Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 682, and 685

RIN 1840-AD26

[Docket ID ED-2018-OPE-0027]

Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Secretary proposes to create Institutional Accountability regulations that would amend the regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to establish a Federal standard for evaluating and a process for adjudicating borrower defenses to repayment for loans first disbursed on or after July 1, 2019, and provide for actions the Secretary may take to collect from schools financial losses due to successful borrower defense to repayment discharges. The Secretary also proposes to withdraw (

i.e.

rescind) certain amendments to the regulations already published but not yet effective.

DATES:

We must receive your comments on or before August 30, 2018.

ADDRESSES:

Submit your comments through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery. We will not accept comments submitted by fax or by email or those submitted after the comment period. To ensure that we do not receive duplicate copies, please submit your comments only once. In addition, please include the Docket ID at the top of your comments.

If you are submitting comments electronically, we strongly encourage you to submit any comments or attachments in Microsoft Word format. If you must submit a comment in Adobe Portable Document Format (PDF), we strongly encourage you to convert the PDF to print-to-PDF format or to use some other commonly used searchable text format.

Please do not submit the PDF in a scanned format.

Using a print-to-PDF format allows the Department to electronically search and copy certain portions of your submissions.

•

Federal eRulemaking Portal:

Go to

www.regulations.gov

to submit your comments electronically. Information on using

Regulations.gov

, including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “Help.”

•

Postal Mail, Commercial Delivery, or Hand Delivery:

The Department strongly encourages commenters to submit their comments electronically. However, if you mail or deliver your comments about the proposed regulations, address them to Jean-Didier Gaina, U.S. Department of Education, 400 Maryland Ave. SW, Mail Stop 294-20, Washington, DC 20202.

Privacy Note:

The Department's policy is to make comments received from members of the public available for public viewing on the Federal eRulemaking Portal at

www.regulations.gov.

Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

For further information related to Borrower Defenses to Repayment, Pre-dispute Arbitration Agreements, Internal Dispute Processes, and Guaranty Agency Fees, Barbara Hoblitzell at (202) 453-7583 or by email at:

Barbara.Hoblitzell@ed.gov

or Annmarie Weisman at (202) 453-6712 or by email at:

Annmarie.Weisman@ed.gov.

For information related to False Certification Loan Discharge, and Closed School Loan Discharge, Brian Smith at (202) 453-7440 or by email at:

Brian.Smith@ed.gov.

For information regarding Financial Responsibility and Institutional Accountability, John Kolotos at (202) 453-7646 or by email at:

John.Kolotos@ed.gov.

For information regarding Recalculation of Subsidized Usage Periods and Interest Accrual, Ian Foss at (202) 377-3681 or by email at:

Ian.Foss@ed.gov.

If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose of This Regulatory Action:

Section 455(h) of the Higher Education Act of 1965, as amended (HEA), authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan. Current regulations in 34 CFR 685.206(c) governing defenses to repayment have been in effect since 1995 but, until recently, were rarely used. Those regulations specify that a borrower may assert as a defense to repayment “any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law.”

On November 1, 2016, the Department published final regulations (81 FR 75926) (the 2016 final regulations) on the topic of borrower defenses to repayment. The 2016 final regulations were developed following negotiated rulemaking and after receiving and considering public comments on a notice of proposed rulemaking. Certain provisions of the 2016 final regulations have been delayed until July 1, 2019 (83 FR 6458).

These proposed regulations are designed to:

• Provide students with a balanced, meaningful process that relies on a single, Federal standard rather than 50 State standards to ensure that borrower defense to repayment discharges are handled swiftly, carefully, and fairly;

• Encourage students to seek remedies from institutions that have committed acts or omissions that constitute misrepresentation and cause harm to the student;

• Ensure that institutions rather than taxpayers bear the burden of billions of dollars

1

in losses from approvals of borrower defense to repayment discharges;

1

The Department estimated that borrower defense activity under the 2016 final regulation would have an estimated $14.9 billion net budget impact for the 2017 to 2026 loan cohorts. 71 FR 76055.

• 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 or from closing precipitously;

• Enable the Department to properly evaluate institutional financial risk in order to protect students and taxpayers;

• Provide students with additional time to qualify for a closed school loan discharge;

• Address the concerns expressed by negotiators, as well as in a suit filed by an association against the Department, that large financial liabilities resulting from the unclear borrower defense standard in the 2016 final regulations could cripple or force the closure of colleges and universities, even as they produce positive outcomes for students and provide students with accurate and complete information relating to enrollment;

• Reduce uncertainty about the future of the Federal financial aid system itself due to the strain on the government of large numbers of borrower defense to repayment discharges; and

• Most of all, to ensure that millions of American students and borrowers are provided with accurate information to inform their enrollment decisions and to ensure that students are not subjected to narrowed educational options as a result of unwarranted school closures.

The goal of the Department is to enable students to make informed decisions on the front end of college enrollment, rather than to grant them financial remedies after-the-fact when lost time cannot be recouped and new educational opportunities may be sparse. Postsecondary students are adults who can be reasonably expected to make informed decisions and who must take personal accountability for the decisions they make. Institutions are prohibited from misleading students by providing false or incomplete information, and remedies should be provided to a student when misrepresentation on the part of an institution causes financial harm to that student. Regardless, students have a responsibility when enrolling at an institution or taking student loans to be sure they have explored their options carefully and weighed the available information to make an informed choice. The Department has an obligation to enforce the Master Promissory Note, which makes clear that students are not relieved of their repayment obligations if later they regret the choices they made.

Through these proposed regulations, the Department is considering whether to reaffirm the Department's original interpretation of the statute, which persisted for 20 years and provided borrowers an opportunity to raise defenses to the repayment of Direct Loans only in response to collection actions by the Department, or to continue with the Department's 2015 interpretation, which allowed borrowers to raise defenses to repayment in affirmative claims. The Department adopted that interpretation in response to advocacy efforts on behalf of student borrowers who had attended institutions owned by Corinthian Colleges, Inc., but without negotiated rulemaking.

This new interpretation to allow affirmative claims was codified in the Department's 2016 final regulations. The 2015 reinterpretation was designed to expand loan forgiveness for borrowers who had attended Corinthian institutions, which, following a sequence of events, closed precipitously after the Department placed the institutions on HCM1 status and added a delay in title IV reimbursement that is typically not associated with HCM1. The Department's closed school loan discharge regulations provide that a student who was attending a school at the time of its closure, who did not complete his or her program of study prior to the school's closure, and who meets other criteria may receive a discharge of Federal student loans obtained for the student's enrollment at the institution. 34 CFR 674.33, 682.402, and 685.214. But the Department wished to extend loan forgiveness to borrowers who may not have qualified for this closed school loan discharge, so it created new policies for accepting affirmative claims.

The Department's experience with these affirmative claims has informed this NPRM. That experience has led the Department to realize that a clear Federal standard is required in order to adjudicate borrower defense claims in a fair and equitable manner. The Department has also heard concerns during the process about the Department's statutory authority to adjudicate these claims in an affirmative posture and about whether the process for adjudicating these claims appropriately balances the competing interests of borrowers, institutions, and taxpayers.

Among other issues enumerated throughout this document, the Department is concerned that a process that allows for borrowers to submit affirmative claims, where there are minimal consequences for submitting an unjustified claim, could potentially create improper incentives for borrowers with unsubstantiated allegations against schools to seek loan discharges. For example, a borrower may attempt to seek loan forgiveness simply because he or she is dissatisfied with the education received or with his or her ability to get a particular job, rather than as a result of a misrepresentation by the institution. This situation could easily increase the burden on the Department of identifying legitimate claims among those that do not meet the defense to repayment standard. And with nothing to lose by submitting a claim, a borrower could be tempted to submit a claim whether or not he or she has been harmed. The Department does not have sufficient information to determine the extent of this potential incentive effect. As of January 2018, it had received 138,989 claims, of which 23 percent had been processed, and only 2 percent of the processed claims were associated with schools other than Corinthian and ITT, but that targeted rather than random sample is insufficiently representative to support conclusions on the issue at this point.

In any case, an influx of affirmative claims could itself cause harm to borrowers. For example, even if the Department can accurately distinguish between genuine and frivolous claims, the time it takes to do so may prolong the time it takes to provide relief to deserving borrowers. And borrowers not entitled to relief may find themselves worse off if they receive a forbearance while the claim was being processed, because interest would accrue and increase the amount the borrower would be required to repay when the loan reenters repayment.

In addition, the Department is concerned that several features of the 2016 final regulations might have put the Department in the untenable position of forgiving billions of dollars of Federal student loans based on potentially unfounded accusations. Specifically, those regulations would allow the Department to afford relief to borrowers without providing an opportunity for institutions to adequately tell their side of the story. And they would allow the Department to afford relief to entire groups of borrowers, including those who did not apply for relief or who were potentially not harmed by the institution.

However, despite these concerns, the Department is considering the continuation of its current practice of accepting affirmative claims from borrowers not in a collections status. A policy that limits borrower defense eligibility to defensive claims may have the unintended effect of treating borrowers harmed by a misrepresentation who default on their loans better than other defrauded borrowers who stay out of default by responsibly enrolling in income-driven repayment plans and making payments on their loan.

In addition, lessons learned from the recent mortgage crisis raise concerns that limiting borrower defense eligibility to defensive claims could lead some relief-seeking borrowers to strategically default. Researchers observed similar strategic behavior by homeowners in response to a 2008 mortgage modification program offered by a large financial institution to borrowers who were at least sixty days delinquent.

2

The study found that the program's structure, which relied on the borrower's repayment status, yielded a thirteen percent increase in the probability of that financial institution's borrowers rolling over from current to delinquent status—evidence of strategic behavior by borrowers aiming to take advantage of mortgage modifications. A

similar behavioral response from relief-seeking borrowers choosing to enter default could result in a range of troubling unintended consequences, including damage to borrower credit scores, increased default collection costs for taxpayers, and increases to institutional cohort default rates.

2

http://www.nber.org/papers/w17065.pdf.

The Department is trying very carefully to balance relief for borrowers who have been harmed by acts of institutional wrongdoing, with its obligation to the taxpayer to provide reliable stewardship of Federal dollars. With more than a trillion dollars in outstanding student loans, the Department must uphold its fiduciary responsibilities and exercise caution in forgiving student loans to ensure that it does not create an existential threat to a program that lacks typical credit and underwriting standards.

With so much at stake for all parties, it seems reasonable that consumer complaints should continue to be adjudicated through existing legal channels that put experienced judges or arbitrators in the position of weighing the evidence and rendering an impartial decision. Significant reputational damage could be done to an institution from an affirmative borrower defense claim long before an institution is given an opportunity to contest that claim in a recoupment proceeding. Such damage could weaken or even force institutions to close, regardless of the truth, extent, or other circumstances surrounding the unverified claims. And if the institution prevails in a recoupment proceeding, it is the taxpayer who is left responsible for the claims the Department approved in error.

These concerns have led the Department to reconsider and seek public comment on whether it should reaffirm the Department's original interpretation of the statute, which provided borrowers an opportunity to raise defenses to the repayment of Direct Loans only in response to collection actions by the Department. The Department is interested in comments about its statutory authority to consider defenses to the repayment of Direct Loans in an affirmative posture, and about the risks and benefits of doing so.

However, the Department is also considering continuing to accept affirmative claims from borrowers not in a collections action. In either case, the Department would need to implement provisions that would protect institutions and taxpayers against frivolous claims. Our initial review of pending claims suggests that some borrowers may believe that the process allows for a discharge based on a borrower's dissatisfaction with the education he or she received or the outcomes he or she realized following enrollment, even in the absence of a misrepresentation on the part of the institution. That is not the case. As stated in the Master Promissory Note the borrower signs when initiating their first loan, the borrower is expected to repay the loan even if the borrower fails to complete the program or is dissatisfied with the institution or his or her outcomes. The Department seeks comments from the public regarding what types of provisions or requirements could be used to reduce frivolous claims while still ensuring a borrower a fair and meaningful opportunity to seek relief in the event of fraud.

The Department is also proposing to change its approach to a possible group adjudication of borrower defense claims. The 2016 final regulations would enable the Department to initiate affirmative claims on behalf of entire groups of borrowers, if the Secretary determines that there are common facts and claims that apply to the group. However, in this NPRM, the Department is proposing a uniform standard based on a misrepresentation made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth. As this proposed standard is dependent upon a fact-specific inquiry, the Department does not believe that the group process is appropriate to include in these proposed regulations. Further, a group discharge process could place an extraordinary burden on both the Department and the taxpayer, and the Department has reconsidered whether such a process appropriately balances the need to reduce burden on borrowers and the Department with the obligation to protect taxpayer funds. Because an institution can refuse to provide an official transcript for a borrower whose loan has been forgiven, group discharges could render some borrowers unable to verify their credentials or work in the field for which they trained and have enjoyed employment.

Moreover, the Department believes that a review of claims on an individual basis is necessary to ensure that it affords appropriate relief to borrowers who suffered harm from an alleged misrepresentation. Since publication of the 2016 final regulations, the Department has conducted further analyses of the tens of thousands of defense to repayment applications for Corinthian students that the Department has received to date. Those analyses have demonstrated that students enrolled at Corinthian who submitted defense to repayment applications may not all have been harmed to the same extent. An individual process would offer all borrowers fair and equal access to defense to repayment relief. And these proposed regulations would not eliminate the opportunity for Corinthian or other students with loans first disbursed prior to July 1, 2019, to seek debt relief under the 2015 interpretation of the regulation.

The Department proposes a new Federal standard to govern claims on loans made after July 1, 2019 based on an alleged misrepresentation. Under that standard, a borrower may assert as a defense to repayment an eligible institution's misrepresentation—that is, a statement, act, or omission by the school to the borrower that is (i) false, misleading, or deceptive, (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (iii) directly and clearly related to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was made. To relate to the “provision of educational services,” a misrepresentation must relate to the borrower's program of study. Such misrepresentations can relate, for example, to the educational resources provided by the institution that are required by an accreditation agency or a State licensing or authorizing agency for the completion of the student's educational program.

The proposed standard for a borrower defense discharge differs from the standard selected in the 2016 final regulations, which was based on the Department's authority during enforcement actions. The 2016 final regulations adopted the misrepresentation standard at 34 CFR 668.71, and provided that defenses to repayment may additionally be based upon breaches of contract and certain types of judgments. The proposed standard would not provide for a defense to repayment based on such breaches of contract or other judgments. Instead, such breaches or judgments may be considered as evidence of a misrepresentation, to the extent they bear on an act or omission related to the educational services provided. The Department believes this approach will assist it to quickly and fairly review each and every application and provide equitable relief to borrowers who were harmed.

