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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-19309

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** September 23, 2019
- **Citation:** 84 FR 49788

## Text

DEPARTMENT OF EDUCATION
34 CFR Parts 668, 682, and 685
RIN 1840-AD26
[Docket ID ED-2018-OPE-0027]
Student Assistance General Provisions, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Final rule.

SUMMARY:

The Department of Education (Department or We) establishes new Institutional Accountability regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to revise a Federal standard and a process for adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020, and provide for actions the Secretary may take to collect from schools the amount of financial loss due to successful borrower defense to repayment loan discharges. The Department also amends regulations regarding pre-dispute arbitration agreements or class action waivers as a condition of enrollment, and requires institutions to include information regarding the school's internal dispute resolution and arbitration processes as part of in the borrower's entrance counseling. We amend the Student Assistance General Provisions regulations 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 certain accounting standards, and account for leases and long-term debt. Finally, we amend the loan discharge provisions in the Direct Loan Program.

DATES:

These regulations are effective July 1, 2020. The incorporation by reference of certain publications listed in these regulations is approved by the Director of the Federal Register as of July 1, 2020. Implementation date: For the implementation dates of the included regulatory provisions, see the
Implementation Date of These Regulations
in
SUPPLEMENTARY INFORMATION
.

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.
For further 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 further information regarding financial responsibility and institutional accountability, John Kolotos (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 1-800-877-8339.

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. The regulations at 34 CFR 685.206(c) governing defenses to repayment were first put in place in 1995. Those 1995 regulations specified 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,” (the State law standard) but were silent on the process to assert a claim.

In May 2015, a large nationwide school operator, filed for bankruptcy. The following month, the Department appointed a Special Master to create and oversee a process to provide debt relief for the borrowers associated with those schools, who had applied for student loan discharges on the basis of the Department's authority to discharge student loans under 34 CFR 685.206(c).

As a result of difficulties in application, interpretation of the State law standard, and the lack of a process for the assertion of a borrower defense claim in the regulations, the Department began rulemaking on the topic of borrower defenses to repayment. On November 1, 2016, the Department published final regulations
1

(hereinafter, “2016 final regulations”) on the topic of borrower defenses to repayment, which significantly expanded the rules regarding how borrower defense claims could be originated and how they would be adjudicated. The 2016 final regulations were developed after the completion of a negotiated rulemaking process and after receiving and considering public comments on a notice of proposed rulemaking. In accordance with the HEA, the 2016 final regulations were scheduled to go into effect on July 1, 2017.

1
81 FR 75926.

On May 24, 2017, the California Association of Private Postsecondary Schools (CAPPS) filed a Complaint and Prayer for Declaratory and Injunctive Relief in the United States District Court for the District of Columbia (Court), challenging the 2016 final regulations in their entirety, and in particular those provisions of the regulations pertaining to: (1) The standard and process used by the Department to adjudicate borrower defense claims; (2) financial responsibility standards; (3) requirements that proprietary institutions provide warnings about their students' loan repayment rates; and (4) the provisions requiring that institutions refrain from using arbitration or class action waivers in their agreements with students.
2

2
Complaint and Prayer for Declaratory and Injunctive Relief,
California Association of Private Postsecondary Schools
v.
DeVos,
No. 17-cv-00999 (D.D.C. May 24, 2017).

In light of the pending litigation, on June 16, 2017, the Department published a notification of the delay of the effective date
3

of certain provisions of the 2016 final regulations under section 705 of the Administrative Procedure Act
4

(APA), until the legal challenge was resolved (705 Notice). Subsequently, on October 24, 2017, the Department issued an interim final rule (IFR) delaying the effective date of those provisions of the final regulations to July 1, 2018,
5

and a notice of proposed rulemaking to further delay the effective date to July 1, 2019.
6

On February 14, 2018, the Department published a final rule delaying the regulations' effective date until July 1, 2019 (Final Delay Rule).
7

3
82 FR 27621.

