. As such, very few borrowers have ever asserted a borrower defense to repayment claim to have their loans discharged. Following the collapse of Corinthian College and the resulting large number of students that were seeking relief, the U.S. Department of Education quickly began creating a new borrower defense rule earlier this year to provide relief to borrowers as soon as possible.
The final Borrower Defense Regulations govern the William D. Ford Federal Direct Loan Program and create new standards and processes for determining when student loan borrowers can have their debt forgiven because of fraud or misrepresentation by a school. The regulations simplify the process of determining if a borrower has a defense to repayment by granting the Department the authority to investigate and adjudicate claims while making it easier for defrauded students to seek relief by providing a clear and transparent process.
Circumstances for Borrowers to Obtain Relief
- A breach of contractual promises between a school and its students;
- State or Federal court judgments against a school related to the loan or the educational services for which the loan was made; or
- A substantial misrepresentation by the school about the nature of the educational program, the nature of financial charges, or the employability of graduates.
Statutes of Limitation
The final regulations provide for extensive-look back periods and state that there are no statutes of limitation for a discharge of borrowers’ loan balances still owed, or relief based on State or Federal court judgments. The statutes of limitation for borrower claims to recover payments that have already been made on loans made on or after July 1, 2017, are six years for claims based on misrepresentation and breach of contract.
Opportunity for Group-Wide Discharges
The final regulations establish a process to make it easier for the Department to provide relief to groups of borrowers. Under the new regulations, the Secretary can identify groups of borrowers from individually filed applications or from any other source of information, and can include borrowers who may not have filed an application for relief, in the event that common facts and claims exist that apply to the group of borrowers. Where there were widespread misrepresentations, the Department may presume that borrowers relied on those misrepresentations without requiring an application.
Student and Taxpayer Protections
The final regulations establish a number of triggering and early-warning events that, if significant enough to cause a school to have a failing financial responsibility composite score, would automatically require the school to provide financial protection to the Department, such as a letter of credit (LOC), that totals at least 10 percent of the amount of Title IV funds received by the school over the previous year. The financial composite score is a measure of a school’s financial viability, with failing scores indicating that schools are at risk of shutting down because they can’t fulfill their financial obligations. The additions to the financial responsibility regulations have potential to put otherwise fiscally sound institutions in financial jeopardy. An excessive amount of automatic triggers could render an institution unable to meet its financial or administrative obligations.
Other triggers that are not tied to the school’s composite score but that indicate risk of closure includes:
- The institution fails the 90/10 non-Federal revenue requirement;
- The institution’s cohort default rate exceeds 30 percent two years in a row after appeal.
Early Warnings for Students
Institutions that are required to provide financial protection to the Department due to triggering events discussed above will have to disclose this fact to students.
Additionally, proprietary institutions will be required to include a warning in their advertising and marketing materials if their students have very poor loan repayment outcomes. These disclosure requirements could threaten enrollment, donor relationships and access to capital.
Increased Access to Closed School Discharges
Borrowers will receive accurate and complete information with regard to their eligibility for a closed school discharge earlier in the process and may receive automatic discharges if they do not subsequently re-enroll at another school. With these changes:
- The Department will send closed school discharge applications and information to borrowers a second time, when their first loan payments are due;
- Schools with teach-out plans must also provide the application for closed school discharge, as well as information on borrowers’ right to opt-out of the teach-out and instead receive a discharge; and
- Eligible borrowers who were enrolled at a school that closed on or after November 2013 and who have not re-enrolled at another school within three years of that closure will automatically have their loans discharged.
Protections against Any Pre-dispute Arbitration Agreements
The final regulations ban any pre-dispute arbitration agreements, whether voluntary or mandatory, and whether or not they contain opt-out clauses. The final rule allows students to agree to arbitration of their claims, but only after disputes arise. Schools will no longer be able to forbid class actions for borrower defense-type claims.
Under the new regulations, Gags rules have been banned. More transparency on the outcomes of arbitration is also provided by requiring schools to notify the Secretary when arbitration and judicial claims are filed, and the decisions and awards issued in arbitration and in court proceedings.
Ensuring All Federal Student Loan Borrowers Have Access to Borrower Defense Relief
The final regulations recognize Federal Family Education Loan (FFEL) and Perkins loan borrowers’ ability to receive borrower defense relief through Direct Consolidation Loans. The final regulations also ensure that borrowers with FFEL Loans will have the same access to administrative forbearance as Direct Loan borrowers while their borrower defense claim is being evaluated, and this provision is designated for early implementation on November 1, 2016
To provide loan discharge relief in instances where schools falsely certify their students’ high school diploma status, the final regulations specify that a borrower qualifies for a false certification discharge if the borrower reported to the school that the borrower did not have a high school diploma or its equivalent and did not satisfy applicable alternative to graduation from high school requirements, but the school nevertheless arranged a loan. In these situations, the borrower will qualify for a false certification discharge if the school:
- Falsified the borrower’s high school graduation status;
- Falsified the borrower’s high school diploma; or
- Referred the borrower to a third party to obtain a falsified high school diploma.
In addition, the final regulations amend the regulatory provisions granting a false certification discharge without an application to include cases in which the Department has information in its possession showing that the school has falsified the Satisfactory Academic Progress (SAP) of its students
Restoring Semesters of Pell Eligibility for Students Affected by Closed Schools
The Department is also announcing plans to restore semesters of Pell Grant eligibility for eligible students who were unable to complete their programs because their institution closed. This policy is expected to benefit several thousand students immediately, who were at or near their lifetime limit, as well as more students whose institutions might close moving forward, and those who hadn’t reached their limits but who will be able to go back to school if they choose. Congress reduced the lifetime eligibility further to 12 semesters.
Borrower Defense Claim Report
The report released today provides updated numbers on borrower defense claims received and announces the approval of more than 11,000 new claims based on the Department’s findings concerning Corinthian’s misleading job placement rates. To date, more than 15,000 claims have been approved, with a combined outstanding loan balance of $247 million.