The Department's proposed standard also does not distinguish between the types of institutions that committed the misrepresentation. Appendix A of the 2016 final regulations, by contrast, took the position that a student who attended a selective, non-profit institution would

not receive debt relief even if the institution committed an act that would otherwise entitle the borrower a defense to repayment because, in the opinion of the Department, the education received was valuable despite the misrepresentation. We cannot adequately support assumptions about the inherent quality of any institution, including a selective non-profit institution. The Department accordingly does not propose to maintain this position.

The Department does propose to maintain the standard of evidence or proof required to make a successful claim that was included in the 2016 final regulations—a preponderance of the evidence. The Department believes that this standard will allow claims to be asserted and handled in a manner that is genuinely fair to students, taxpayers, and institutions, especially since a borrower in collections could have left the institution many years prior to making a claim, which would make it exceedingly difficult to meet a higher evidentiary standards. However, if the Department chooses to continue to accept affirmative claims, where barriers to submitting such claims are very low and there are no penalties for a borrower who submits an unjustified claim, the Department believes that a higher evidentiary standard may be appropriate. The Department seeks comments from the public about whether or not a clear and convincing evidence standard would be appropriate if the Department chooses to continue to accept affirmative claims and, if so, whether that clear and convincing standard should apply solely to affirmative claims or to both affirmative and defensive claims.

Finally, the Department proposes to limit the period of time during which the Secretary may recoup funds discharged under these regulations. Specifically, for loans disbursed on or after July 1, 2019, the Secretary would have five years from the date of the final determination on a borrower's defense to repayment application to initiate a proceeding to recover from the school the amount of the losses incurred by the Secretary on the discharged loans.

In addition to the changes to the borrower defense regulations discussed above, we seek in this NPRM to strengthen the Department's ability to protect the Federal taxpayer from the consequences of a school's precipitous closure by amending the Department's financial responsibility regulations. The proposed regulations identify actions or events that the Secretary may consider in determining whether a school is financially responsible, provide that the Secretary may accept other types of surety or financial protection in lieu of letters of credit, clarify that the Department may impose a limitation on a school by changing a school's participation status from “fully certified” to “provisionally certified”, and update the Department's regulations as to initial and final decisions that may be made by a hearing official in a fine, limitation, suspension, or termination proceeding to incorporate the proposed alternate means of financial protection to the Department. These proposed regulations balance the need for consumer protection, regulatory enforcement, and fairness to schools. They seek to hold schools accountable, provide prospective and continuing students with information necessary to make informed choices, and mitigate actions that pose an existential threat to institutions. A school's precipitous closure—as opposed to a well-planned, accreditor approved teach-out—puts students, borrowers, and taxpayers at unnecessary risk.

Further, through these proposed regulations, the Department seeks to encourage schools that are closing to go through an orderly closure, which includes offering appropriate teach-outs to their students. Since 2015, precipitous closures have led to large numbers of defense to repayment and closed school discharge applications. We believe that closing schools should be encouraged to offer accreditor-approved and, if applicable, State authorizer-approved teach-out plans. Such plans allow students the reasonable opportunity to complete their academic programs, either at another location after the school has closed or through an orderly wind-down process before the school officially closes.

We also propose changes to the Department's current false certification regulations. The Department believes that in cases when the borrower is unable to obtain an official transcript or diploma from the high school, postsecondary institutions should be able to rely on an attestation from a borrower that the borrower earned a high school diploma since the Department relies on a similar attestation in processing a student's Free Application for Federal Student Aid (FAFSA). This policy change provides assurances to students that they will have a reasonable opportunity to pursue postsecondary education when they cannot obtain an official transcript or diploma, and to institutions that they will not face significant liabilities years later if a student's status cannot be verified. Therefore, we are proposing regulatory language that when a borrower provides an institution an attestation of his or her high school graduation status for purposes of admission to the institution, the borrower may not subsequently qualify for a false certification discharge based on not having a high school diploma.

We do not propose to adopt the changes relating to pre-dispute arbitration agreements and class action waivers that are in the 2016 final regulations. In those regulations, the Department took the position that the HEA gives the Department broad authority to impose conditions on schools that wish to participate in a Federal benefit program and that regulation of the use of pre-dispute arbitration agreements and class action waivers was necessary to “protect the interests of the United States and promote the purposes” of the Direct Loan Program under Section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6). We continue to recognize, as explained in the preamble to the 2016 final regulations, that pre-dispute arbitration agreements and class action waivers, in some circumstances, may not be well understood by consumers and may not facilitate the Department's awareness of potential issues faced by students at a school. However, in re-weighing all applicable factors, including the current legal landscape, we have determined that the Department should take a position more in line with the benefits of arbitration and the strong Federal policy favoring it.

Several potential benefits of arbitration are relevant here. Arbitration is often a more efficient and less adversarial means of dispute resolution than time-consuming and expensive litigation that may result in borrowers waiting years to obtain a fair hearing and any relief. Arbitration may also allow borrowers to obtain greater relief than they would in a consumer class action case where attorneys often benefit most. Moreover, arbitration may reduce the expense of litigation that a university would otherwise pass on to students in the form of higher tuition and fees. Arbitration also eases burdens on the overtaxed U.S. court system.

For all of these reasons, the Department has decided that the 2016 final regulations' provisions on class action waivers and pre-dispute arbitration should not be included in these proposed regulations. As stated above, we believe that borrower defense to repayment should be a last resort for borrowers. Arbitration is one means of dispute resolution through which borrowers may be able to obtain relief without filing a defense to repayment

with the Department. The Department does not propose to prevent that means. But because pre-dispute arbitration agreements or class-action waivers may limit the availability of certain alternative means of dispute resolution, we propose changes that would provide borrowers with a better understanding of the dispute resolution processes available to them when they enroll at a school.

The proposed regulations also update the appendices to subpart L of 34 CFR part 668 to account for changes in accounting standards and terminology.

Incorporation by Reference

In proposed § 668.175(d) with respect to the zone alternative, we reference the following accounting standards: FASB ASC 850, Accounting Standards Update (ASU) 2015-01, and ASC 225. FASB ASC 850 addresses disclosures of transactions between related parties. These disclosures are considered to be related party transactions even though they may not be given accounting recognition. While not providing accounting or measurement guidance for such transactions, FASB ASC 850 requires their disclosure nonetheless.

Accounting Standards Update (ASU) No. 2015-01 addresses extraordinary and unusual items, to simplify income statement classification by removing the concept of extraordinary items from United States generally accepted accounting principles (U.S. GAAP).

ASC 225 provides general income statement guidance. Specifically, it addresses the classification and resulting presentation and disclosure of extraordinary events and transactions. It also addresses the presentation and disclosure of unusual and infrequently occurring items that do not meet the extraordinary criteria, and speaks to business interruption insurance. The types of costs and losses covered by business interruption insurance typically include items such as gross margin that was lost or not earned due to the suspension of normal operations.

These items are accessible to the public on the Financial Accounting Standards Board (FASB) website,

www.fasb.org.

Summary of the Major Provisions of This Regulatory Action:

For the Direct Loan Program, we propose new regulations governing borrower defenses that would—

• Establish a new Federal standard for borrower defenses to repayment submitted by borrowers with loans first disbursed on or after July 1, 2019;

• Establish a process for the assertion and resolution of borrower defenses to repayment for loans first disbursed on or after July 1, 2019;

• Provide schools and borrowers with opportunities to provide evidence and arguments when a defense to repayment application has been filed and to provide an opportunity for each to respond to the other's submitted evidence;

• Require a borrower to sign an attestation to ensure that financial harm is not the result of the borrower's workplace performance, disqualification for a job for reasons unrelated to the education received, a personal decision to work less than full-time or not at all, or the borrower's decision to change careers.

• Establish a time limit for the Secretary to initiate an action to collect from the responsible school the amount of any loans first disbursed on or after July 1, 2019, that are subject to a successful borrower defense to repayment discharge for which the school is liable;

• Provide for remedial actions the Secretary may take to collect from the responsible school the amount of any loans subject to a successful borrower defense to repayment discharge for which the school is liable; and

• Establish institutional responsibility and financial liability for losses incurred by the Secretary for repayment of loan amounts discharged by the Secretary on the basis of a borrower defense to repayment discharge.

The proposed regulations would also revise the Student Assistance General Provisions regulations to—

• Provide for schools that require Federal student loan borrowers to sign pre-dispute arbitration agreements or class action waivers as a condition of enrollment to make a plain language disclosure of those requirements to prospective and enrolled students and place that disclosure on its website where information regarding admissions and tuition and fees is presented; and

• Provide for schools that require Federal student loan borrowers to sign pre-dispute arbitration agreements or class action waivers as a condition of enrollment to include information in the borrower's entrance counseling regarding the school's internal dispute and arbitration processes.

• Amend the financial responsibility provisions to establish the conditions or events that have or may have an adverse material effect on an institution's financial condition and which warrant financial protection for the Department, update the definitions of terms used to calculate an institution's composite score to conform with changes in accounting standards but provide a six year phase-in to enable the Department adequate time to update the Composite Score regulations accordingly through future negotiated rulemaking, and expand the types of financial protection acceptable to the Secretary.

The proposed regulations would also—

• Revise the Perkins Loan, FFEL, and Direct Loan programs' closed school discharge regulations to extend the window for a borrower to qualify for a closed school discharge to 180 days;

• Revise the Perkins Loan, FFEL, and Direct Loan programs' closed school discharge regulations to specify that if a closing school provides an opportunity to complete the program of study approved by the school's accrediting agency and, if applicable, the school's State authorizing agency, the borrower would not qualify for a closed school discharge;

• Modify the conditions under which a Direct Loan borrower may qualify for a false certification discharge by specifying that, in cases when the borrower could not reasonably provide the school an official transcript or diploma from the borrower's high school, but provided an attestation to the school that the borrower was a high school graduate, the borrower would not qualify for a false certification discharge based on not having a high school diploma;

• Prohibit guaranty agencies from charging collection costs to a defaulted borrower who enters into a repayment agreement with the guaranty agency within 60 days of receiving notice of default from the agency;

• Prohibit guaranty agencies from capitalizing interest on a loan that is sold following the completion of loan rehabilitation;

• Reflect the Department's policy regarding the impact that a discharge of a Direct Subsidized Loan has on the 150 Percent Direct Subsidized Loan Limit; and

• Update composite score calculations to reflect recent changes in FASB accounting standards and provide for a six year phase-in process to provide the Department sufficient time to update the Composite Score regulations accordingly through negotiated rulemaking.

In addition, for the reasons set forth below, we propose to withdraw (

i.e.,

rescind) specified provisions of the final regulations we published on November 1, 2016 (81 FR 75926) (the 2016 final regulations) that were delayed until July 1, 2019, pertaining to borrower defenses to repayment and related issues.

Please refer to the

Summary of Proposed Changes

section of this notice of proposed rulemaking (NPRM) for more details on the major provisions contained in this NPRM.

Costs and Benefits:

As further detailed in the

Regulatory Impact Analysis,

the benefits of the proposed regulations include: (1) An updated and clarified process and the creation of a Federal standard to streamline the administration of defense to repayment applications; (2) improved financial protections for the Federal government and taxpayers by requiring institutions to incur the losses associated with a successful defense to repayment application and reducing the likelihood of taxpayers incurring costs related to paying claims submitted by students who were not harmed; (3) additional information to help students, prospective students, and their families make educated decisions based on information about a school's mandatory arbitration or class action waiver requirements and to effectively use arbitration when necessary; (4) an extended window for a borrower to qualify for a closed school discharge and revisions incentivizing completion of educational programs; (5) revised conditions under which a Direct Loan borrower may qualify for a false certification discharge to ensure that students who are unable to obtain a high school transcript have an opportunity to participate in postsecondary education and that a student's intentional misrepresentation of his or her high school graduation status cannot then be used to justify a false certification discharge; (6) restrictions on guaranty agencies from charging collection costs to a defaulted borrower who enters into a repayment agreement with the guaranty agency within 60 days of receiving notice of default from the agency, and from capitalizing interest on a loan that is sold following the completion of loan rehabilitation; (7) recalculating subsidized usage periods, as appropriate, when a borrower has received a loan discharge; and (8) updating the calculation of composite scores to reflect changes in FASB standards, but also providing a six-year phase in to provide time for the Department to update its composite score regulations through future negotiated rulemaking.

Costs include the paperwork burden associated with the required reporting and disclosures to ensure compliance with the proposed regulations, the cost to affected schools of providing financial protection, and the cost to taxpayers of borrower defense claims that are not reimbursed by schools. There may also be costs to borrowers who may be reluctant to go into default, even if they have a claim that would result in loan relief or partial loan relief, and therefore do not benefit from that loan relief. There may also be costs to borrowers who use the legal system to seek damages from an institution rather than relying on the government to adjudicate consumer complaints.

Invitation to Comment:

We invite you to submit comments regarding these proposed regulations.

To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses, and provide relevant information and data whenever possible, even when there is no specific solicitation of data and other supporting materials in the request for comment. We also urge you to arrange your comments in the same order as the proposed regulations. Please do not submit comments that are outside the scope of the specific proposals in this NPRM, as we are not required to respond to such comments.

We invite you to assist us in complying with the specific requirements of Executive Orders 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from these proposed regulations. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Department's programs and activities.

During and after the comment period, you may inspect all public comments about the proposed regulations by accessing

Regulations.gov

. You may also inspect the comments in person at 400 Maryland Ave. SW, Washington, DC, between 8:30 a.m. and 4:00 p.m., Eastern Time, Monday through Friday of each week except Federal holidays. To schedule a time to inspect comments, please contact one of the persons listed under

FOR FURTHER INFORMATION CONTACT

.

Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record:

On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed regulations. To schedule an appointment for this type of accommodation or auxiliary aid, please contact one of the persons listed under

FOR FURTHER INFORMATION CONTACT

.

Background

The Secretary proposes to amend parts 668, 674, 682, and 685 of title 34 of the Code of Federal Regulations (CFR). The regulations in 34 CFR part 668 pertain to Student Assistance General Provisions. The regulations in 34 CFR part 674 pertain to the Perkins Loan Program. The regulations in 34 CFR part 682 pertain to the FFEL Program. The regulations in 34 CFR part 685 pertain to the Direct Loan Program.