4
5 U.S.C. 705.

5
82 FR 49114.

6
82 FR 49155.

7
83 FR 6458.

Following issuance of the 705 Notice, the plaintiffs in
Bauer
filed a complaint challenging the validity of the 705 Notice.
8

The attorneys general of eighteen States and the District of Columbia also filed a complaint challenging the validity of the 705

Notice.
9

Plaintiffs in both cases subsequently amended their complaints to include the IFR and the Final Delay Rule, and these cases were consolidated by the Court.

8
Complaint for Declaratory and Injunctive Relief,
Bauer
v.
DeVos,
No. 17-cv-1330 (D.D.C. Jul. 6, 2017).

9

Massachusetts
v.
U.S. Dep't of Educ.,
No. 17-cv-01331 (D.D.C. Jul. 6, 2017).

In November 2017, the Department began a negotiated rulemaking process. The resultant notice of proposed rulemaking was published on July 31, 2018 (2018 NPRM).
10

The 2018 NPRM used the pre-2016 regulations, which were in effect at the time the NPRM was published, as the basis for proposed regulatory amendments.

10
83 FR 37242.

The 2018 NPRM also expressly proposed to rescind the specific regulatory revisions or additions included in the 2016 final regulations, which were not yet effective. Accordingly, the preamble of the 2018 NPRM generally provided comparisons between the regulations as they existed before the 2016 final regulations, the 2016 final regulations, and the proposed rule. The Department received over 30,000 comments in response to the 2018 NPRM. Many commenters compared the Department's proposed regulations to the 2016 final regulations, when the 2016 final regulations differed from a proposed regulatory change in the 2018 NPRM. The Department also provided a Regulatory Impact Analysis that was based on the President's FY 2018 budget request to Congress, which assumed the implementation of the 2016 final regulations.

On September 12, 2018, the Court issued a Memorandum Opinion and Order in the consolidated matter, finding the challenge to the IFR was moot, declaring the 705 Notice and the Final Delay Rule invalid, and convening a status conference to consider appropriate remedies.
11

11

Bauer,
No. 17-cv-1330.

Subsequently, on September 17, 2018, the Court issued a Memorandum Opinion and Order immediately vacating the Final Delay Rule and vacating the 705 Notice, but suspending its vacatur of the 705 Notice until 5 p.m. on October 12, 2018, to allow for renewal and briefing of CAPPS' motion for a preliminary injunction in
CAPPS
v.
DeVos
and to give the Department an opportunity to remedy the deficiencies with the 705 Notice.
12

The Department decided not to issue a revised 705 notice.

12

Bauer,
No. 17-cv-1330.

On October 12, 2018, the Court extended the suspension of its vacatur until noon on October 16, 2018.
13

On October 16, 2018, the Court denied CAPPS' motion for a preliminary injunction, ending the suspension of the vacatur.
14

13
Minute Order (Oct. 12, 2018),
Bauer,
No. 17-cv-1330.

14
Memorandum Opinion and Order,
CAPPS,
No. 17-cv-0999 (Oct. 16, 2018).

In the 2018 NPRM, we proposed to rescind provisions of the 2016 final regulations that had not yet gone into effect.
15

However, as detailed in the Department's
Federal Register
notice of March 19, 2019,
16

as a result of the Court's decision in
Bauer,
those regulations have now become effective. This change necessitates technical differences in the structure of this document, which rescinds certain provisions, and amends others, of the 2016 final regulations that have taken effect, compared with that of the 2018 NPRM.

15

See:
83 FR 37250-51.

16
84 FR 9964.

In particular, while the 2018 NPRM technically proposed to amend the pre-2016 regulations (in addition to proposing that the 2016 regulations be rescinded), these final regulations, as a technical matter, amend the 2016 final regulations which have since taken effect. Thus, we describe the changes to the final regulations and show them in the amendatory language at the end of the document based on the currently effective 2016 final regulations. We do this in order to accurately instruct the
Federal Register
's amendments to the Code of Federal Regulations.

