U.S. Department of Education Proposes Revised Regulations on Borrower Defense and Other Student Loan Discharge Matters

On July 13, 2022, the U.S. Department of Education (the Department) published in the Federal Register a Notice of Proposed Rulemaking (the Proposed Rule) to revise its regulations governing student loan discharge standards and processes, including but not limited to its borrower defense to repayment (BDR) regulations. The Proposed Rule covers topics that were addressed by the Department’s “Affordability and Student Loans” negotiated rulemaking committee, conducted by the Department in late 2021. Where that negotiated rulemaking committee reached consensus on an issue, the Proposed Rule generally reflects the language approved by the committee. Otherwise, the Proposed Rule constitutes new regulatory text on which the public, including any stakeholder groups that participated in the negotiated rulemaking, may comment. Comments to the Proposed Rule must be submitted by August 12, 2022. Final regulations on the topics covered by the Proposed Rule must be published in the Federal Register on or before November 1, 2022, in order to take legal effect on July 1, 2023. 

The matters set forth by the Proposed Rule apply to all higher education institutions that participate in the federal student financial aid programs under Title IV of the Higher Education Act, whether public, private nonprofit or proprietary. This alert summarizes the key provisions of this Proposed Rule.

Borrower Defense to Repayment

Under the Department’s BDR regulations, a federal student loan borrower may seek relief from loan repayment obligations based on certain acts of omissions of the postsecondary institution attended by the borrower and for which the borrower incurred the loan. These regulations, originally promulgated in 1994, were previously revised in both 2016 and 2019..

The Proposed Rule again revises the standards for BDR claims and would establish five types of institutional conduct that may form the basis of a BDR claim. Specifically, a borrower’s claim could be based upon: 

• A substantial misrepresentation;
• A substantial omission of fact;
• Breach of contract for educational services;
• Aggressive or deceptive recruitment; or
• Federal or State judgment, or adverse Departmental action, against an institution, which itself gives rise to a BDR claim.

While certain of these standards exist under the prior BDR regulations, the Proposed Rule would expand the existing definition of misrepresentation, provide an additional basis for a borrower defense claim based on aggressive and deceptive recruitment practices, and allow claims based on State law standards.

With respect to “substantial misrepresentation,” the Proposed Rule would adopt a presumption that a borrower reasonably relied on alleged misrepresentations when deciding to enroll and to incur the federal student loan debt. This is a significant change from existing regulation, which requires a borrower to demonstrate reasonable reliance, to their detriment, as part of the BDR claim adjudication process. Similarly, the Proposed Rule also adds “substantial” omissions of fact — without any requirement that the omission made some other representations misleading, or any proof that the omission had any effect on the borrower — as a basis for BDR relief.

The Proposed Rule defines “aggressive or deceptive recruitment” to include:

• Pressuring a prospective student to make enrollment decisions “immediately;”
• Falsely claiming that failure to enroll “immediately” would adversely affect the student’s opportunity to attend the institution;
• Taking advantage of non-knowledgeable prospective students in order to pressure them into attendance or borrowing;
• Discouraging a student or prospective student from consulting outside advisors, including family or friends, prior to making enrollment decisions;
• Failing to respond to a prospective student’s request for more information, including information regarding program cost;
• Using threatening or abusive language toward the student or prospective student;
• Repeatedly soliciting a student for enrollment or re-enrollment after they have requested no further contact; or
• Obtaining the student’s information through websites that present themselves, the institution, or related employment opportunities in a false light.

The Proposed Rule emphasizes that this list is merely illustrative in nature and does not comprehensively enumerate all institutional conduct which may be deemed to constitute “aggressive or deceptive recruitment tactics or conduct” under the rule.

Under current regulations, the Department’s adjudications of BDR claims are subject to the regulatory standards for relief that were in effect at the time a federal student loan was made. The Proposed Rule would instead adjudicate all claims pending at the Department as of July 1, 2023 or filed thereafter, and whether individual or group claims, solely under the above standards. For group claims, the Department may initiate a group claim based on its observation of common facts, or a group claim may be originated and referred to the Department by a newly defined “State Requestor,” such an attorney general, state educational regulator or state consumer protection agency.

