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What You Need to Know About Borrower Defense to Repayment

August 9, 2018 Diana Ali NASPA

At the tail end of June, the Department of Education (ED) released a Notice of Proposed Rulemaking (NPRM) on borrower defense to repayment (BDR) an opened a 30-day public comment period. The proposal would reduce the amount of and increase eligibility criteria for relief available for defrauded borrowers. The call for public comment will close on August 30, 2018. This post will provide a brief history of the BDR regulations, including an initial analysis of the new proposed rule.  We strongly encourage NASPA members to engage their institutional leadership in conversations about submitting comments on the new proposed BDR rule. NASPA's policy and advocacy staff is working to review the proposed rule in its entirety and will be drafting sample text to distribute to our members next week so that they or their institutional leadership can incorporate it into their own comments.

Borrower Defense to Repayment Origins: 1994 - 1996

The BDR rule was created in 1994 as a temporary measure during the transition to the initial federal Direct Loan program. The rule was a small provision within 20 U.S. Code 1087e, Terms and Conditions of Loans, laying out that “notwithsanding any other provision of State or Federal law, the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part.” As instructed in the legislation, ED in turn released proposed rules of interpreted guidance (§685.206 (c)), explaining in the preamble that  “this proposed rule relating to borrower defenses to repayment of a loan is intended to be effective for the 1995-1996 academic year only,” and called for the creation of a negotiated rulemaking panel. The Department planned on creating more detailed regulatory guidance applicable to both the Direct Loan and the former bank-based private lending program (FFEL) in the following years, but never got back to it. The panel convened once, on April 25, 1995, and decided that the language did not need further clarification, which explains why the guidance remained broad and vague.

The Fall of Corinthian Colleges and Revival of the BDR Rule: 2015 - 2016

In 2015 the closing of predatory for-profit institution Corinthian Colleges brought the language of the BDR under question. The closure of multiple campuses required hundreds of thousands of students who had been enrolled at Corinthian at the time it closed to scramble to reconfigure their academic futures. A small group of students, known as the ‘Corinthian 15’ started a loan repayment strike. The students’ refusal to pay caught on as other students felt victim to misrepresentation of educational outcomes by their respective institutions, and former Department of Education Secretary Arnie Duncan announced shortly thereafter that ED would forgive the loans of the students affected by the closure.

The Department proposed an interpretation of the BDR rule in June 2016 (81 FR 39329) to finally amend the original 1994 Direct Loan Program rules (§685.206 (c)). The rule proposed in 2016 was designed to better ensure institutional accountability and provide comprehensive loan forgiveness pathways for borrowers on the receiving end of institutional fraud.  Following a period of negotiated rulemaking, final regulations were released in November 2016, just days before the 2016 presidential election, and were set to go into effect in July 2017.

The final regulations clarified that BDR claim eligibility included borrowers that had not yet entered the collection process, a longstanding practice that had never been fully codified. The final rule also allowed for the determination of a group claims by the Department in order to speed up loan forgiveness for borrowers experiencing institutional fraud in mass numbers, such as in the case with Corinthian Colleges. The Department created accountability measures to keep schools in check, requiring those with several consecutive years of substantial borrower default rates to provide proof of institutional financial health. To further protect students, the final regulations also limited institutions from requiring students to sign pre-dispute arbitration agreements and class action waivers upon enrollment. Finally, the rule required institutions to create school discharge and teach-out plan options in the case of sudden closure.

Both for-profit institutions and Historically Black Colleges and Universities (HBCUs) took issue with a number of components of the proposed regulations. For example, both for-profit institutions and HBCUs expressed concerns with language in the standard regarding “misrepresentation” without a precursor of “intent,” claiming that accidental misrepresentation should not open institutions to BDR claims. For-profit institutions also opposed institutional disclosure measures and automatic discharge policies. Student advocates such as The Institute of College Access and Success (TICAS) expressed overall support for the regulations.

BDR Under the Trump Administration: 2016 - Present

While the regulations were set to go into effect in July 2017, early actions by the Trump administration halted them from implementation. The Department first staved off implementation of the rules until July 2018, and then halted them from taking effect indefinitely. Secretary of Education Betsy DeVos sent the rules back to the drawing board, reconvening the negotiated rulemaking process in late 2017. Negotiators convened in late 2017 and early 2018 but were unable to reach consensus on a new rule, shifting the onus back on ED to release a proposed rule.  

At the end of July 2018, the Department released a Notice of Proposed Rulemaking (NPRM) and corresponding call for public comments on a final BDR rule. After reviewing the proposal, NASPA policy and advocacy staff believes that it would reduce the amount of relief availability for borrowers overall, making it difficult, if not impossible, for borrowers to be awarded relief under the newly proposed rule. The rule considers changing the evidentiary standard used to evaluate discharge claims and proposes that individual claimants prove an institution’s intent to mislead to be eligible for relief while at the same time barring group or class action claims. Schools that provide a teach-out plan for students would be exempt from claims, with little mechanism to evaluate the quality or usefulness of the teach-out plan in assisting students to complete their educations. By couching the language as a requirement that such statements be made in “plain language,” the rule also re-introduces mandatory arbitration clauses for institutions. Finally, the NPRM requests public input on whether only students who are engaged in collection activities, for example wage garnishment or default, (defensive claims) should be eligible for discharge.

A side-by-side comparison document to the 2016 rule developed by TICAS and The Century Foundation, cites that the 2016 rule would provide an estimated $15 billion in relief to students while the new rule would reduce loan forgiveness by $13 billion. Many higher education and student advocates have expressed deep concerns with the proposed regulations, including but not limited to: TICAS, New America, Higher Ed Not Debt, California Attorney General Xavier Becerra, and a number of veterans groups.

Inside Higher Ed reported that even Steve Gunderson, president and CEO of Career Education Colleges and Universities and the chief lobbyist for for-profit institutions in the United States, suggested that the proposal swung too far in the opposite direction of student protections. Along these lines, American Enterprise Institute Education Research Analyst, Preston Cooper, noted reservations regarding proposed limitations to claim eligibility.    

Call to Action: Responding to the NPRM

If the rule is implemented as it has been proposed it would create significant negative impacts for defrauded borrowers and may create unintended consequences that would increase borrower default. While we know most NASPA member institutions are unlikely to be subject to the rule directly, many of these defrauded students will seek to complete their educations at our institutions, and their financial well-being and success will become our concern. As stated previously, we strongly encourage our members to engage with their institutional leadership to submit comments on the proposed BDR rule. We will circulate draft language for our members to consider for inclusion in their own or their institutional comments by mid-August. In the meantime, please review our tips for submitting effective comments or to reach out to NASPA Director of Policy and Advocacy Teri Lyn Hinds at [email protected] with any questions.