With the 2016 final regulations in effect, the Department initially considered publishing a second NPRM that used those regulations as the starting point, rather than the pre-2016 regulations. However, given that the policies we proposed in the 2018 NPRM were not affected by the set of regulations that served as the underlying baseline, and that we provided a meaningful opportunity for the public to comment on each of the regulatory proposals in the NPRM and on the rescission of the 2016 final regulations, we determined that an additional NPRM would further delay the finality of the rulemaking process for borrowers and schools without adding meaningfully to the public's participation in the process. The Department addressed the provisions in these final regulations in the 2018 NPRM and afforded the public a meaningful opportunity to provide comment. For these reasons, despite the intervening events since publication of the 2018 NPRM, we are proceeding with the publication of these final regulations.

Additionally, after further consideration, we are keeping many of the regulatory changes that were included in the 2016 final regulations. Some of the revisions proposed in the 2018 NPRM are essentially the same as, or similar to, the revisions made by the Department in the 2016 final regulations, which are currently in effect. The Department is not rescinding or further amending the following regulations in title 34 of the Code of Federal Regulations, even to the extent we proposed changes to those regulations in the 2018 NPRM:

• § 668.94 (Limitation),

• § 682.202(b) (Permissible charges by lenders to borrowers),

• § 682.211(i)(7) (Forbearance),

• § 682.405(b)(4)(ii) (Loan rehabilitation agreement),

• § 682.410(b)(4) and (b)(6)(viii) (Fiscal, administrative, and enforcement requirements), and

• § 685.200 (Borrower eligibility).

The Department also did not propose to rescind in the 2018 NPRM, and is not rescinding here, 34 CFR 685.223, which concerns the severability of any provision of subpart B in part 685 of title 34 of the Code of Federal Regulations; 34 CFR 685.310, which concerns the severability of any provision of subpart C in part 685 of title 34 of the Code of Federal Regulations; or 34 CFR 668.176, which concerns the severability of any provision of subpart L in part 668 of title 34 of the Code of Federal Regulations. If any provision of subparts B or C in part 685, subpart L in part 668, or their application to any person, act, or practice is at some point held invalid by a court, the remainder of the subpart or the application of its provisions to any person, act, or practice is not affected.

While the negotiated rulemaking committee that considered the draft regulations on these topics during 2017-2018 did not reach consensus, these final regulations reflect the results of those negotiations and respond to the public comments received on the regulatory proposals in the 2018 NPRM. The regulations are intended to:

• Provide students with a balanced, meaningful borrower defense to repayment claims process that relies on a single, Federal standard;

• Grant borrower defense to repayment loan discharges that are adjudicated equitably, swiftly, carefully, and fairly;

• Encourage students to directly seek remedies from schools when acts or omissions by the school, including those that do not support a borrower defense to repayment claim, fail to

provide a student access to the educational or job placement opportunities promised, or otherwise cause harm to students;

• Ensure that schools, rather than taxpayers, bear the burden of billions of dollars in losses from approvals of borrower defense to repayment loan discharges;

• Establish that the Department has a complete record to review in adjudicating claims by allowing schools to respond to borrower defense to repayment claims and provide evidence to support their responses;

• Discourage schools from committing fraud or other acts or omissions that constitute misrepresentation;

• Encourage closing institutions to engage in orderly teach-outs rather than closing precipitously;

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

• Eliminate the inclusion of lawsuits as a trigger for letter of credit requirements until those lawsuits are settled or adjudicated and a monetary value can be accurately assigned to them;

• Provide students with additional time to qualify for a closed school loan discharge and protect students who elect this option at the start of a teach-out, even if the teach-out exceeds the length of the regular lookback period;

• Adjust triggers for Letters of Credit to reflect actual, rather than potential, liabilities; and

• Reduce the strain on the government, and the delay to borrowers in adjudicated valid claims, due to large numbers of borrower defense to repayment applications.