While the Proposed Rule does not permit an individual borrower to ground an initial BDR claim entirely in state law, it does provide for consideration of state law claims if the Department reconsiders its full or partial rejection of an unsuccessful borrower claim. (The Proposed Rule establishes a rebuttable presumption that borrowers should receive full discharge.) As is the case under current BDR regulations, both individual and group claims would be adjudicated under a “preponderance of the evidence” standard, with evidence including the BDR application document, other evidence from related group or individual claims, information from the institution, information in the Department’s possession and any other pertinent information. Notably, the Proposed Rule specifically states that the Department will consider its own prior actions, including final program review and audit determinations, or prior shortcomings relating to administrative capacity, or loss of Title IV program eligibility due to a “high cohort default rate,” as relevant information in its possession when adjudicating these claims. 

The Proposed Rule allows for an institutional response during the Department’s adjudication of the borrower’s claim but does not provide for direct rebuttal or appeal of the Department’s eventual decision on that claim. Because the Proposed Rule creates a single standard for adjudicating claims pending on, or filed after, July 1, 2023, the Department acknowledges that certain of those claims will relate to loans disbursed under a previous BDR regulatory regime. In those instances, the Proposed Rule provides that in any recoupment action against an institution for a successful underlying BDR claim, the Department may only seek to recoup the discharged amounts that would have been approved for discharge under the pertinent regulation at the time. As the Department stated in its commentary, recoupment may only occur “for conduct that would have been approved under the regulation that governed the conduct at the time it occurred, in the amount that would have been granted under that [prior] regulation.” The Proposed Rule also sets out a six-year limitation period for institutional liability in general, running from the student’s graduation or last attendance date, unless the institution receives actual or constructive notice of the claim through a class action lawsuit, state or federal investigation or enforcement action relating to borrower defense, or from the Department itself. 

Class Action Waivers and Mandatory Arbitration Agreements

Currently, institutions wishing to include a class action waiver or mandatory arbitration clause in an enrollment agreement may do so, provided that the institution also discloses this information to students (other than in the agreement itself) and proactively notifies borrowers. Under the Proposed Rule, neither class action waivers nor pre-dispute arbitration agreements would be permitted. In addition, the Proposed Rule prohibits institutions from requiring students to exhaust any internal dispute resolution process before filing a complaint directly with the institution’s accreditor or other applicable regulatory or enforcement agency. For borrower defense claims against an institution which are ultimately subject to arbitration or judicial process, the Proposed Rule requires institutions to provide those judicial and arbitral records to the Department, for which it proposes to create a publicly searchable database containing those records. 

Closed School Discharges

The Department would, under the Proposed Rule, have greater discretion to determine the applicable lookback period under which a closed school discharge will be available. For purposes of such discharges, an institution’s “closure date” would not be the final date of operations, but rather the earlier of:

• The date on which the institution concludes educational instruction in “most” programs, or
• The date on which the institution concludes such instruction for “most” students, both as determined by the Department.

Closed school discharges would be available for students who do not accept, or who accept but do not complete, an approved teach-out, and the latter group would obtain a closed school discharge after one year, rather than the current three-year period. For borrowers who withdraw from an institution that ultimately closes, the Proposed Rule maintains the current 180-day lookback period for loan discharge, but also allows the Department to extend that period for additional “exceptional circumstances.” Such circumstances may include the discontinuation of a “significant share” of the institution’s academic programs, or issuance of a show-cause or probationary status by the institution’s accreditor, or the closure of most physical locations while maintaining online programs, or the Department placing the school on a heightened cash monitoring status, among other circumstances. The Proposed Rule would also permit the Department to undertake a recovery action from “a person affiliated with” the closed institution, with respect to loans disbursed on or after July 1, 2023. 