We are proposing these amendments to: (1) Specify that the standard used to identify an act or omission of a school that provides the basis for a borrower defense to repayment discharge will depend on when the Direct Loan was first disbursed; (2) establish a new Federal standard that the Department will use to determine whether a school's act or omission constitutes a basis for a borrower defense to repayment discharge for loans disbursed on or after July 1, 2019; (3) provide an opportunity for an institution to know that a defense to repayment application has been lodged against it and to respond to claims made in that application; (4) establish the procedures to be used by a borrower to initiate a borrower defense to repayment application for loans first disbursed on or after July 1, 2019; (5) establish a time limit for the Secretary to initiate action to collect from the responsible school the amount of any loans first disbursed on or after July 1, 2019 that are subject to an approved borrower defense to repayment discharge; (6) establish the procedures that the Department would use to determine the liability of a school for the amount of any loan discharges and reimbursement of loan payments resulting from successful borrower defenses to repayment; (7) establish the conditions or events upon which an institution is or may be required to provide to the Department financial protection, such as a letter of credit, to help protect the Federal government and taxpayers, against potential institutional liabilities; (8) institute requirements to ensure borrowers are informed and educated about pre-dispute arbitration agreements and class action waivers that students are required to sign by the school as a condition of enrollment; (9) revise the closed school discharge regulations to extend the window for a borrower to qualify for a closed school discharge and specify that if a closing school provides a borrower an opportunity to complete his or her academic program through a teach-out plan approved by the school's accrediting agency and, if applicable, the school's State

authorizing agency, the borrower would not qualify for a closed school discharge; (10) amend the eligibility criteria for the false certification loan discharge by specifying that, in cases when a borrower could not provide the school an official high school transcript or diploma but provided an attestation that the borrower was a high school graduate, the borrower would not qualify for a false certification discharge based on not having a high school diploma; (11) clarify the conditions under which FFEL Program loan holders may capitalize the interest due on a loan to be consistent with the Department's practice for loans it holds; (12) reflect the conditions under which the discharge of a Direct Subsidized Loan will lead to the elimination or recalculation of a Subsidized Usage Period under the 150 Percent Direct Subsidized Loan Limit or the restoration of interest subsidy; and (13) prohibit guaranty agencies from charging collection costs if a borrower enters into a repayment agreement within 60 days of the default notice.

Public Participation

On June 16, 2017, we published a notification in the

Federal Register

(82 FR 27640) announcing our intent to establish a negotiated rulemaking committee under section 492 of the HEA to revise the regulations on borrower defenses to repayment of Federal student loans and other matters, and on the authority of guaranty agencies in the FFEL Program to charge collection costs to defaulted borrowers under 34 CFR 682.410(b)(6). We also announced two public hearings at which interested parties could comment on the topics suggested by the Department and suggest additional topics for consideration for action by the negotiated rulemaking committee. The hearings were held on—

July 10, 2017, in Washington, DC; and

July 12, 2017, in Dallas, TX.

Transcripts from the public hearings are available at

www2.ed.gov/policy/highered/reg/hearulemaking/2017/index.html.

We also invited parties unable to attend a public hearing to submit written comments on the proposed topics and to submit other topics for consideration. Written comments submitted in response to the June 16, 2017,

Federal Register

notification may be viewed through the Federal eRulemaking Portal at

www.regulations.gov,

within docket ID ED-2017-OPE-0076. Instructions for finding comments are also available on the site under “How to Use

Regulations.gov

” in the Help section.

On August 30, 2017, we published a notification in the

Federal Register

(82 FR 41194) requesting nominations for negotiators to serve on the negotiated rulemaking committee and setting a schedule for committee meetings.

Negotiated Rulemaking

Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to obtain public involvement in the development of proposed regulations affecting programs authorized by title IV of the HEA. After obtaining extensive input and recommendations from the public, including individuals and representatives of groups involved in the title IV, HEA programs, the Secretary in most cases must subject the proposed regulations to a negotiated rulemaking process. If negotiators reach consensus on the proposed regulations, the Department agrees to publish without alteration a defined group of regulations on which the negotiators reached consensus unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreement reached during negotiations. Further information on the negotiated rulemaking process can be found at:

www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.

On August 30, 2017, the Department published a notification in the

Federal Register

(82 FR 41194) announcing its intention to establish two negotiated rulemaking committees and a subcommittee to prepare proposed regulations governing the Federal Student Aid programs authorized under title IV of the HEA. One negotiated rulemaking committee was established to propose regulations relating to gainful employment and the other to propose regulations pertaining to borrower defenses to repayment of Federal student loans, the definition of misrepresentation as it pertains to borrower defense, the program participation agreement for schools participating in the title IV programs, closed school and false certification loan discharges, financial responsibility and administrative capability, arbitration and class action lawsuits, revisions to regulations that will address whether and to what extent guaranty agencies may charge collection costs under 34 CFR 682.410(b)(6) to a defaulted borrower who enters into a loan rehabilitation or other repayment agreement within 60 days of being informed that the guaranty agency has paid a claim on the loan.

A subcommittee, which was composed of individuals with expertise in the applicable financial accounting and reporting standards set by the Financial Accounting Standards Board (FASB), was established to discuss whether and how the (FASB's) recent changes to the accounting standards for financial reporting affected financial reporting requirements for schools and to recommend appropriate regulatory changes to the negotiated rulemaking committee.

The notification set forth a schedule for the committee meetings and requested nominations for individual negotiators to serve on the negotiating committee and the subcommittee. The Department sought negotiators to represent the following groups: Students and former students; consumer advocacy organizations; legal assistance organizations that represent students and former students; groups representing U.S. military service members or veteran Federal student loan borrowers; financial aid administrators at postsecondary schools; general counsels/attorneys and compliance officers at postsecondary schools; chief financial officers (CFOs) and experienced business officers at postsecondary schools; State attorneys general and other appropriate State officials; State higher education executive officers; institutions of higher education eligible to receive Federal assistance under title III, parts A, B, and F, and title V of the HEA, which include Historically Black Colleges and Universities, Hispanic-Serving Institutions, American Indian Tribally Controlled Colleges and Universities, Alaska Native and Native Hawaiian-Serving Institutions, Predominantly Black Institutions, and other institutions with a substantial enrollment of needy students as defined in title III of the HEA; two-year public institutions of higher education; four-year public institutions of higher education; private, nonprofit institutions of higher education; private, proprietary institutions of higher education; FFEL Program lenders and loan servicers; FFEL Program guaranty agencies and guaranty agency servicers (including collection agencies); and accrediting agencies. The Department sought subcommittee members to represent the following constituencies who also have expertise in the applicable financial accounting and reporting standards set by the Financial Accounting Standards Board (FASB): Private, nonprofit institutions of higher education, with knowledge of the accounting standards and title IV financial responsibility

requirements for the private, nonprofit sector; private, proprietary institutions of higher education, with knowledge of the accounting standards and title IV financial responsibility requirements for the proprietary sector; accrediting agencies; chief financial officers (to include experienced business officers and bursars) at postsecondary institutions; associations or organizations that provide accounting guidance to auditors and institutions; certified public accountants or firms who conduct financial statement audits of title IV participating institutions; and FASB. The Department considered the nominations submitted by the public and chose negotiators who would represent the various constituencies.

The negotiating committee included the following members: Joseline Garcia, United States Students Association, and Stevaughn Bush, (alternate) Student, Howard University School of Law, representing students and former students.

Ashley Harrington, Center for Responsible Lending, and Suzanne Martindale (alternate), Consumers Union, representing consumer advocacy organizations.

Abby Shafroth, National Consumer Law Center, and Juliana Fredman, (alternate) Bay Area Legal Aid, representing legal assistance organizations that represent students.

Will Hubbard, Student Veterans of America, and Walter Ochinko (alternate), Veterans Education Success, representing U.S. military service members or veterans.

Valerie Sharp, Evangel University, and Kimberly Brown (alternate), Des Moines University, representing financial aid administrators.

Aaron Lacey, Partner, Thomas Coburn LLP, and Bryan Black, (alternate), Attorney, representing General Counsels/attorneys and compliance officers.

Kelli Hudson Perry, Rensselaer Polytechnic Institute, and Dawnelle Robinson (alternate), Roanoke Chowan Community College, representing CFOs and business officers.

John Ellis, State of Texas Office of the Attorney General, and Evan Daniels (alternate), Office of the Arizona Attorney General, representing State attorneys general and other appropriate State officials.

Robert Flanigan, Jr., Spelman College, and Lodriguez Murray (alternate), United Negro College Fund, representing minority serving institutions.

Dan Madzelan, American Council on Education, and Barmak Nassirian (alternate), American Association of State Colleges and Universities, representing two-year public institutions.

Alyssa Dobson, Slippery Rock University, and Kay Lewis (alternate), University of Washington, representing four-year public institutions.

Ashley Ann Reich, Liberty University, and Gregory Jones (alternate), Compass Rose Foundation, representing private, non-profit institutions.

Mike Busada, Ayers Career College, and Chris DeLuca (alternate), DeLuca Law LLC, representing private, proprietary institutions with enrollment of 450 students or fewer.

Michael Bottrill, SAE Institute North America, and Linda Rawles, (alternate) Rawles Law, representing private, proprietary institutions with enrollment of 451 students or more.

Wanda Hall, Edfinancial Services, and Colleen Slattery (alternate), MOHELA, representing FFEL Program lenders and loan servicers.

Jaye O'Connell, Vermont Student Assistance Corporation, and Sheldon Repp (alternate), National Council of Higher Education Resources, representing FFEL Program guaranty agencies and guaranty agency servicers.

Dr. Michale McComis, Accrediting Commission of Career Schools and Colleges, and Karen Peterson Solinski, (alternate), Higher Learning Commission, representing accreditors.

Annmarie Weisman, U.S. Department of Education, representing the Department.

The subcommittee included the following members:

John Palmucci, Maryland University of Integrative Health, representing private, non-profit institutions.

Jonathan Tarnow, Drinker Biddle & Reath LLP, representing private, proprietary institutions.

Dr. Julianne Marie Malveaux, Economic Education, and formerly of Bennett College, representing minority serving institutions.

Dale Larson, Dallas Theological Seminary, representing Accrediting agencies.

Dawnelle Robinson, Shaw University, representing CFOs, business officers, and bursars.

Susan M. Menditto, National Association of College and University Business Officers, representing organizations that provide accounting guidance to auditors and institutions.

Ronald E. Salluzzo, Attain, representing Certified public accountants or firms who conduct compliance audits and/or prepare financial statements of participating Title IV institutions.

Jeffrey Mechanick, the Financial Accounting Standards Board (FASB), representing FASB.

The negotiated rulemaking committee met to develop proposed regulations on November 13-15, 2017, January 8-11, 2018, and February 12-15, 2018. The subcommittee met in person on November 16-17, 2017, January 4-5, 2018, and by telephone on January 30, 2018.

At its first meeting, the negotiating committee reached agreement on its protocols and proposed agenda. The protocols provided, among other things, that the committee would operate by consensus. Consensus means that there must be no dissent by any member in order for the committee to have reached agreement. Under the protocols, if the committee reached a final consensus on all issues, the Department would use the consensus-based language in its proposed regulations. Furthermore, the Department would not alter the consensus-based language of its proposed regulations unless the Department reopened the negotiated rulemaking process or provided a written explanation to the committee members regarding why it decided to depart from that language.

During the first meeting, the negotiating committee agreed to negotiate an agenda of eight issues related to student financial aid. These eight issues were: Borrower defense to repayment standard; the process for applying for and considering borrower defense claims; financial responsibility and administrative capability; pre-dispute arbitration agreements, class action waivers, and internal dispute processes; closed school discharges; false certification discharges; guaranty agency collection fees; and subsidized usage period recalculations.

During committee meetings, the negotiators reviewed and discussed the Department's drafts of regulatory language and the committee members' alternative language and suggestions. At the final meeting on February 15, 2018, the committee did not reach consensus on the Department's proposed regulations. For that reason, and according to the committee's protocols, all parties who participated in or who were represented in the negotiated rulemaking, in addition to all members of the public, may comment freely on the proposed regulations. For more information on the negotiated rulemaking sessions, please visit:

www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html.

Transcripts and audio recordings of the negotiated rulemaking session are also available at:

www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html.

While transcripts have been made available by the Department to aid public understanding of the negotiated rulemaking proceedings, the transcripts have not been vetted or reviewed for accuracy or completeness and should not be considered as the Department's official transcription of the negotiated rulemaking proceedings.

Summary of Proposed Changes

The proposed regulations would—

• Rescind specified provisions of the 2016 final regulations, which have not yet become effective.

• Amend § 668.41 to require schools that require students to accept pre-dispute arbitration agreements or class action waivers as a condition of enrollment to disclose that information to students, prospective students, and the public in an easily accessible format;

• Amend § 668.91 to provide that the Secretary may accept other types of surety or financial protection in addition to letters of credit and that a hearing official must uphold the amount of financial protection required by the Secretary unless certain conditions are met;

• Amend § 668.94 to provide that a limitation on an institution's participation in the Title IV programs may include changing the institution's status from fully certified to provisionally certified;

• Amend § 668.171 to establish the actions or events that have or may have an adverse material effect on an institution's financial condition and revise appendices A and B of the financial responsibility regulations to conform with changes in accounting standards;

• Amend § 668.172 to address changes to the accounting standards regarding leases;

• Amend § 668.175 to expand the types of financial protection acceptable to the Secretary;

• Amend §§ 674.33, 682.402 and 685.214 to extend the window for a borrower to qualify for a closed school discharge and to specify that if a closing school provided a borrower the reasonable opportunity to complete his or her academic program through an orderly school closure or a teach-out plan and that is approved by the school's accrediting agency and, if applicable, the school's State authorizing agency, the borrower will not qualify for a closed school discharge;

• Amend §§ 682.202, 682.405, and 682.410 to prohibit guaranty agencies and FFEL Program lenders from capitalizing the outstanding interest on a FFEL loan when the borrower rehabilitates a defaulted FFEL loan;

• Amend § 682.405 to prohibit guaranty agencies and FFEL Program lenders from charging collections costs when a borrower enters into a repayment agreement within 60 days of the notice of default;

• Amend § 685.200 to specify that a loan discharge based on school closure, false certification, an unpaid refund, or a defense to repayment will lead to the elimination of or recalculation of the subsidized usage period that is associated with the loan or loans discharged;

• Amend § 685.206 to clarify that existing regulations with regard to borrower defenses to repayment apply to loans first disbursed prior to July 1, 2019; to establish a Federal standard for deciding borrower defenses to repayment pertaining to a loan first disbursed on or after July 1, 2019; to establish the procedures that the Department would use to determine the liability of a school for the amount of any loan discharges resulting from borrower defense claims pertaining to loans first disbursed on or after July 1, 2019; and to provide that the Secretary may initiate a proceeding to recover from an institution the amount of any loan discharged by the Secretary based on a defense to repayment within five years of the date of the final decision to discharge the loan.