Summary of the Major Provisions of This Regulatory Action: For the Direct Loan Program, the Final Regulations

• Establish a revised Federal standard for borrower defenses to repayment asserted by borrowers with loans first disbursed on or after July 1, 2020;

• Revise the process for the assertion and resolution of borrower defense to repayment claims for loans first disbursed on or after July 1, 2020;

• 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 side to respond to the other's submissions, so that the Department can review a full record as part of the adjudication process;

• Require a borrower applying for a borrower defense to repayment loan discharge to supply documentation that affirms the financial harm to the borrower is not the result of the borrower's workplace performance, disqualification for a job for reasons unrelated to the education received, or a personal decision to work less than full-time or not at all;

• Revise the 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, 2020, that are discharged based on a successful borrower defense to repayment claim for which the school is liable;

• Modify the remedial actions the Secretary may take to collect from the responsible school the amount of any loans discharged to include those based on a successful borrower defense to repayment claim for which the school is liable; and

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

The final regulations for the Direct Loan Program also include many of the same or similar provisions as the 2016 regulations, which are currently in effect. For example, both the 2016 regulations and these final regulations:

• Require a preponderance of the evidence standard for borrower defense to repayment claims;

• Provide that a violation by a school of an eligibility or compliance requirement in the HEA or its implementing regulations is not a basis for a borrower defense to repayment unless the violation would otherwise constitute a basis under the respective regulations;

• Allow the same universe of people to file a borrower defense to repayment claim, as the definition of “borrower” in the 2016 final regulations is the same as the definition of “borrower” in these final regulations;

• Provide a borrower defense to repayment process for both Direct Loans and Direct Consolidation Loans;

• Allow the Secretary to determine the order in which objections will be considered, if a borrower asserts both a borrower defense to repayment and other objections;

• Require the borrower to provide evidence that supports the borrower defense to repayment;

• Automatically grant forbearance on the loan for which a borrower defense to repayment has been asserted, if the borrower is not in default on the loan, unless the borrower declines such forbearance;

• Require the borrower to cooperate with the Secretary in the borrower defense to repayment proceeding; and

• Transfer the borrower's right of recovery against third parties to the Secretary.

The final regulations also revise the Student Assistance General Provisions regulations to:

• Provide that 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 their website where information regarding admission, tuition, and fees is presented; and

• Provide that 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.

The final regulations also:

• Amend the financial responsibility provisions with regard to 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 students and the Department;

• Update composite score calculations to reflect certain recent changes in Financial Accounting Standards Board (FASB) accounting standards;

• Update the definitions of terms used to describe the calculation of the composite score, including leases and long-term debt;

• Revise the Direct Loan program's closed school discharge regulations to extend the time period for a borrower to qualify for a closed school discharge to 180 days;

• Revise the Direct Loan program's closed school loan discharge regulations to specify that if offered a teach-out opportunity, the borrower may select that opportunity or may decline it at the beginning of the teach-out, but if the borrower accepts it, he or she will still qualify for a closed school discharge only if the school fails to meet the material terms of the teach-out plan or agreement approved by the school's accrediting agency and, if applicable, the school's State authorizing agency;

• Affirm that in instances in which a teach-out plan is longer than 180 days, a borrower who declines the teach-out opportunity and does not transfer credits to complete a comparable program, continues to qualify, under the

exceptional circumstances provision, for a closed school loan discharge;

• Modify the conditions under which a Direct Loan borrower may qualify for a false certification discharge by specifying that the borrower will not qualify for a false certification discharge based on not having a high school diploma in cases when the borrower could not reasonably provide the school a high school diploma and has not met the alternative eligibility requirements, but provided a written attestation, under penalty of perjury, to the school that the borrower had a high school diploma; and

• 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.

• 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.

Timing, Comments and Changes

On July 31, 2018, the Secretary published a notice of proposed rulemaking (NPRM) for these parts in the
Federal Register
.
17

The final regulations contain changes from the NPRM, which are fully explained in the
Analysis of Comments and Changes
section of this document.