False Certification Discharges

The Proposed Rule reflects the consensus reached during negotiated rulemaking on this topic. It would expand the availability of loan discharges based on an institution’s false certification of student eligibility and would also create a group process for false certification discharges. Currently, a borrower who previously attested (to his or her institution) to having a high school diploma or its equivalent is precluded from pursuing false certification discharge. The Proposed Rule amends that policy and allows borrowers to report not having a high school diploma (or its equivalent), along with their institution’s falsification of their graduation status (or referral to a third party to obtain a false diploma). Borrowers whose falsely certified loans are placed into forbearance must apply for discharge within 60 days, with additional allowances for emendation if the application is incomplete, or the borrower obtains additional evidence. 

For the first time, the Proposed Rule creates a group process for false certification discharges. State Requestors and non-profit legal aid organizations may initiate such group claims, upon their identification of falsely certified borrowers sharing substantial common facts. The Proposed Rule also permits the Department to discharge falsely certified loans without any application by an individual borrower, if the agency is in possession of evidence showing that the borrower is entitled to a full discharge on those grounds. Further, if an institution has falsified a student’s satisfactory academic progress (SAP) during the borrower’s period of enrollment, then the Department may discharge as “falsely certified” any loans covering the period during which that borrower’s SAP was falsified. 

Total and Permanent Disability (TPD) Discharges

With respect to TPD discharges, the Proposed Rule reflects consensus language from the negotiated rulemaking, which expands the medical professionals who may certify discharge applications, including nurse practitioners, physician assistants and licensed psychologists in independent practice. The Proposed Rule also broadens the categories of disability status which would allow for TPD discharge as a threshold matter, including compassionate allowances for certain illnesses, for disabilities lasting over five years, and for disabilities in which a “Medical Improvement Possible” assessment has been renewed at least once on a three-year basis. Where the Department is able to independently determine that TPD discharge is appropriate, based on information from the Department of Veterans’ Affairs or the Social Security Administration, the Proposed Rule allows the Department to proactively provide automatic discharge. Generally, the Proposed Rule relaxes the post-discharge income monitoring requirements that had applied to TPD discharge recipients, except that the borrower’s debt would be reinstated if a new student loan is obtained by the same borrower within three years. 

Public Service Loan Forgiveness (PSLF)

The Department’s revisions to the PSLF program are rooted in its expressed concern that “current regulations around this program are too restrictive.” Consequently, the Proposed Rule lowers to 30 the minimum number of average “full time” weekly hours that must be worked by a borrower, at a qualifying employer, for PSLF discharge after 120 qualifying payments. (Under the current rule, full time employment is defined as the higher of 30 hours or the employer’s definition of full time.) The Proposed Rule also expands the definition of qualifying payments, such that late, partial, and lump sum payments may be included. It would also permit certain deferment or forbearance periods to count toward PSLF, including deferments for military service, Peace Corps service, cancer treatment, or economic hardship, or forbearance due to AmeriCorps or National Guard duties, or other administrative forbearances not requested by the borrower. The Department also proposes to make PSLF automatic, requiring no application by an individual borrower, in circumstances where adequate documentation of qualifying service and payment is already available to the agency. Finally, the Proposed Rule creates a process for reconsidering PSLF applications which are denied, including for borrowers who were denied PSLF between October 1, 2017, and the eventual effective date of the final rule for this regulatory package. 

Interest Capitalization

The Department is statutorily permitted to capitalize the interest on an existing federal student loan under certain circumstances, adding such interest to the borrower’s principal balance and utilizing that revised higher balance as a basis for future interest accrual and payment calculations. Consistent with the consensus reached during negotiated rulemaking, the Proposed Rule would narrow the permissible instances of interest capitalization to those required — not merely permitted — by the underlying statute. Specifically, the Proposed Rule would no longer permit the Department to capitalize interest upon the occurrence of any of the following events: entry into repayment; expiration of a forbearance period; default; or upon negative amortization or failure to recertify income for borrowers paying under the Department’s income-based repayment plans. 

Please do not hesitate to contact John Przypyszny, Jonathan Tarnow, Cindy Irani or Sarah Pheasant if you have any questions regarding the Proposed Rule, this alert or other educational regulatory matters.