• Amend § 685.212 to add borrower defense to repayment discharges to the discharge provisions listed in this section.

• Amend § 685.215 to provide that in cases when a Direct Loan borrower could not obtain an official transcript or diploma from high school and instead provided an attestation to the institution that the borrower was a high school graduate, the borrower will not qualify for a false certification discharge based on not having a high school diploma.

• Amend § 685.300 to require institutions to accept responsibility for the repayment of amounts discharged by the Secretary pursuant to the borrower defense to repayment, closed school discharge, false certification discharge, and unpaid refund discharge regulations.

• Amend § 685.304 to require institutions that use pre-dispute arbitration agreements or class action waivers to provide written, plain language descriptions of those agreements and to provide the student borrower with written information on how to use the school's internal dispute resolution process.

• Amend § 685.308 to require the repayment of funds and the purchase of loans by the school if the Secretary determines that the school is liable as a result of a successful claim for which the Secretary discharged a loan, in whole or in part, pursuant to §§ 685.206, 685.214, and 685.216.

Significant Proposed Regulations

We discuss substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address proposed regulatory provisions that are technical or otherwise minor in effect.

In 2016, the Department conducted negotiated rulemaking and published the 2016 final regulations on the topic of borrower defenses to repayment and related issues, but those regulations have not yet gone into effect. On June 16, 2017, the Department published in the

Federal Register

a notification of the partial delay of effective dates under section 705 of the Administrative Procedure Act (5 U.S.C. 705) (82 FR 27621) (705 Notification), for certain provisions of the final regulations until a legal challenge by the California Association of Private Postsecondary Schools is resolved.

See

Complaint and Prayer for Declaratory and Injunctive Relief,

California Association of Private Postsecondary Schools

v.

DeVos

, Civil Action No. 1:17-cv-00999 (D.D.C. May 24, 2017). Subsequently, we published an interim final rule (82 FR 49114), which gave notice that after the 705 notification delayed implementation past July 1, 2017, pursuant to the Department's interpretation of the master calendar requirement, the earliest the regulation could go into effect was July 1, 2018. Then, on February 14, 2018, following a notice of proposed rulemaking, the Department published a final rule establishing July 1, 2019, as the effective date of the 2016 final regulations (83 FR 6458).

We now propose rescission of the 2016 final regulations that we delayed through previous notification. In this preamble, we describe the proposed changes to the regulations based on the currently effective regulations and not the delayed provisions of the 2016 final regulations. In light of the withdrawal (

i.e.

rescission) of the delayed provisions of the 2016 final regulations, this approach is required under 1 CFR part 21, which provides that each agency that drafts regulations must do so as an amendment to the Code of Federal Regulations. The currently effective regulations, not the delayed provisions of the 2016 final regulations, are the provisions codified in the Code of Federal Regulations. Thus, we are

amending the currently effective regulations, not the delayed provisions of the 2016 final regulations, in this NPRM. Throughout the “Significant Proposed Regulations” section of this NPRM, we describe our reasoning for the proposed rescissions in the context of the topics to which they pertain. For purposes of determining the budget impact of the regulation, we utilize the 2019 President's Budget Request, which assumed the implementation of the 2016 regulation.

Please note that the following two issues in the 2016 final regulations are being addressed through a separate rulemaking process focused on the Gainful Employment regulations process: The requirement that proprietary schools at which the median borrower has not repaid in full, or paid down by at least one dollar the outstanding balance of, the borrower's loans to provide a Department-issued plain language warning in promotional materials and advertisements; and the requirement for a school to disclose on its website and to prospective and enrolled students if it is required to provide financial protection, such as a letter of credit, to the Department. The Department felt that the Gainful Employment rulemaking was the appropriate place to propose and discuss eliminating these disclosures because the Gainful Employment negotiated rulemaking committee addressed other regulations on disclosures.

Thus, in this NPRM, we propose rescinding the revisions to or additions to the following regulations:

Section 668.14(b)(30), (31), and (32) Program participation agreement.

Section 668.41(h) and (i) Reporting and disclosure of information.

Section 668.71(c) Scope and special definitions.

Section 668.90(a)(3) Initial and final decisions.

Section 668.93(h), (i) and (j) Limitation.

Section 668.171 General.

Section 668.175(c), (d), (f), and (h) Alternative standards and requirements.

Part 668, subpart L, appendix C.

Section 674.33(g)(3) and (8) Repayment.

Section 682.202(b)(1) Permissible charges by lenders to borrowers.

Section 682.211(i)(7) Forbearance.

Section 682.402(d)(3), (d)(6)(ii)(B)(

1

) and (

2

), (d)(6)(ii)(F) introductory text, (d)(6)(ii)(F)(

5

), (d)(6)(ii)(G), (d)(6)(ii)(H) through (K), (d)(7)(ii) and (iii), (d)(8), and (e)(6)(iii) Death, disability, closed school, false certification, unpaid refunds, and bankruptcy payments.

Section 682.405(b)(4)(ii) Loan rehabilitation agreement.

Section 682.410(b)(4) and (b)(6)(viii) Fiscal, administrative, and enforcement requirements.

Section 685.200(f)(3)(v) and (f)(4)(iii) Borrower eligibility.

Section 685.205(b)(6) Forbearance.

Section 685.206(c) Borrower responsibilities and defenses.

Section 685.212(k) Discharge of a loan obligation.

Section 685.214(c)(2), (f)(4) through (7) Closed school discharge.

Section 685.215(a)(1), (c) introductory text, (c)(1) through (8), and (d) Discharge for false certification of student eligibility or unauthorized payment.

Section 685.222 Borrower defenses.

Part 685 subpart B, appendix A Examples of borrower relief.

Section 685.300(b)(11) and (12) and (d) through (i) Agreements between an eligible school and the Secretary for participation in the Direct Loan Program.

Section 685.308(a) Remedial actions.

Note:

Section 668.90 has been redesignated as § 668.91 and § 668.93 has been redesignated as § 668.94 pursuant to the borrower defense procedural rule, published January 19, 2017 at 82 FR 6253 (the borrower defense procedural rule).

Borrower Defenses—General (§ 685.206)

Background:

Section 455(h) of the HEA authorizes the Secretary to specify which acts or omissions of an institution of higher education a borrower may assert as a defense to the repayment of a Direct Loan. 20 U.S.C. 1087e(h). Under the Department's current regulations at § 685.206(c), a borrower may assert as a defense against repayment of a loan in response to a proceeding by the Department to collect on a Direct Loan, any act or omission of the school attended by the student directly and clearly related to the making of a Direct Loan for enrollment at the institution or the provision of educational services for which the loan was made that would give rise to a cause of action against the school under applicable State law (referred to in this document as the “State law standard”).

The Department first promulgated the Direct Loan Program's borrower defense to repayment regulation December 1, 1994 (59 FR 61664, 61696), which became effective on July 1, 1995. The Department's intent was for this rule to be effective for the 1995-1996 academic year and then to develop a more extensive rule for both the Direct Loan and FFEL Loan programs through a negotiated rulemaking process. However, based on the recommendation of the non-Federal negotiators on a negotiated rulemaking committee convened in the spring of 1995 (60 FR 37768), the Secretary decided not to develop further regulations or to revise § 685.206(c).

Though the regulation has been in effect since 1995, it was rarely used prior to 2015, when the Department received applications from borrowers for loan relief in response to the Department's announcement (

see www.ed.gov/news/press-releases/fact-sheet-protecting-students-abusive-career-colleges

and

https://studentaid.ed.gov/sa/about/announcements/corinthian

) that it would consider affirmative borrower defense claims.

The current regulation does not set forth the process a borrower may use to assert an affirmative borrower defense claim. Therefore, the Department appointed a Special Master in June 2015 to create and oversee a process to provide debt relief for borrowers who sought Federal student loan discharges based on claims against the borrower's institution. Later, the Department's Federal Student Aid (FSA) office assumed responsibility for resolving these claims, and it continues to do so. This FSA process has proven to be burdensome to borrowers, given the time it takes to adjudicate each claim, and costly to taxpayers.

The Department is considering whether to allow only defensive claims or to continue the approach taken in its 2015 interpretation that allowed it to accept both defensive and affirmative claims. One regulatory alternative, specified in the proposed amendatory language, continues to provide a remedy to borrowers in a collections proceeding, as has been the case since the borrower defense to repayment regulation was promulgated in 1994, by permitting borrowers to assert defense to repayment during a proceeding by the Department to collect on a Direct Loan including, but not limited to, tax refund offset proceedings under 34 CFR 30.33, wage garnishment proceedings under section 488A of the HEA, salary offset proceedings for Federal employees under 34 CFR part 31, and consumer reporting proceedings under 31 U.S.C. 3711(f).

The other regulatory alternative, specified in the proposed amendatory language, would allow for both affirmative claims from borrowers not in a collections action and defensive claims. If we do accept affirmative claims, we would need to develop appropriate deterrents to frivolous claims. At a minimum, the Department

would revise the affirmative claim review process to provide institutions with a reasonable opportunity to see and respond to borrower claims and would require the borrower to sign a waiver that allows the institutions to provide the Department with any information from the borrower's education record that is relevant to the claim. The Department could also limit the period of time after a borrower leaves an institution during which a borrower could make an affirmative claim. Given the Department's long-standing requirement that institutions retain certain documents for only three years, the Department could limit claims to the three-year period following the borrower's departure from the institution to ensure that the institution would have access to records that could be relevant to their defense. The Department seeks public comment on ways to balance the need to serve borrowers with the need to limit unsubstantiated claims and provide an opportunity for the institution to provide evidence in its own defense.

Borrower Defense to Repayment—Assertion of Defenses to Repayment in Collection Proceedings and Federal Standard for Asserting a Borrower Defense to Repayment

Statute:

Section 455(h) of the HEA authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan.

Current Regulations:

Section 685.206(c) establishes the conditions under which a Direct Loan borrower may assert a defense to repayment, the relief afforded by the Secretary in the event the defense is successful, and the Secretary's authority to recover from the school any loss that results from a defense to repayment discharge granted by the Department. Specifically, § 685.206(c)(1) provides that a borrower may assert a defense to repayment based upon any act or omission of the school that would give rise to a cause of action against the school under applicable State law. The borrower may raise such defense to repayment during a proceeding by the Department to collect on a Direct Loan, including, but not limited to, tax refund offset proceedings under 34 CFR 30.33, wage garnishment proceedings under section 488A of the HEA, salary offset proceedings for Federal employees under 34 CFR part 31, and consumer reporting proceedings under 31 U.S.C. 3711(f). Under the current regulations, since 2015, the Department has accepted affirmative claims,

i.e.,

those not in collection proceedings. Under 34 CFR 685.206(c)(2), if a borrower defense to repayment discharge is approved, the borrower is relieved of the obligation to pay all or part of the loan and associated costs and fees, and may be afforded such further relief as the Secretary determines is appropriate, including, among other things, reimbursement of amounts previously paid toward the loan.

Proposed Regulations:

Proposed § 685.206(c) would specify that, with respect to Direct Loans disbursed prior to July 1, 2019, the State law standard would continue to apply. Proposed paragraph (c) maintains that a borrower defense to repayment of these loans may be asserted in proceedings including, but not limited to, tax refund offset proceedings, wage garnishment proceedings, salary offset proceedings for Federal employees, and consumer reporting agency reporting proceedings, but includes clarifications as to statutory and regulatory authorities for those specified proceedings.

Proposed § 685.206(d) would establish a new uniform standard not based upon applicable State law, also referred to here as the “Federal standard” for a borrower's defense to repayment discharge on a Direct Loan first disbursed on or after July 1, 2019. First, § 685.206(d)(1) would define terms applicable to the Federal standard, including the term “borrower defense to repayment.” Consistent with the Department's current interpretation that it is not appropriate for the taxpayer to face potential loss based on action by schools in matters unrelated to the Department's loan programs, this definition would provide that a borrower defense to repayment discharge must directly and clearly relate to the making of the Direct Loan, or the making of a loan that was repaid by a Direct Consolidation Loan, for enrollment at a school or the provision of educational services for which the loan was obtained. In addition, we clarify that for the purposes of this paragraph, “borrower” includes the student who attended the institution for whom Direct Loans (Parent PLUS) were obtained by a parent. Further, under this proposed definition, a “borrower defense to repayment” would be considered to include both a defense to repayment of amounts owed to the Secretary on a Direct Loan and reimbursement of payments previously made to the Secretary on the Direct Loan. Proposed § 685.206(d)(1) also would define the terms “provision of educational services” and “school” and “institution.”

Parallel to the current regulation, the proposed regulations provide that for loans first disbursed on or after July 1, 2019, a borrower may assert a defense to repayment “defensive” claim as part of a proceeding related to certain actions by the Department to collect on a Direct Loan, including tax refund offset proceedings under 26 U.S.C. 6402(d), 31 U.S.C. 3716 and 3720A; wage garnishment proceedings under section 488A of the Act or under 31 U.S.C. 3720D and 34 CFR part 34; salary offset proceedings for Federal employees under 34 CFR part 31, 5 U.S.C. 5514, and 31 U.S.C. 3716; and consumer reporting agency reporting proceedings under 31 U.S.C. 3711(e). This language is reflected in proposed § 685.206(d)(2)—Alternative A.

The Department is also considering accepting “affirmative” claims from borrowers not in a collections action. Proposed regulatory language for this approach is set forth in § 685.206(d)(2)—Alternative B. Like Alternative A, Alternative B proposes to consider both affirmative and defensive claims under a preponderance of the evidence standard. But the Department seeks comment on whether claims under this regulatory alternative should have to be supported by clear and convincing evidence, rather than a preponderance of the evidence. Such a standard might be appropriate, as it is the standard used in most States for adjudicating fraud litigation and could deter some frivolous affirmative claims.

See

Restatement (Third) of Torts: Liab. for Econ. Harm section 9 TD No 2 (2014) (“The elements of a tort claim ordinarily must be proven by a preponderance of the evidence, but most courts have required clear and convincing evidence to establish some or all of the elements of fraud.”)