17
83 FR 37242.

Implementation Date of These Regulations:
Section 482(c) of the HEA requires that regulations affecting programs under title IV of the HEA be published in final form by November 1, prior to the start of the award year (July 1) to which they apply. However, that section also permits the Secretary to designate any regulation as one that an entity subject to the regulations may choose to implement earlier with conditions for early implementation.

The Secretary is exercising her authority under section 482(c) of the HEA to designate the following new regulations at title 34 of the Code of Federal Regulations included in this document for early implementation beginning on September 23, 2019, at the discretion of each institution, as appropriate:

(1) Section 668.172(d).

(2) Appendix A to Subpart L of Part 668.

(3) Appendix B to Subpart L of Part 668.

The Secretary has not designated any of the remaining provisions in these final regulations for early implementation. Therefore, the remaining final regulations included in this document are effective July 1, 2020.

Incorporation by Reference.
In §  668.172(d) of these final regulations, we reference the following accounting standard: Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842).

FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard is available at
www.fasb.org,
registration required.

Public Comment.
In response to our invitation in the July 31, 2018, NPRM, more than 38,450 parties submitted comments on the proposed regulations, which included comments also relevant to the 2016 regulations, the implementation of which had been delayed.

We discuss substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address technical or other minor changes or recommendations that are out of the scope of this regulatory action or that would require statutory changes in the preamble.

Analysis of Comments and Changes

An analysis of the comments and of any changes in the regulations since publication of the 2018 NPRM follows.

Borrower Defenses—General (§ 685.206)

Comments:
Many commenters supported the Department's proposals to improve the borrower defense to repayment regulations. These commenters asserted that the proposed regulations would provide the necessary accountability in the system to prevent fraud, while giving borrowers a path to a more expedient resolution of complaints through arbitration or a school's internal dispute processes.

Some commenters claim that the regulations demonstrate government overreach by creating regulations that would add billions of dollars to Federal spending.

Discussion:
We appreciate the comments in support of the proposed borrower defense to repayment regulations.

We disagree with commenters who state that these regulations represent government overreach. 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. Section 455(h) of the HEA states: “Notwithstanding any other provision of State or Federal law, the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part, except that in no event may a borrower recover from the Secretary, in any action arising from or relating to a loan made under this part, an amount in excess of the amount such borrower has repaid on such loan.”

The Department is not creating a new borrower defense to repayment program but rather is revising the terms under which a borrower may assert a defense to repayment of a loan, for loans first disbursed on or after July 1, 2020, which is the anticipated effective date of these regulations. The Department believes that these regulations strike an appropriate balance between attempting to correct aspects of the 2016 final regulations, that people criticized as Federal Government overreach, and the interests of students, institutions, and the Federal Government.

The Department acknowledges that the 2016 final regulations anticipated that taxpayers would bear a great expense and seeks to cabin that burden through these final regulations. The Department generally seeks to decrease costs to Federal taxpayers and decrease Federal spending through these final regulations. These costs are more fully outlined through the Regulatory Impact Assessment section to follow.

Changes:
None.

Comments:
One group of commenters supported the regulations for providing a better balance between relief for borrowers and due process for schools by providing both parties with an equal opportunity to provide evidence and arguments and to review and respond to evidence. These commenters acknowledged that balance is essential to a fair process. They expressed concern, however, that the pendulum has shifted too far once again and asserted that in comparison to the 2016 final regulations, the proposed regulations, which elevated the evidentiary standard to clear and convincing, make it too difficult for borrowers to obtain relief.

Other commenters generally opposed the Department's proposed rules concerning the borrower defense to repayment. One commenter suggested that the proposed rules would effectively block relief for the vast majority of borrowers, while shielding institutions from accountability for their misconduct.

Another group of commenters contended that the NPRM favors predatory institutions over students, doing so based upon unsupported assertions and hypotheticals that ignore and distort data and evidence.

