On November 12, 2017 Tina Carr and Yvette Colon filed a lawsuit against Secretary of Education Betsy DeVos and the loan servicer Navient seeking forgiveness for student loans after finding no other available process. The lawsuit was filed a day before the start of negotiated rulemaking by the borrower-defense committee. Carr and Colon represent just two of nearly 90,000 claims to loan forgiveness that have yet to be addressed by the Trump administration. Because the borrower defense to repayment rule implemented by the Obama administration has been stalled by Secretary of Education DeVos, borrowers have been left in limbo with no viable options for protections from lenders holding loans students incurred to attend institutions which closed suddenly. The fate and future of the borrower defense to repayment rule is still unknown and, as will be discussed below, a resolution for these borrowers is likely still a long way off.
The Trump administration has been rolling back Obama-era protections for student borrowers since March, when a Dear Colleague Letter withdrew an Obama administration memo preventing high interest rates on defaulted loans. With nearly 11.2 percent of total student loan debt estimated to be more than 90 days delinquent or in default as of December 2016, the change in guidance makes borrowers vulnerable to unscrupulous servicers. An April 2017 Memo released by Secretary DeVos emphasized a commitment to federal loan borrowers, but declared that, thus far policymaking within ED “has been subjected to a myriad of moving deadlines, changing requirements and a lack of consistent objectives.” She explained that her new objective was to withdraw former guidance and move forward with “precision, timeliness, and transparency.”
In June, Secretary DeVos chose to block two Obama-era regulations addressing loan forgiveness concerns, the borrower defense to repayment and gainful employment rules. The final guidance for both rules was announced at the end of 2016 and scheduled to go into effect on July 1, 2017. To prevent them from going into effect, Secretary DeVos called for a reexamination of both rules, sending them back to the negotiated rulemaking process. By restarting the negotiated rulemaking process for both rules, a process that generally extends for several months, the release of a new rule on either borrower defense or gainful employment is a long way off. For a reminder of the rulemaking, our post “The Rulemaking Process: Differences in Federal Regulatory and Sub-Regulatory Guidance” is a great start.
The borrower defense to repayment rule offers student borrowers loan forgiveness in the case of institutional misconduct, such as in the closures of Corinthian Colleges and IIT Tech in 2015 and 2016 respectively. The gainful-employment rule was designed to hold institutions, specifically for-profit institutions, accountable for an excessive debt to earnings ratio of graduates. The new negotiated rulemaking committees for both rules began meeting in the last month. This post will provide an in-depth analysis of the borrower defense committee meeting, with another post coming in January 2018 on the gainful employment committee, which is meeting this week.
Last month, the borrower defense committee met from November 12-15. All materials from the meetings are available on the Education Department (ED) website. Committee issue papers which discuss the founding for a federal borrower defense to repayment rule beginning with an analysis of Direct Loan program regulations issued in 1994 and clarified through a Notice of Interpretation in 1995. Legal assistance organizations have released commentary on these issue papers to provide additional context from the former rule, much of which will be discussed in the following paragraphs.
Some of the questions under consideration by the committee are fleshed out below, including:
1. Whether ED should establish a federal standard for submitting and evaluating borrower defense claims. The 2016 rule created a federal standard to “allow a borrower to assert a borrower defense on the basis of a substantial misrepresentation, a breach of contract, or a favorable, nondefault contested judgement against the school.” While the current committee discussed developing a federal standard versus leaving decision-making up to the states, former negotiators also considered the option of establishing a policy floor to protect borrowers in states without robust guidelines already in place.
2. What the standard should be, and given this, what the burden of persuasion for a borrower’s claim should be. In 2016 ED determined that misrepresentation from an institution that led to excessive burden on the student should not fall under a standard interpretation of fraud, which includes a component of intent. Under this interpretation, an institution facing closure has committed fraud regardless of whether this closure was forecasted beforehand. Upon the release of the original Notice of Proposed Rulemaking (NPRM) in 2016, for-profit and technical career institutions pushed back against this reasoning. In their public commentary the association of Career Education Colleges and Universities (CECU) stated that “the rule would impose potentially fatal financial and operational penalties on institutions based only on allegations of misbehavior” putting all institutions, public, nonprofit, and for-profit, at risk. Conversely, upon announcement of the rule implementation freeze in June 2017, 18 states filed a lawsuit, ultimately turned down by a 2-to-1 decision, arguing that upholding the current law unfairly places the burden of institutional fraud on the public.
The current committee is considering the value of using the typical standard of proof required for law cases, clear and convincing, while the 2016 rule determined preponderance of evidence to be the reasonable standard, in line with typical civil proceedings.
3. Terms of relief resulting from a successful claim. Should a borrower prove merit to a loan forgiveness claim, the committee needs to determine relief eligibility of the borrower. The 2016 rule placed liability on institutions to reimburse students for the full amount lost under misrepresentation or fraud. Both the 1995 Notice of Interpretation and the 2016 borrower defense rule place responsibility on the Secretary of Education to initiate the process of recovering borrower losses from an institution. The current committee discussed whether a borrower with a successful defense claim should be eligible for a recalculation of their corresponding subsidized usage period under which they did not receive the full education benefits of past subsidized loans. The 2016 rule established that any loan discharge falling under school closure, false certification, unpaid refund, or borrower defense acted as a qualifier for a recalculation of the subsidized usage period.
In addition, the current committee discussed the process for borrowers to submit claims, the parameters of arbitration agreements, protocol in specific cases of misrepresentation such as that of a school closure, and the possible revision of existing regulation to protect defaulted borrowers. The 2016 provision through which ED interpreted arbitration agreements to largely decrease institutional transparency and shift the risk to taxpayers was met with some institutional pushback, but overall there was consensus that arbitration agreements should be only viable upon mutual party agreement. Should a new rule allow mandatory arbitration agreements, borrowers might face difficulty in pursuing avenues outside of the institution under the interpretation of misrepresentation or predatory practice. In regards to protecting defaulted borrowers, ED has generally interpreted existing regulation consistent to the, now withdrawn, 2015 Dear Colleague Letter since 1997, where it explained in the amicus brief of Bible vs United Student Aid Funds that the purpose of requiring a guarantor to alert the borrower of default was to create an opportunity for the borrower “to enter into a satisfactory repayment before the agency either reports the default to a credit bureau or assesses collection costs against a borrower.”
The borrower defense committee is scheduled to meet again from January 8-11 and February 12-15. During the times between these sessions ED will amend regulatory language based on recommendations from the committee. A new draft of the regulatory language will be made available to negotiators before each of the upcoming sessions. Assuming a consensus is reached by the end of committee meetings in February, ED will use this final regulatory language to produce its NPRM where after receiving public input, the remaining process is left in the hands of ED to receive final comments and determine a final ruling. Additional information on this process is available on ED’s website. The Policy and Advocacy Team will be tracking the committee meetings and regulation procedure on borrower defense to repayment in the coming months.