The Department is interested in comments regarding the benefits or risks of these proposals. The Department also seeks public comments regarding other mechanisms that could be utilized to discourage the submission of frivolous claims, which are costly for the Department and institutions to adjudicate. Such mechanisms could include limiting the period of time after a borrower leaves an institution during which a defense to repayment claim can be submitted (such as imposing a 3 year limit on borrower defense to repayment claims to align with the Department's 3 year record retention requirement).

Under this proposed regulation, the Department would develop a claim review process for either (or both) defensive or affirmative claims that would provide institutions with a reasonable opportunity to see and

respond to borrower claims. The Department proposes, for example, to require the borrower to sign a waiver that allows the institution to provide the Department with any information from the borrower's education records that is relevant to the claim. The Department also proposes to require borrowers to submit information about whether, for reasons other than the education received, the borrower has been removed from a job due to on-the-job-performance, disqualified from work in the field for which the borrower trained, or worked less than full-time in the chosen field. Such circumstances would not disqualify a borrower from a successful defense to repayment, but might be relevant to determining whether the asserted financial harm was in fact caused by an alleged misrepresentation.

The proposed regulations also would remind borrowers submitting affirmative or defensive claims that if the borrower receives a 100 percent discharge for the loan, the institution has the right to withhold an official transcript for the borrower, as has always been the case in instances in which the borrower has been awarded student loan discharge through false certification, closed school or defense to repayment discharge.

The Department also welcomes comments regarding the process the Department might use to collect evidence from borrowers and schools, to evaluate the merits of a borrower's defense to repayment claim, and to render decisions on claims that are submitted affirmatively.

Under proposed § 685.206(d)(4), a borrower defense to repayment related to a loan that was repaid by a Direct Consolidation Loan disbursed on or after July 1, 2019, would be evaluated under the proposed Federal standard. Although this approach may result in different treatment of some borrowers who took out loans before this NPRM, such differences in treatment would arise only if the borrower chose to take out a new Direct Consolidation Loan after July 1, 2019. This is consistent with the longstanding treatment of consolidation loans as new loans. The Department is interested in comments as to whether this structure would likely lead borrowers to engage in, or borrower advocates to encourage, strategic default for the sole purpose of asserting a defense to repayment. Proposed § 685.206(d)(5) includes two alternatives relating to affirmative and defensive claims.

Section 685.206(d)(5)(i) and (ii)—Alternative A provides that the Secretary will approve the borrower's defense to repayment claim if a preponderance of the evidence establishes that the school at which the borrower was enrolled made a misrepresentation, upon which the borrower reasonably relied under the circumstances in deciding to obtain a Direct Loan (or a loan repaid by a Direct Consolidation Loan) for the student to enroll in a program at the school which resulted in financial harm to the borrower. The proposed regulations in § 685.206(d)(5) would define misrepresentation as a statement, act, or omission by the eligible institution to the borrower that is (i) false, misleading, or deceptive, (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, and (iii) directly and clearly related to the making of a Direct Loan for enrollment at the school or to the provision of educational services for which the loan was made. Proposed section 685.206(d)(5)(i) and (ii)—Alternative B contains the same language with respect to defensive claims and extends the proposed standard to affirmative claims.

Proposed § 685.206(d)(5)(iii) sets forth that the Secretary may consider additional information when evaluating a claim. Proposed § 685.206(d)(5)(iv) would provide additional information about what may constitute a preponderance of the evidence of a misrepresentation and evidence of financial harm. The Department is interested in comments as to whether it should require clear and convincing evidence of misrepresentation and financial harm (as opposed to a preponderance of the evidence of misrepresentation and financial harm) in the event it continues to consider affirmative claims.

Proposed § 685.206(d)(6) would clarify that a school's violation of an eligibility or compliance requirement in the HEA or the Department's implementing regulations is not a basis for a borrower defense to repayment unless that conduct would, by itself, establish a basis for a defense to repayment. Proposed § 685.206(d)(6) also lists other circumstances that would not suffice to establish a defense to repayment under the proposed Federal standard.

Reasons:

During the public hearings and negotiated rulemaking sessions, the Department heard from representatives from a broad range of constituencies on what they thought was an appropriate basis for a borrower defense to repayment. At the negotiated rulemaking sessions, negotiators expressed a shared desire to develop a regulation that would provide for fair treatment of borrowers who had been harmed by an act or omission of a school, but differed widely in their views of how this might be achieved. The Department began negotiations by asking whether we should establish a Federal standard for evaluating future borrower defense to repayment applications.

Defense to Repayment--Assertion of Borrower Defenses

As part of the discussions of a Federal standard, negotiators debated whether borrowers should be allowed to assert defenses to repayment affirmatively—in other words, at any point of time regardless of whether the borrower's loan is in default and the subject of Department collection proceedings—or only defensively, during such collection proceedings. Many negotiators were in favor of permitting borrowers to pursue affirmative claims to allow borrowers an opportunity to rectify the harm stemming from an act or omission of a school. One negotiator noted that the current regulation implies that a borrower raises a defense to repayment in response to collection activities and asked what, if any, discretion the Department might have to interpret the regulation more broadly. Another negotiator asserted that she understood that the Department did not interpret the current regulation to limit claims to borrowers who are in default and that it had allowed affirmative applications to be submitted by borrowers.

From 1994 to 2015, the Department's regulation—as per earlier negotiated rulemaking—provided defense to repayment loan discharge opportunities only to borrowers who were in a collection proceedings. As a matter of practice, starting in 2015 and later codified in the 2016 regulations, the Department has (primarily in response to the closure of Corinthian Colleges, Inc.) accepted borrower defenses to repayment requests asserted affirmatively outside of the collection proceedings specifically listed in the existing regulation.

We are now considering that for loans first disbursed on or after July 1, 2019, the Department return to the pre-2015 interpretation such that borrowers may only submit applications in connection with one of the specific collection proceedings listed in current § 685.206(c). The language of both the statute and existing regulations on borrower defenses is consistent with this approach, and the Department believes it may better balance the competing interests of borrowers and taxpayers. Under this approach, the Department would view the assertion of

defenses to repayment as a last resort for borrowers, with disputes between borrowers and schools primarily resolved by those parties in the first instance. The proposal to allow borrowers to assert defenses to repayment during the enumerated Department collection proceedings, and not as affirmative claims at any point in time, aligns with the Department's 20 year prior practice and protects taxpayers from liabilities that should be leveraged first against the institutions that committed acts or omissions covered by the defense to repayment provision.

Section 455(h) of the HEA provides that “a borrower may assert . . . a

defense

to repayment of a loan made under [the Direct Loan Program],” on the basis of an act or omission of a school, as specified by the Secretary. 20 U.S.C. 1087e(h) (emphasis added). The current regulations implementing the statutory provision reflect the Department's understanding at the time of the rule's promulgation in 1994 that the statute directs the Department to provide borrowers with a

defense

to repayment, as part of certain Department collection actions.

See

34 CFR 685.206(c)(1) (“In any proceeding to collect on a Direct Loan, the borrower may assert [ ] a

defense

to repayment . . . These proceedings include, but are not limited to, the following . . .” (emphasis added)). The proceedings referenced in the regulation only occur after a borrower defaults on a loan.

The Department processed a small number of defense to repayment claims from borrowers in a collections proceeding under the existing regulation from 1994 through 2015. In response to the closure of Corinthian Colleges, Inc. (CCI) in 2015, however, the Department changed its position and began to accept borrowers' requests for the type of relief (loan discharges and certain further relief) provided under 34 CFR 685.206(c), even before the borrower defaulted on a loan—or, in other words, the Department allowed borrowers to affirmatively assert borrower defense claims. As a result, the Department was flooded with tens of thousands of borrower defense claims before it had promulgated new regulations that officially notified the public of this new interpretation or established a mechanism or structure under which to adjudicate the large volume of claims.

After further consideration of the history and regulatory provisions governing borrower defenses, the Department believes that it may be appropriate to provide in the proposed regulations that, for loans first disbursed after the proposed rules' anticipated effective date of July 1, 2019, borrowers may request a loan discharge and related relief under the proposed Federal misrepresentation standard for such requests only by asserting such defense in a proceeding to collect on the loan by the Department (

i.e.,

a tax refund offset proceeding, a wage garnishment proceeding, a salary offset proceeding for a Federal employee, or a consumer reporting agency reporting proceeding).

As noted above, this proposal is squarely within the Department's authority under section 455(h) of the HEA to “specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a

defense

to repayment” of a Direct Loan. 20 U.S.C. 1087e(h) (emphasis added). It is also consistent with the Department's direction that students should use processes already in place at schools, as well as at accrediting agencies and State authorizing agencies, to resolve issues relating to the services provided by the institution as quickly as possible following any incident, rather than delaying corrective action and shifting the financial burden to the taxpayer.

This differs from the approach taken in the 2016 final regulations. In those regulations, the Department took the approach it had adopted in 2015 to allow affirmative defense to repayment claims and accordingly would have removed language referencing the Department's collection proceedings as the forum for a borrower's assertion of a defense to repayment. The Department continues to consider whether to accept affirmative claims from borrowers, as opposed to only accepting defensive claims from borrowers during a specified collection proceeding. However, the Department believes that if it were to allow affirmative claims, it would need to also consider appropriate deterrents to frivolous claims.

The Department is concerned that in the event of affirmative claims, it is relatively easy for a borrower to submit an application for loan relief, even if the borrower has suffered no harm, on the chance that perhaps some amount of loan forgiveness will be awarded. Although the barriers to submitting a claim are low for borrowers, the collective burden of numerous unjustified claims could be significant for both the Department and institutions. This could delay our efforts to review and provide loan relief to borrowers who have been genuinely harmed. The Department seeks comment on how it could continue to accept and review affirmative claims, but at the same time discourage borrowers from submitting unjustified claims. One idea is to increase the evidentiary standard to “clear and convincing” for affirmative claims. The Department seeks comment on whether or not this evidentiary standard would be appropriate to balance the need to serve borrowers who have been harmed and the need to reduce the number of unjustified claims students might otherwise submit. If such a standard is warranted, the Department also seeks comment about whether it should continue to evaluate defensive claims under the preponderance of the evidence standard and on the rationale for having two different evidentiary standards.

The Department believes that, even if it continues to accept affirmative claims, it must also accept defensive claims so both students in repayment and students in collections have access to remedies for instances of fraud.

Defense to Repayment—Federal Standard (Provision of Educational Services and Relationship With the Loan)

The language we propose in this NPRM clarifies that the misrepresentation of a school forming the basis of a borrower defense to repayment discharge must directly and clearly relate to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was made. This language reflects the Department's consistent position, as explained in a Notice of Interpretation issued in 1995 (60 FR 37769) and adopted in the 2016 final regulations (81 FR 76080 (revised 34 CFR 685.206(c)(1)), 76083 (new 34 CFR 685.222(a)(5))), that the Department will acknowledge a borrower defense to repayment only if it directly relates to the loan or to the school's provision of educational services for which the loan was provided.

Some non-Federal negotiators requested that the regulation define the term “provision of educational services” and include a reference to educational resources. Another non-Federal negotiator noted that the Department has made its understanding of this term “provision of educational services” clear in the regulatory history for the borrower defense regulation and that there are well-developed bodies of State law that explain this term.

The Department agrees that the term “provision of educational services” is open to interpretation and, in proposed § 685.206(d), we define that term as “the educational resources provided by the institution that are required by an accreditation agency or a state licensing

or authorizing agency for the completion of the student's educational program.” We thus intend for a misrepresentation relating to the “provision of educational services” to be clearly and directly related to the borrower's program of study. We also intend misrepresentation to include items such as the nature of the school's educational program or related resources required by an accreditor or licensing authority, the nature of the school's financial charges, the advertised outcomes (including job placement rates, licensure pass rates, and graduation rates) of prior graduates of the school's educational program, an institution's published rankings or selectivity statistics, the eligibility of graduates of the educational program for licensure or certification, the State agency authorization or approval of the school or educational program, or an accreditor approval of the school or educational program.

Defense to Repayment—Consolidation Loans

The Department proposes that for a Direct Consolidation Loan first issued on or after the anticipated effective date of these regulations, a borrower may assert a defense to repayment under the proposed Federal standard (discussed below). Under the Department's existing regulation at 34 CFR 685.220, a borrower may consolidate certain specified loans into a Direct Consolidation Loan. Generally, the Department views a consolidation loan as a new loan, distinct from the underlying loans that were paid in full by the proceeds of the Direct Consolidation Loan. The Department's borrower defense authority is part of the Direct Loan Program,

see

20 U.S.C. 1087e(h) (“[A] borrower may assert . . . a defense to repayment of a loan made under this part [as to the Direct Loan Program]”) and Direct Consolidation Loans are made under the Direct Loan Program. As a result, the Department's existing practice is to provide relief under the Direct Loan authority if the underlying loans have been consolidated under the Direct Loan Program into a Direct Consolidation Loan. Or, if consolidation is being considered depending on the outcome of any preliminary analysis of whether relief might be available under 34 CFR 685.206(c), relief is not actually provided until the borrower's loans have been consolidated into a Direct Consolidation Loan.

The Department's proposal clarifies the Department's position and the standard that it proposes to use to evaluate a Direct Consolidation Loan borrower's defense to repayment claim. The Department will consider a misrepresentation that the borrower reasonably relied upon under the circumstances in deciding to obtain the underlying loan repaid by the Direct Consolidation Loan, for the student to enroll or continue enrollment in a program at an institution.

The Department's standard is designed to provide borrowers with relief for the misrepresentations made with either knowledge of their false, misleading, or deceptive nature, or with a reckless disregard for the truth. Where misconduct of such nature has been demonstrated, the Department believes it is appropriate to provide borrowers with relief, regardless of whether the underlying loan is a Direct Loan. However, given that the Department's borrower defense authority is part of the Direct Loan Program,

see

20 U.S.C. 1087e(h) (“[A] borrower may assert . . . a defense to repayment of a loan made under this part [as to the Direct Loan Program]”), the Department will only consider providing such relief if the underlying loans were themselves Direct Loans or have been consolidated under the Direct Loan Program, into a Direct Consolidation Loan. If a defense to repayment was approved on a Direct Consolidation Loan, borrowers would receive a discharge of the remaining balance on their Direct Consolidation Loan in an amount proportionate to the amount of the underlying loan at issue and would receive proportionate reimbursements of any payments made to the Secretary on the underlying loan or the Direct Consolidation Loan.