Discussion:
We appreciate the commenters' concern that, in attempting to strike a balance, the pendulum may have swung too far, making it more difficult for harmed borrowers to receive relief. Similarly, the Department appreciates the commenters' recognition that the proposed regulations better balance the rights of students and institutions alike. In the sections below, we discuss changes we have made in the final regulations to achieve the balance and fairness commenters from all perspectives encouraged.

For example, and as described below, under the final regulations, borrowers will be required to demonstrate a misrepresentation by a preponderance of the evidence instead of the clear and convincing evidence proposed alternative standard that was included in the 2018 NPRM.

We disagree with commenters who contend that the proposed rules would have blocked relief to borrowers who were victimized by bad actors. Nevertheless, we have revised the rules to provide a fairer and more equitable process for borrowers to seek relief when institutions have committed acts or omissions that constitute a misrepresentation and cause financial harm to students. The Department, in turn, has a process to recover the losses the Department sustains from institutions as a result of granting borrower defense to repayment discharges. This process is outlined in subpart G of Part 668, of Title 34 of the Code of Federal Regulations.

We also disagree with commenters that the proposed rules indicate that the Department sides with institutions over students, and notes that those commenters used unsupported assertions and hypothetical examples to support their comments. We disagree that the proposed regulations would have shielded bad actors from being held accountable for their actions. These final regulations send a clear and unequivocal message that institutions need to be truthful in their communications with prospective and enrolled students.

Throughout this document, as in the 2018 NPRM, we explain the reasons and rationales for these final regulations using data and real-world examples, while drawing upon the Department's experience since the publishing of the 2016 final regulations. The Department remains committed to protecting borrowers and taxpayers from institutions engaging in predatory behavior—regardless of whether those institutions are propriety, non-profit, selective, or open enrollment—which includes misrepresenting an institution's admissions standards and selectivity. The proposed and final regulations also ensure that schools are accountable to taxpayers for losses from the appropriate approval of borrower defense to repayment claims. Borrowers continue to have a meaningful avenue to seek a discharge from the Department, and nothing in these rules burdens a student's ability to access consumer protection remedies at the State level.

Changes:
None.

Comments:
Several commenters expressed dismay at the Department's 30-day timetable, which the commenters characterized as accelerated, for considering comments and publishing a final rule. These commenters felt that a “rush to regulate” had resulted in a public comment period that did not give the public enough time to fully consider the proposals and a timeline that did not afford the Department enough time to develop an effective, cost-efficient rule. Another commenter also asserted that we were following a hastened review schedule and were inappropriately allowing only a 30-day comment period on an NPRM that the commenter asserts was riddled with inaccuracies. The commenter said that, while the APA requires a minimum of 30 days for public comment during rulemaking,
18

a longer period was needed in this instance to allow affected parties to provide meaningful comment and information to the Department. The commenter noted that the Administrative Conference of the United States recommends a 60-day comment period when a rule is economically significant and argued that this recommendation is appropriate in this case due to the vast number of individuals affected by a regulation that modifies the Department's responsibilities for over $1 trillion in outstanding loans.

18
5 U.S.C. 553(d).

Discussion:
We disagree with the commenters who contend that the Department's timetable for developing borrower defense to repayment regulations did not give the public enough time to fully consider the proposals. The 30-day public comment period provided sufficient time for interested parties to submit comments, particularly given that prior to issuing the proposed regulations, the Department conducted two public hearings and three negotiated rulemaking sessions, where stakeholders and members of the public had an opportunity to weigh in on the issues at hand. The Department also posted the 2018 NPRM on its website several days before publication in the
Federal Register
, providing stakeholders additional time to view the proposed regulations and consider their viewpoints on the NPRM. Further, the Department received over 30,000 comments, many representing large constituencies. The large number of comments received indicates that the public had adequate time to comment on the Department's proposals.

Additionally, the 30-day period referenced in 5 U.S.C. 553(d) refers to the period of time between the publication of a substantive rule and its effective date and not the amount of time necessary for public comment. The applicable case law, interpreting the APA, specifies that comment periods should not be less than 30 days to provide adequate opportunity to comment.

With respect to the comment concerning inaccuracies in the NPRM, we address those concerns in response to comments summarized below.

Changes:
None.

Comments:
Another group of commenters offered their full support for our efforts to assist students in addressing wrongs perpetrated against them by schools that acted fraudulently or made a misrepresentation with respect to their educational services. The commenters asserted that, when students are defrauded, they need to have the means to remedy the situation. According to these commenters, colleges routinely overpromise and under-deliver for their students and must be held accountable to their students for their failures. These commenters recommended the Department proactively use the many tools already at its disposal to uniformly pursue schools throughout each sector of higher education that are not serving their students well rather than rely on the borrower defense to repayment regulations, which necessarily provide after-the-fact relief for borrowers. The commenters asserted that addressing a problem before it becomes a borrower defense to repayment issue should be the first priority, thus saving current and future students from harm. Another group of commenters offered a similar suggestion and proposed that the Department examine the effectiveness of its gatekeeping obligations under title IV of the HEA as well as the nature of its relationship with accrediting agencies

and States, to prevent participation by bad actors in the title IV programs.

Another group of commenters who generally supported the proposed regulations noted areas of concern or disagreement. They suggested that we amend the regulations to provide a “material benefit” to schools that do not have a history of meritorious borrower defense to repayment claims. These commenters also propose that the regulations address the “moral hazard” created by giving students an opportunity to receive an education and raise alleged misrepresentations to avoid paying for that education after they complete their education. These commenters would like the Department to mitigate the proliferation of “scam artists” and opportunists who advertise their ability to obtain, on behalf of a borrower, “student loan forgiveness”. They also would like to discourage attorneys from exploiting students through the Department's procedural rules, while harming the higher education sector and the taxpayers in the process.

Discussion:
We agree with commenters who suggest that a better approach is to stop misrepresentation before it starts, rather than providing remedies after the student has already incurred debt and expended time and energy in a program that does not deliver what it promised. We also agree the Department should proactively use the many tools already at its disposal such as program reviews and findings from those reviews to pursue schools throughout each sector of higher education that are not serving their students well. The Department devotes significant resources to the oversight of title IV participants and makes every effort to work with accrediting agencies and States to identify problems early, including identifying schools that should be prevented from participating in title IV programs altogether. The Department recognizes accrediting agencies, and only recognized accrediting agencies may accredit institutions so that the institutions may receive Federal student aid.
19

The Department of Education's Program Compliance Office has a School Eligibility Service Group that examines, analyzes, and makes determinations on the initial and renewal eligibility applications submitted by schools for participation in Federal student aid programs.
20

This Office also performs financial analyses, monitors financial condition, and works with state agencies and accrediting agencies.
21

The Office monitors schools and their agents, through on-site and off-site reviews and analysis of various reports, to provide early warnings of program compliance problems so that appropriate actions may be taken.
22

19
20 U.S.C. 1001,
et seq.;
34 CFR 600.2; 34 CFR 600.20; 34 CFR 668.13.

20
U.S. Dep't of Educ., Office of Federal Student Aid, Principal Office Functional Statements,
available at https://www2.ed.gov/about/offices/list/om/fs_po/fsa/program.html.

21

Id.

22

Id.

We do not believe it is necessary or appropriate, nor does the Department possess the legal authority, to provide “material benefit” to schools that follow the law and, therefore, do not have a history of meritorious borrower defense to repayment claims. The Department expects that all schools, in every sector, will engage in a forthright and honest manner with their prospective and enrolled students and, therefore, the Department has the discretion to impose certain consequences upon schools who commit certain types of misrepresentations, even if an institution has previously provided accurate information to students.