See Hiatt

v.

Indiana State Student Assistance Comm. (In re Hiatt),

36 F.3d. 21, 24 (7th Cir., 1994) and

In re McBurney,

357 B.R. 536, 538 (9th Cir BAP, 2006), supporting the consideration of consolidation loans as new loans.

Under the Department's proposal, the standard that would be applied to determine if a defense to repayment has been established is the Federal standard for Direct Consolidation Loans first disbursed after July 1, 2019. The 2016 final regulations would have similarly applied a Federal standard to some underlying loans that were

not

Direct Loans, but it would have done so based upon the underlying loans' date of first disbursement. Thus, under the 2016 final regulations, the same claim might have required the application of different standards to different underlying loans, if the borrower had both underlying Direct Loans and loans that are not Direct Loans. The Department believes that the language it proposes in this NPRM is more consistent with the Department's longstanding policy regarding the treatment of consolidated loans, would be more easily understood, would create less confusion for schools and borrowers, and would be easier to administer for the Department. Further, as a consolidation loan is a new loan, the Department believes it is appropriate to apply the date of first disbursement of that loan to determine what standard would apply. The Department understands that this approach may deter some borrowers who might otherwise wish to consolidate their loans but do not wish to be subject to the proposed standard and associated time limits. But the Department believes that this concern is outweighed by the benefits of this standard. In all events, as under the existing regulations, a borrower would be able to choose consolidation if he or she determines it is the right option for the borrower. The Department invites comment on this approach.

Defense to Repayment—Federal Standard (Misrepresentation)

In this rulemaking, the Department is proposing an exclusively Federal standard not based in State law for loans disbursed after July 1, 2019, for ease of administration and to provide fair, equitable treatment for all borrowers regardless of the State in which the school is located or the student was in residence while enrolled or while in repayment. That Federal standard differs somewhat from the “substantial misrepresentation” standard adopted in the 2016 final regulations and drawn from more general enforcement contexts. 81 FR 75939-75940. It also differs somewhat from the proposal that the Department offered during negotiations, in that it relies solely on misrepresentation as the basis for discharge, rather than also allowing final judgments to serve as a basis for discharge. As discussed in more detail below, the Department believes that the standard it proposes will provide more equitable treatment for borrowers and ease of administration for the Department.

During discussions relating to the Federal standard for borrower defense to repayment applications, negotiators disagreed about whether to establish a Federal standard at all. Some negotiators expressed opposition, arguing that protecting consumers and ensuring the educational quality of schools licensed to operate by the State are the responsibilities of the States. Other negotiators noted that a Federal standard not based in State law could disadvantage borrowers. Many States'

consumer protection laws might be more favorable to borrowers than the Federal standard proposed by the Department (discussed immediately below). These negotiators also noted that the proposed Departmental process to adjudicate claims under a Federal standard would not provide borrowers with the benefit of a discovery process like the one that exists in judicial proceedings. Still, many negotiators supported establishing a Federal standard, arguing that doing so would provide clarity, uniformity of borrower treatment, and ease of administration. Some negotiators stated that the Department should adopt a structure under which a Federal standard would serve as a minimum standard, but with the Department also evaluating whether a borrower defense claim would receive more favorable treatment under applicable State law and then applying the more favorable standard to the borrower defense claim.

The Department is persuaded that an exclusively Federal standard for borrower defense to repayment applications is appropriate. The Department's primary reason for proposing a Federal standard for borrower defenses to repayment is that Direct Loans are Federal assets and the benefits of such loans should be established by Federal law. In addition, the Department believes that using a Federal standard will reduce the burden on borrowers and the Department. Applying a State law-based standard means that borrowers have to determine which State law applies to their claim and the Department has to review that determination. Moreover, borrowers in some States may have access to more favorable law than borrowers in other States for the same Federal defense to repayment. In contrast, applying a Federal standard will eliminate the issue of what law applies and ensure that all borrowers' claims are evaluated under the same rules.

The Department's proposed Federal standard is a modified version of the proposal it offered at the negotiated rulemaking sessions. The Department's proposal during negotiations would have included two different bases for a borrower to assert a defense to repayment for loans first disbursed on or after July 1, 2019: (1) A final, definitive judgment by a State or Federal court of competent jurisdiction, rendered in a contested proceeding, where the borrower was awarded monetary damages against the institution relating to the student's enrollment at the subject institution or the provision of educational services for which the loan was obtained, and (2) generally, a misrepresentation by the school made with intent to deceive, knowledge of the falsity of the misrepresentation, or a reckless disregard for the truth, and that resulted in financial harm to the borrower. In this NPRM, the Department now proposes a modified version of the second basis for relief—a misrepresentation standard, as discussed in depth below.

With regard to the misrepresentation standard, negotiators disagreed on the appropriate definition of “misrepresentation” and whether the borrower should be required to prove the school's intent, knowledge of falsity, or reckless disregard for the truth. Some negotiators argued that it would be difficult for a borrower to prove that a school had acted with the requisite intent or had knowledge of the falsity of the misrepresentation, and that it would also be difficult for a borrower to demonstrate that the school had engaged in a level of misconduct that would amount to a “reckless disregard for the truth.” These negotiators argued in favor of a standard that would enable borrowers to avail themselves of the full range of States' consumer protection laws that prohibit certain unfair and deceptive conduct (commonly known as “unfair and deceptive trade acts and practices” or “UDAP” laws). Some negotiators argued the Department should not approve borrower defenses and also hold a school liable for losses from approvals of misrepresentation-based defenses to repayment, if the school had committed an inadvertent mistake or if the misrepresentation had been made by an employee acting without the school's knowledge or against the school's direction.

The 2016 final regulations provided that a borrower may assert a borrower defense for a “substantial misrepresentation” as defined in the Department's regulation at 34 CFR 668.71, if the school, any of its representatives, or any institution, organization, or person with whom the school has an agreement for specified services made such a substantial misrepresentation that the borrower reasonably relied on to the borrower's detriment in deciding to attend, or continue attending, the school or in deciding to take out a Direct Loan.

See

81 FR 76083 (text for 34 CFR 685.222(d)). The 2016 final regulations also included a non-exclusive list of circumstances for a Department official to consider in determining whether the borrower's reliance was reasonable. Under those regulations, a borrower would be able to assert such a borrower defense to recover funds previously collected by the Secretary not later than six years after the borrower discovered, or reasonably could have discovered, the substantial misrepresentation. The borrower would also be able to assert a defense to any outstanding amounts owed on the loan at any time.

The “substantial misrepresentation” definition was drawn from § 668.71, which permits the Department to bring an enforcement action for a substantial misrepresentation in the form of a suspension, limitation, termination, or fine action. The section generally defines a misrepresentation as any false, erroneous, or misleading statement made by a school, and it defines a misleading statement to include any orally or visually made statement, or one that is made in writing or by other means, that has the likelihood or tendency to deceive. It then defines a “substantial misrepresentation” as any misrepresentation on which the person to whom it was made could reasonably be expected to rely, or has relied, to that person's detriment. The 2016 final regulations amended the language of § 668.71 to explicitly note that an omission of information can amount to a misrepresentation. 81 FR 76072 (text of language added to 34 CFR 668.71). As stated above, while a substantial misrepresentation under current § 668.71 includes misrepresentations that a person had relied upon or could reasonably have been expected to rely upon, for the purposes of borrower defense to repayment under the 2016 final regulations, a substantial misrepresentation would have been found only if the person had, indeed, reasonably relied upon the misrepresentation to his or her detriment.

In this NPRM, the Department proposes a different Federal standard for defenses to repayment based upon misrepresentations by an institution to the borrower. Under the proposed standard, a misrepresentation is a statement, act, or omission by an eligible institution to a borrower upon which the borrower reasonably relies that is false, misleading, deceptive, and made with knowledge of its false, misleading, or deceptive nature or with reckless disregard for the truth and directly and clearly related to the making of a Direct Loan, or a loan repaid by a Direct Consolidation Loan, for enrollment at the school or to the provision of educational services for which the loan was made. The vast majority of the borrower defense claims filed since 2015 have alleged that the school at issue made statements to the borrower that amount to misrepresentations under State law. As

a result, we believe it is appropriate to base the Federal standard upon a school's misrepresentations. We have removed breach of contract or State law judgment as a standard for borrower defense relief since breach of contract or a State law judgment may be for actions or events not directly related to the educational services provided by the institution, and therefore do not qualify for relief under borrower defense to repayment. That said, a State law judgment could serve as evidence provided by a borrower in filing a borrower defense to repayment application.

Nothing in this proposed regulation attempts to prevent a borrower from taking action against an institution of higher education based on State law. However, for the purpose of evaluating a borrower's defense to repayment claim, only the new Federal standard will be considered.

The proposed standard takes the same position as in the 2016 final regulations that certain persons and institutions affiliated with a school may make misrepresentations leading to a borrower defense to repayment under circumstances generally understood to render those misrepresentations attributable to the school.

In the 2016 final regulations, the Department declined to include a requirement that the borrower prove that the school had acted with intent in making the misrepresentation. In the preamble to those regulations, the Department also specifically declined to include any requirement that the Department find that the school had knowledge of the misrepresentation. 81 FR 75947. The Department reasoned, in 2016, that it is more reasonable and fair to have an institution be responsible for the harm caused to borrowers as a result of a misrepresentation, even if such a misrepresentation is the result of innocent or inadvertent mistakes.

Id.

at 75947-75948.

As was the case in the 2016 final regulations, the Department does not propose that a defense to repayment be approved only when a school can be shown to have made a misrepresentation with the intent to induce the reliance of the borrower on the misrepresentation. The Department agrees with negotiators that it is unlikely that a borrower would have evidence to demonstrate that an institution had acted with intent to deceive. But given its responsibility to the Federal taxpayer, the Department believes that defense to repayment should be granted only where a preponderance of the evidence shows that a school has made a misrepresentation with either knowledge of its falsity or with a reckless disregard of the truth. The Department's proposal includes a non-exhaustive list of evidence that may indicate that such a misrepresentation took place. The Department believes that this standard strikes a balance between protecting borrowers by establishing a standard of evidence that is reasonable for a borrower to meet and protecting the Federal taxpayer by requiring a level of evidence that ensures misrepresentation actually took place and the student relied upon that misrepresentation and suffered harm.

Like the 2016 final regulations, the Department's proposed misrepresentation standard also covers omissions. The Department believes that an omission of information that makes a statement false, misleading, or deceptive can cause injury to borrowers and can serve as the basis for a defense to repayment. As it did in the 2016 final regulations, the Department recognizes that the reasonableness of a borrower's reliance on the misrepresentation may depend upon the circumstances, and its proposed rule thus states that the Department will look at whether a borrower reasonably relied upon the misrepresentation “under the circumstances.”

Under the proposed alternative regulations, which would return to the practice of allowing borrower defense to repayment applications only in response to Department collection proceedings, the proposed standard differs from the time limitations imposed under the 2016 final regulations. Those regulations imposed a six-year limitation period on a borrower's ability to raise a defense to repayment claim for amounts previously collected. Under the proposed standard, a borrower may be able to assert a defense to repayment at any time during the repayment period, once the loan is in collections, regardless of whether the collection proceeding is one year or many years after a borrower's discovery of the misrepresentation. The proposal does not impose a limit on the borrower's ability to recover amounts previously collected by the Department.

The Department considered an alternative approach in which the borrower would have only three years following the end of enrollment at the institution to assert a defense to repayment claim. This three-year limit corresponds to the three-year record retention policy imposed by the Department. It is unlikely that it would take a borrower more than three years to realize that he or she was harmed by misrepresentations upon which the borrower relied to make an enrollment decision. However, since collection proceedings can be initiated at any time during the repayment period, the current proposal similarly provides borrowers with the opportunity to assert a defense to repayment during a collection proceeding, regardless of how many years after enrollment that proceeding is commenced. In the event that the Department is persuaded by public comments provided in response to this NPRM to continue accepting affirmative claims, the Department proposes to implement a three-year limit on filing claims after the end of the borrower's enrollment at the institution accused of misrepresentation.

The proposed standard also differs from the 2016 final regulations in that it does not include breach of contract or a State law judgment as a standard for defense to repayment. Although those standards are utilized by the Department in enforcement actions, and breach of contract or a State law judgment could be used as evidence to substantiate a borrower defense claim, breach of contract or a State law judgment, alone, does not automatically qualify a borrower for borrower defense to repayment relief since these may pertain to actions or activities other than the institution's provision of educational services.

Some negotiators noted that consumer protection laws governing misrepresentations are generally the province of the States, but the Department's proposed Federal standard would not invade that province. The proposed Federal standard would not prevent a borrower from pursuing a claim against a school based on a violation of State law. It simply would not provide for that claim to be the basis of a borrower defense to repayment claim. Thus, it would leave such State law claims to be pursued through arbitration, State courts, or other administrative bodies responsible for adjudicating them.

Other negotiators expressed concern that changes to a financial aid award letter not be construed as misrepresentations, and the Department agrees that such changes ordinarily would not qualify as misrepresentations. For example, if a financial aid award letter changes as a result of a change in the borrower's financial circumstances, the Department would not consider the change to form the basis of a borrower defense to repayment claim under our proposed regulations.

Borrower Defense—Judgments and Breach of Contract

During the negotiations, the Department discussed using a non-default, contested Federal or State court judgment issued by a court of competent jurisdiction, as a possible basis for borrower defense claims. Negotiators expressed support generally for a judgment-based standard as one basis for a claim, but some negotiators expressed concern that lawsuits based on the acts or omissions of a school have often been concluded by default judgments that did not result from a contested proceeding or by settlement. Some negotiators also expressed the concern that borrowers may not have the resources to bring such lawsuits or that the schools may require borrowers to execute agreements that would prevent such lawsuits. They urged that the Department accept judgments obtained by government entities, such as State Attorneys General. However, since Direct Loans are Federal assets, only the Federal government has the authority to relieve a borrower of his or her repayment obligation. Therefore, although a State law judgment could serve as evidence to support a borrower defense to repayment claim, the judgment alone would not be sufficient to grant automatic relief.

The Department had included non-default, favorable contested judgments as a basis for a borrower defense claim for loans first disbursed after the anticipated effective date of the 2016 final regulations. In the preamble to those regulations, the Department stated that while it does not anticipate such judgments to be common, such a standard would allow the Department to continue to recognize State law causes of action, without putting the burden on the Department to interpret and apply States' laws. 81 FR 75941-75942. However, this does not alleviate the inequities that can result if, as a result of differences in State laws, two borrowers who have suffered equal harm as the result of the same misrepresentation receive different treatment. Therefore, in this regulation we propose a single Federal standard that would ensure equal treatment of borrowers regardless of where they live or their school is located.

The Department acknowledges negotiators' concerns that some court cases do not result in contested, non-default judgments, such as where the institution chooses to settle pending litigation or an arbitration proceeding and satisfies the claim pursuant to a settlement agreement or consent judgment, or where an insurer for the institution satisfies the claim. But the Department believes this concern is less pressing for these regulations, which do not propose a judgment-based standard for a defense to repayment claims. The Department also acknowledges that private parties often settle disputes among themselves without court action. The Department believes that it is preferable for a school (or its insurer, if such coverage exists) to satisfy a student borrower's meritorious claims of misrepresentation against it and to provide appropriate relief directly to the student borrower for the school's own actions where it is merited. A borrower who receives a favorable decision in such a dispute but believes he or she still has not received the relief to which he or she is entitled may submit the record of that dispute process and decision as evidence in support of the defense to repayment claim with the Department. As part of its adjudication of a defense to repayment, and if the evidence is directly and clearly related to the loan or to the school's provision of education services for which the loan was provided, the Department may also consider as evidence findings of fact by a court of competent jurisdiction or arbitrator, admissions of fact by the school made in a court of competent jurisdiction or arbitration, and court orders.

During the negotiated rulemaking sessions, one negotiator proposed including breaches of contract as a basis for borrower defense claims. In 2016, the Department included breach of contract as a basis for borrower defense in recognition of lawsuits borrowers have brought alleging breaches of contract. 81 FR 39341. But the majority of the defense to repayment applications before the Secretary do not allege breaches of contract, and the Department believes it is appropriate in these proposed regulations to tailor the standard to the types of claims being alleged by borrowers. Moreover, breach of contract, as described in the 2016 regulations, would cover conduct beyond the scope of defense to repayment since breach of contract is not limited to the provision of education services. If the conduct underlying a breach of contract would satisfy the proposed requirements for a misrepresentation, a borrower may assert a defense to repayment for that misrepresentation during a collection proceeding. Or, prior to those proceedings, a borrower may pursue more expedient relief through a school's internal dispute process, arbitration, or other legal proceeding.

While the Department is proposing a new Federal standard based in misrepresentation for loans first disbursed on or after the anticipated effective date of the proposed regulations, July 1, 2019, we are not proposing any changes to the existing State law standard (or, as noted above, the context in which a defense to repayment may be requested) for loans first disbursed before the anticipated effective date of these regulations. Rather, for loans made on or before July 1, 2019, the Department proposes to keep the State law-based standard in the currently effective regulations. In the event that a borrower enters into a consolidation loan, the date on which the loan was consolidated (prior to or after July 1, 2019) determines whether the Department will review a defense to repayment claim based on a State law standard or the proposed Federal standard.

Borrower Defense—Evidentiary Standard for Asserting a Borrower Defense

During the negotiated rulemaking sessions, negotiators were divided on the evidentiary standard that should be applied to borrower defense to repayment claims adjudicated by the Department under a Federal standard. There were extensive discussions regarding the meaning of, and differences between, the terms “clear and convincing evidence” and “preponderance of the evidence.” Some negotiators argued that the evidentiary standard should use terms that are consistent with legal terminology and precedent. Other negotiators advocated using an evidentiary standard that is not based on legal terminology and might be clearer to individual borrowers. In addition, several negotiators argued in favor of an evidentiary standard based on “clear and convincing evidence;” others argued that a “preponderance of the evidence” standard would be fairer to borrowers, since it would not require a high level of evidence that borrowers would be unlikely to be able to provide. One negotiator noted that preponderance of the evidence is the typical standard that applies in civil cases. Negotiators representing consumer advocates asserted that the Department's proposal to apply a preponderance of the evidence standard that requires corroboration of the borrower's attestation would be harder to satisfy than a simpler preponderance of the evidence standard.

We preliminarily agree with negotiators that, given the types of evidence borrowers are likely to have in their possession, a preponderance of the evidence standard is appropriate. The Department is accordingly proposing an

evidentiary standard that requires the borrower to establish by a preponderance of the evidence that the school at which the borrower enrolled made a statement, act, or omission directly and clearly related to enrollment at the school or the provision of educational services upon which the borrower reasonably relied under the circumstances in deciding to obtain a Direct Loan to enroll or continue enrollment in a program at the school that resulted in financial harm to the borrower.

As we noted in the 2016 final regulations, the Department uses a preponderance of the evidence standard in other proceedings regarding borrower debt issues. See 34 CFR 34.14(b), (c) (administrative wage garnishment); 34 CFR 31.7(e) (Federal salary offset). We believe that this evidentiary standard strikes a balance between ensuring that borrowers who have been harmed are not subject to an overly burdensome evidentiary standard and protecting the Federal government, taxpayers, and institutions from unsubstantiated claims.

Proposed § 685.206(d)(5)(ii)—Alternative A would provide that the Secretary will find that the preponderance of the evidence supports the approval of a borrower defense to repayment discharge when the borrower's attestation is supported by sufficient evidence provided by the borrower or otherwise in the possession of the Secretary. The Secretary will permit the institution to review and respond to this evidence and will consider the school's response. Alternative B for this section would extend this standard to affirmative claims as well.

Borrower Defense—Financial Harm

Consistent with its proposal during the negotiated rulemaking sessions, the Department proposes that a misrepresentation may serve as a basis for a borrower defense to repayment only if the misrepresentation resulted in financial harm to the borrower. During discussions of this issue, some negotiators argued that the act of taking a Federal student loan should be sufficient evidence of financial harm to the borrower. These negotiators suggested that, absent the misrepresentation, the borrower may have opted to not take a Federal student loan.

The Department does not agree that taking a Federal student loan, by itself, is sufficient evidence of financial harm to the borrower in the context of a borrower defense to repayment. Borrowers consider a variety of factors in choosing a school or program, including not just cost, but also other attributes of the school, such as its facilities, convenience, and the opportunity for the student to enroll in his or her program of choice (which may be unavailable to the student at other institutions). The borrower has the opportunity to compare schools' and programs' relative costs and other factors before committing to borrow and repay a Federal student loan, and the borrower has the opportunity to leave an institution should it not provide educational opportunities or experiences commensurate with the borrower's expectations. Therefore, even in the event of misrepresentation, the borrower may not be successful in receiving loan relief under the defense to repayment regulation if that misrepresentation was not the basis for the borrower's enrollment decision or it did not cause subsequent financial harm.

Moreover, the Master Promissory Note signed by the borrower describes the borrower's obligation to repay the full amount of the loan even if the student borrower (or the student for whom a PLUS loan was obtained) does not complete the program, does not complete the program within the regular time for program completion, is unable to obtain employment upon completion, or is otherwise dissatisfied with or does not receive the educational or other services that the student borrower purchased from the school. The foregoing information is provided to borrowers again during entrance counseling.

As discussed earlier, some negotiators were concerned that a borrower might allege misrepresentation on the part of the school based solely on a change in the borrower's financial aid award due to changes in financial circumstances or the availability of outside aid, such as vocational rehabilitation funding. The Department does not view such changes to necessarily be evidence of a misrepresentation on the part of the school. Instead, the proposed regulations specify that financial harm may be established if, for example, there were a significant difference between the actual amount or nature of the tuition and fees charged by the school for which the Direct Loan was obtained and the amount or nature of the tuition and fees that the school represented to the borrower the school would charge or was charging. Similarly, financial harm might be established if an institution awarded sizeable grants or scholarships to attract a student to an institution, but then failed to continue such support throughout the program (except in cases in which the student failed to meet the requirements of the scholarship or grant), because the student could have made the decision to enroll based on the reasonable belief that scholarship or grant support would continue. Such misrepresentation could potentially form the basis of a defense to repayment claim.

Some negotiators advocated including opportunity costs or the quality of education as evidence of financial harm. However, the Department believes these assertions of financial harm are too difficult to quantify to be used for that purpose.

Under the 2016 final regulations, a borrower was required to show that he or she had reasonably relied upon the misrepresentation to his or her detriment. 81 FR 76083 (text of 34 CFR 685.222(d)(1)). The use of the word “detriment” echoed the definition for substantial misrepresentation under the Department's regulation for its enforcement activities for a school's misrepresentation under 34 CFR 668.71, which was expressly cross-referenced by the 2016 final regulations' borrower defense to repayment standard. While the 2016 final regulations did not include a definition for “detriment,” in the preamble, the Department noted that generally the term refers to any loss, harm, or injury suffered by a person or property. 81 FR 75951. Further, the Department stated that there was no quantum or minimum amount of detriment required for borrower defense under the substantial misrepresentation standard and a school's failure to provide some element or quality of a program that had been promised may be such a detriment.

Id.

Under the proposed Federal standard, a borrower would be required to demonstrate that the borrower had suffered financial harm as a result of the misrepresentation by the school, and does not use the word “detriment.” As the Department is not proposing to align the Department's enforcement regulation at 34 CFR 668.71 for misrepresentation to the borrower defense to repayment standard, we do not believe it is necessary to use the same term in the proposed regulation. Further, in light of the Department's interest in balancing the need to protect both borrowers and Federal taxpayers, the Department believes it is appropriate to require that financial harm, in the form of a monetary loss as a result of the misrepresentation, be present for a borrower defense to repayment to be approved. As with the 2016 final regulations, however, the Department does not believe it is necessary for a borrower to demonstrate

a specific level of financial harm, other than the presence of such harm, to be eligible for relief under the proposed standard.

Borrower Defense—Filing Deadline for Asserting a Borrower Defense Claim

During the negotiated rulemaking sessions, negotiators discussed whether to impose time limits on a borrower's ability to assert a borrower defense to repayment and possible time periods for such limits. Some negotiators expressed concern that the imposition of a limitation period would bar otherwise valid borrower defenses to repayment, even when the loan(s) in question remained collectible under Federal law.

The proposed regulations do not impose a statute of limitations on the filing of a borrower defense to repayment claim. However, a borrower must comply with the filing deadlines established for the different proceedings in which a borrower defense claim may be raised. For example, when the Department intends to garnish a borrower's wages, the borrower is sent a notice of the Department's intention to initiate wage garnishment and is provided 30 days to request a hearing to dispute that action. A borrower could raise a defense to repayment claim during that 30-day timeframe, but would not be able to raise a claim after that period has elapsed.

With our regulatory proposal to accept defense to repayment claims during the enumerated collection proceedings, as opposed to the regulatory proposal to accept both defensive and affirmative claims, we do not propose to incorporate the timeframes for submission of borrower defense to repayment claims that were included in the 2016 final regulations. As discussed previously, the 2016 final regulations established time limits for borrowers' claims regarding recovery of amounts previously collected, but allowed defenses of repayment for amounts owed to be brought at any time. This NPRM instead enables borrowers to assert claims during collection proceedings, which can occur at any time during the repayment period. Borrowers can accordingly raise their defenses whenever such proceedings are instituted, but must comply with the existing filing deadlines for raising defenses in those collections proceedings. The Department proposes adopting the existing filing deadlines for defensive claims both because amending those deadlines was beyond the scope of the negotiated rulemaking and because harmony of deadlines will reduce confusion for borrowers.

The filing deadlines for the various proceedings in which a defensive borrower defense claim may be raised are reflected in the chart below:

3

The days listed may vary depending on the particular circumstances of each borrower's situation.

Collection action

Number of

days

3

for

borrower

response

Tax Refund Offset proceedings

under 34 CFR 30.33

65

Salary Offset proceedings for Federal employees under 34 CFR part 31

65

Wage Garnishment proceedings

under section 488A of the HEA

30

Consumer Reporting proceedings

under 31 U.S.C. 3711(f)

30

Similar to our approach to timeframes in this NPRM, for suspension of collections, we follow the existing processes in the applicable collection proceeding. For example, with regard to wage garnishment proceedings under section 488A of the HEA, the accompanying regulations at 34 CFR 32.10 state that the wage deductions do not begin until a written decision has been issued, if the borrower has requested a pre-offset hearing to review the existence of amount of the debt. Thus, if a borrower defense claim has been raised in the context of a wage garnishment proceeding, collections would be suspended until a written decision on the wage garnishment has been issued. The 2016 final regulations also included suspension of collection for defaulted loans during a pending borrower defense claim.

If the Department were to accept affirmative claims as well as defensive claims, the Department proposes to impose a three-year time limit on borrowers to file such claims based on regulations that require institutions to retain administrative records for three years, while allowing defensive claims to be asserted at any time in response to collection proceedings. The Department welcomes comments on other approaches to set up a window for submitting affirmative claims. Since institutions would likely need access to records to defend themselves against inaccurate claims, it would make sense to require that affirmative borrower defense claims must be made within the first three years after a student leaves an institution. We recognize that in the case of defensive claims, it is likely that the institution would no longer have access to certain records, but the Department must balance that concern with the need to provide borrowers an opportunity to make a defense to repayment claim during already established opportunities for the borrower to challenge collection of the loan.

Borrower Defense—Exclusions

As discussed above, the Department's consistent position since 1995 has been that the Department will acknowledge a borrower defense to repayment only if it directly relates to the loan or to the school's provision of educational services for which the loan was provided. 60 FR 37769. As a result, the Department has not considered personal injury tort claims or allegations of sexual or racial harassment to be grounds for alleging a defense to repayment. In these regulations, the Department proposes making this limit explicit and provides a non-exhaustive list of circumstances that would not constitute, in and of themselves, borrower defenses to repayment that are directly related to the borrower's loan or the provision of educational services. This list also includes slander or defamation, property damage, and allegations about the general quality of the student's education or the reasonableness of an educator's conduct in providing educational services. The Department believes such a list will provide clarity and guidance for borrowers and schools in applying the proposed defense to repayment regulation.

The proposed regulations further state that a violation of the HEA does not by itself establish a defense to repayment, unless the underlying conduct also meets the Federal standard under the regulations. This has been the Department's consistent position since 1995.

See

60 FR 37769; 81 FR 76053 (text of 34 CFR 685.222(a)(3) (defense to repayment regulation does not provide a private right of action for a borrower nor create any new Federal right)).

For all of these reasons, we are proposing to adopt the regulations described above and to rescind the Federal standard provisions of the 2016 final regulations.

Borrower Defense Adjudication Process (§§ 685.206, 685.212)

Statute:

Section 455(h) of the HEA authorizes the Secretary to specify in regulation which acts or omissions of a school a borrower may assert as a defense to repayment of a Direct Loan.

Current Regulations:

Section 685.206(c) provides that borrowers may

assert a borrower defense to repayment during proceedings which are available to the borrower when the Department initiates certain collection actions on a Direct Loan.

Section 685.212 establishes the conditions under which the Department discharges a borrower's obligation to repay a loan, or a portion of a loan, under various discharge or forgiveness provisions of the HEA, including closed school discharges, false certification discharges, and public service loan forgiveness.

Proposed Regulations:

Proposed § 685.206(d)(2) and (3) describes the process by which a borrower would file a borrower defense to repayment application for a loan disbursed on or after July 1, 2019. Proposed § 685.206(d)(2) would specify that a borrower may assert a borrower defense to repayment in any of the enumerated proceedings to collect on a Direct Loan. Proposed § 685.206(d)(3) would specify that the borrower must raise a defense to repayment within the specified timeframe included in the notification to the borrower of the Department's action to collect on a defaulted student loan. The borrower would submit a completed borrower defense to repayment application to the Department on a form approved by the Secretary and signed under penalty of perjury. The borrower must also submit any evidence supporting the defense to repayment within the specified timeframe included in the Department's directions to the borrower.

Proposed § 685.206(d)(7) provides that the school against which the borrower alleges misrepresentation in a defense to repayment will be notified of the pending application and allowed to submit a response and evidence within the specified timeframe included in the notice.

Proposed § 685.206(d)(8) provides the items the Secretary may consider in resolving a borrower defense to repayment claim and that, following such consideration, the Secretary will issue a written decision informing both the borrower and the school of the relief, if any, that the borrower will receive.

Proposed § 685.206(d)(9) would provide that the Secretary would decide the amount of financial relief provided to the borrower upon the determination of successful borrower defense to repayment. This section also would provide that the amount of relief awarded to a borrower during the borrower defense process would be reduced by any amounts that the borrower obtained from the school or other sources for claims related to the justification of the defense to repayment, as reported pursuant to proposed § 685.206(d)(3).

Proposed § 685.206(d)(10) provides that the determination of a borrower defense by the Department is final and not subject to appeal.

Proposed § 685.212(k)(1) would add borrower defense discharges to the discharge provisions listed in § 685.212.

Reasons:

During negotiated rulemaking, some negotiators were in favor of the Department providing borrowers with a non-adversarial process through which to seek resolution, with others asserting that in such a process, the Department should rely primarily on the borrower's attestation, submitted under penalty of perjury, and that corroborating evidence could come from the Department's own records. Other negotiators advocated for a more extensive process for resolving borrower defenses to repayment, and asserted that an unsubstantiated assertion of wrongdoing by a borrower should not be sufficient to justify the discharge of a borrower's Federal student loans or to impose a financial liability upon the school for the relief provided to the borrower.

The 2016 final regulations established separate adjudication processes for borrower defense to repayment applications submitted by individuals and those to be considered as a group. Generally, for the individual application process, the 2016 final regulations established that a borrower would submit an application on a form approved by the Secretary and provide any supporting evidence or other information or documentation reasonably requested by the Secretary. A Department official would then take appropriate action to put the borrower in loan forbearance, if not declined by the borrower, or, in the case of a defaulted loan, in stopped collection status. Next, the Department official would conduct a fact-finding process, during which the Department would notify the school of the defense to repayment application and consider the application and any supporting evidence provided by the borrower. According to the 2016 regulations, the Department official would consider any additional information found in the Department's records, or obtained by the Department. If requested by the borrower, the Department would identify relevant records to the borrower and provide such records upon reasonable request. At the end of the process, the Department official would issue a written decision. Although the written decision would be the final decision of the Department, the borrower could request reconsideration, upon the identification of “new evidence,” or relevant evidence not previously provided by the borrower or identified in the written decision. 81 FR 76083-76084 (text of 34 CFR 685.222(e)).

The process proposed by the Secretary in this NPRM would require that the borrower submit an application to the Department along with any supporting evidence. Whereas the 2016 final regulations did not explicitly provide an opportunity for schools to submit evidence and information in response to the borrower defense claim, this NPRM proposes to provide schools with an opportunity to provide a response and supporting evidence. Given the fact-specific nature of misrepresentation claims, the Department believes that it is appropriate to obtain as much evidence as possible from all sources, including from the school alleged to have made the misrepresentation. The Department would not, however, rely upon Department records or other information obtained by the Secretary, unless the school had an opportunity to review and respond to such evidence. The Department believes that the proposed process will assist it in making fair and accurate decisions, while providing borrowers and schools with due process protections.

As discussed in the section titled “Defense to Repayment—Federal Standard for Asserting a Defense to Repayment,” the Department is proposing that borrowers who have defaulted on a Direct Loan may raise a defense to repayment of loans first disbursed on or after July 1, 2019, on the basis of the proposed Federal misrepresentation standard, in response to a notice of the Department's intent to engage in certain collection actions. The Department's existing regulations as to those collection actions provide certain processes and protections for borrowers, which the Department is not proposing to change and would apply to borrower defense to repayment applications made during the course of those proceedings.

As is the case for defense to repayment claims under the existing regulation and the 2016 final regulations, the Department proposes that a decision made in the adjudication process be final as to the merits of the defense to repayment and any relief to be provided as a result. In this way, borrowers will not be subject to the additional wait that an appeal period may cause and will receive more expedient relief. We address the issue of reconsideration later in this section.

In the 2016 final regulations, the Department established a process for evaluating defense to repayment applications, regardless of the substantive standard that would be applied to the defense to repayment. Because the Department is now proposing that, for loans first disbursed on or after the anticipated effective date of these regulations (July 1, 2019), defenses to repayment applications be made only during the specified collection proceedings. The Department will continue to apply the State law standard for loans made prior to July 1, 2019. The Department proposes only clarifying updates to the statutory and regulatory cross-references for the collection proceedings listed for defenses to repayment for pre-effective date loans, and otherwise retains the existing language of current 34 CFR 685.206(c) as to such defenses to repayment applications. We also propose to rescind the process for adjudication of borrower defense to repayment portions of the 2016 final regulations.

The Department seeks public comment regarding potential processes that could be used to adjudicate affirmative claims, should the Department accept affirmative claims for some period after a borrower ends enrollment at an institution. The Department preliminarily believes that such a process must include an opportunity for the institution to receive a copy of the borrower's claim and a signed waiver allowing the institution to share relevant portions of the borrower's education record with the Department, and provide sufficient time for the institution to provide a response and any supporting evidence of its own to the Secretary. In order to assist the Department's assessment of the harm a potential misrepresentation caused a borrower, the borrower, in submitting a defense to repayment claim, might also be required to submit information about whether, for reasons other than the education received, the borrower has been removed from a job due to on-the-job-performance, disqualified from work in the field for which the borrower trained, or working less than full-time in the chosen field. In addition, the Secretary proposes to include a provision emphasizing to borrowers submitting affirmative or defensive claims that if the borrower receives a 100 percent discharge for the loan, the institution has the right to withhold an official transcript for the borrower, to avoid any confusion or surprise that would result from such withholding. Finally, the regulations make clear that the Secretary will also review both the borrower's claim and the institution's response in making a defense to repayment decision.

Additional Borrower Defense to Repayment Application Process Proposals

At the negotiated rulemaking sessions, the Department proposed that the regulations could allow borrowers to ask the Secretary to reconsider a denial of a defense to repayment, if the reconsideration claim was supported by newly discovered evidence. The negotiating committee discussed variations on this reconsideration process idea, in which either the school or the borrower could submit additional evidence to the Department. Negotiators also proposed that the regulations include an early dispute resolution process, whereby the Department or another party would mediate borrower defense disputes between a borrower and the school, to attempt to resolve the dispute without the need for the parties to go through the Department's full borrower defense adjudication process.

Under our proposed process for adjudicating defenses to repayment, a defense to repayment would be submitted in response to the Department's collection actions on a defaulted loan on a form approved by Secretary, and the Department's Federal Student Aid office will make a decision on the defense to repayment based on the submissions from the borrower and the school, if any. The borrower and the school will each be afforded the opportunity to see and respond to evidence provided by the other.

The reconsideration process proposed by some members of the negotiated rulemaking committee would involve either the borrower or the school submitting additional, newly discovered, evidence to the Department. Under the process and standard included in these proposed regulations, the Department expects to receive and consider all relevant evidence from the borrower and the institution during its consideration of the borrower's defense. Therefore, we do not believe that an appeal process or a process for reconsideration will be needed, nor is one included in these proposed regulations.

With regard to the proposed early dispute resolution process, the Department does not believe such a process is appropriate within the proposed regulations governing borrower defense. A borrower and a school may pursue voluntary resolution of a claim by the borrower at any time, without the involvement of the Department. A borrower may also pursue relief through his or her state consumer protection agency.

Group Process

A group of negotiators proposed that the Department establish a process for considering groups of borrower defenses to repayment claims. They argued that groups of borrowers who were all subject to the same act or omission by a school should have their defenses considered together as a group. These negotiators also asserted that a group process in these cases would be more efficient and would result in more equitable treatment of similarly situated borrowers.

The 2016 final regulations provided for a group process. Specifically, the Secretary could initiate, upon consideration of factors including, but not limited to, common facts and claims, fiscal impact, and the promotion of compliance by the school or other title IV, HEA program participant, a process to determine whether a group of borrowers has a legitimate borrower defense claim. Those regulations provided for the Secretary to identify groups comprised of borrowers who individually filed applications, as well as borrowers who did not file applications, should those borrowers have common facts and claims. 81 FR 76084. The Department further differentiated the processes based upon whether the subject school was open or closed. 81 FR 76085.

The Department does not include a group process, whether the school in question is open or closed, in these proposed regulations. Because relief through a borrower's defense to repayment claim is based not just on evidence of misrepresentation, but also evidence that the borrower reasonably relied on the misrepresentation in deciding to enroll or continue enrollment in the institution, and was harmed by the misrepresentation, the Department must consider each borrower's claim independently. The Department recognizes that a group of borrowers with defaulted loans who are each subject to a proceeding to collect on a Direct loan may assert misrepresentation on the part of the same school based on the same facts and circumstances, such as when the student borrowers were enrolled in a program that the school advertised to the public as being fully accredited by a specific programmatic accrediting agency when, in fact, it was not so accredited. The Department may, at its discretion, determine it is more efficient to establish facts regarding claims of misrepresentation put forth by a group

of borrowers. However, in approving an individual defense, the Secretary would still need to determine that the borrower made a decision based on the misrepresentation, that the borrower was harmed by the misrepresentation, and to what, if any, amount of or type of relief the borrower is entitled. To make that determination, it will be necessary to have a completed application from each individual borrower, and to examine the facts and circumstances of each borrower's individual situation. In addition, it would be inappropriate to subject borrowers who did not individually submit defense to repayment claims to the possible collateral consequences of debt relief, including potentially having their transcript withheld.

Relief

Proposed § 685.206(d)(9) would provide that the Secretary would decide the amount of financial relief provided to the borrower upon the determination of an approved defense to repayment discharge. As part of this determination, the amount of relief awarded to a borrower during the defense to repayment process would be reduced by any amounts that the borrower received from other sources based on a claim by the borrower that relates to the same loan and the same misrepresentation by the school as the defense to repayment. The rule would prevent a double recovery for the same injury at the expense of the Federal taxpayer.

As noted in the preamble to the 2016 final regulations, the Department has a responsibility to protect the interests of Federal taxpayers as well as borrowers. As a result, we continue to believe that establishing a legal presumption of full relief would not be appropriate.

See, e.g.,

81 FR 75973-75974. While the Department's other loan discharge processes for closed school discharges, 34 CFR 685.214; false certification, 34 CFR 685.215; and unpaid refunds, 34 CFR 685.216, do provide for full loan discharges and recovery of funds paid on subject loans, the factual premises for such discharges are clearly established in statute and are relatively straightforward. In contrast, we anticipate that determinations for borrower defense claims will involve more complicated issues of law and fact since students may have been told different things by different representatives of an institution or may have heard the same statements differently. In many instances, borrower defense claims assert that an admissions representative made certain claims or promises, and yet without a recording of the actual conversation, it is hard to know precisely what was said, the degree to which the borrower relied on that information to make an enrollment decision, and the harm that came from the decision.

In the NPRM for the 2016 final regulations, the Department proposed certain methodologies for calculating relief, 81 FR 39420, but ultimately did not include those in light of their confusing nature, 81 FR 75976. Instead, the Department stated that it would consider factors such as the value of the education provided by the school and the student's cost of attendance, as well as conceptual, non-binding examples for substantial misrepresentation claims.

See

81 FR 76086-76087. The Department proposes to allow for partial relief, based on the degree of harm suffered by the borrower. Given the complexity of such determinations, however, the Department invites comments on this proposal and on methods for calculating partial relief in connection with defenses to repayment. We also propose to rescind the application provisions of the 2016 final regulations.

Recovery From The School (§§ 685.206 and 685.308)

Statute:

Section 455(h) of the HEA authorizes the Secretary to specify in regulation which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a Direct Loan.

Current Regulations:

Section 685.206(c)(3) states that the Department may initiate an appropriate proceeding to require a school whose act or omission resulted in a successful borrower defense to repayment to require the school to pay the Department the amount of the loan to which the defense applies. It specifies that this proceeding may not be initiated after the period of record retention required in § 685.309(c), unless the school received notice of the borrower's defense during that period.

Proposed Regulations:

Proposed § 685.206(d)(13) would clarify that, for borrower defense to repayment discharges granted under the new Federal standard, the Secretary may initiate, within five years of the date of the final determination of the borrower's defense to repayment application, an appropriate proceeding to require a school whose misrepresentation resulted in an approved borrower defense to repayment discharge to pay the Department the amount of the discharged loan. The recovery proceeding would be conducted in accordance with 34 CFR part 668 subpart G.

Proposed § 685.206(d)(11) would require that a borrower who has received a defense to repayment loan discharge reasonably to cooperate with the Secretary in any proceeding to recover funds from the school. The Secretary may revoke relief granted to a borrower who does not fulfill this obligation. Proposed § 685.206(d)(12) would require a borrower whose defense to repayment is successful to transfer to the Secretary any right to recovery against third parties of any amounts discharged by the Department, based on the borrower's de

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