We agree that a borrower defense to repayment regulation that is poorly constructed, under the statute, may create a “moral hazard” by giving students an opportunity to complete their education and raise alleged misrepresentations to avoid paying for that education. These regulations, however, include a process by which the Department receives information from both a borrower and the school. The Department will evaluate whether a borrower defense to repayment claim is meritorious, and the borrower will receive a discharge only if the borrower demonstrates, by a preponderance of the evidence, that the institution made a misrepresentation.

We share the concern of commenters regarding the proliferation of people described by the commenter as “scam artists” and opportunists who disingenuously advertise “student loan forgiveness” and of some plaintiff's attorneys, and others, who seek to exploit borrowers. The Department, along with the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), receive and investigate consumer complaints regarding student loan scams. Those investigative functions are unchanged by these regulations. State consumer protection agencies and laws also help borrowers in this regard. Given these additional protections, the Department maintains that these final regulations strike the right balance between consumer protection and due process.

The Department also seeks to prevent borrower defense claims before they arise by disseminating information about various institutions that will help students make informed decisions based upon accurate data. As stated here and throughout the rest of these final regulations, the Department believes that schools and the Federal government each play a role in helping students make informed choices when considering the pursuit of postsecondary education. We are also aware that research has shown that students across the socioeconomic spectrum receive insufficient and impersonal guidance about colleges from their high schools.
23

Evidence also indicates that school selection is critically important to students' postsecondary success, given that students are more likely to persist to completion or degree attainment if they attend a well-matched institution.
24

Similarly, research has shown that a student's choice of major or program may be even more important than his or her choice of institution in determining long-term career and earnings outcomes.
25

The Department has created online tools, like the College Scorecard
26

and College Navigator,
27

that provide objective data across a range of institutional attributes to enable prospective students and their families to weigh their options based upon the characteristics that they deem most important to their decision-making. While we know that millions of users access these tools each year, we have limited evidence on these tools' potential for impact on college-related decisions and outcomes. Moreover, we recognize that some students may be overwhelmed by the process of parsing through the volumes of information on

potential postsecondary options and have worked to streamline data sources through the College Scorecard and College Navigator to make it easier for users to focus on the criteria they deem most important. Nonetheless, we believe that, “armed with detailed, relevant information on financial costs and benefits, students can more fairly evaluate the tradeoffs of attending a certain institution and understand the financial implications of their decisions.”
28

23
Alexandria Walton Radford, Top Student,
Top School?: How Social Class Shapes Where Valedictorians Go to College,
University of Chicago Press, (2013).

24
Audrey Light & Wayne Strayer,
Determinants of College Completion: School Quality or Student Ability?,
35 J. of Human Res. 299-332 (2000).

25
See: Holzer, Harry J. and Sandy Baum,
Making College Work: Pathways to Success for Disadvantaged Students
(Washington, DC: Brookings Institution Press, 2017); Carnevale, Anthony, et al., “Learning While Earning: The New Normal,” Center on Education and the Workforce, Georgetown University, 2015,
1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/Working-Learners-Report.pdf;
Schneider, Mark, “Are Graduates from Public Universities Gainfully Employed? Analyzing Student Loan Debt and Gainful Employment,”
American Enterprise Institute,
2014,
www.aei.org/publication/are-graduates-from-public-universities-gainfully-employed-analyzing-student-loan-debt-and-gainful-employment/.

26
U.S. Dep't of Educ., College Scorecard,
available at https://collegescorecard.ed.gov/.

27
U.S. Dep't of Educ., College Navigator,
available at https://nces.ed.gov/collegenavigator/.

28
Exec. Office of the U.S. President, Using Federal Data to Measure and Improve the Performance of U.S. Institutions of Higher Education (rev. Jan. 2017),
available at https://collegescorecard.ed.gov/assets/UsingFederalDataToMeasureAndImprovePerformance.pdf.

The Department has announced its intent to expand the College Scorecard to provide program level outcomes data for all title IV programs, which is the first time such data will be made available to institutions or consumers.
29

We believe that program-level data will be more useful to students than institution-level data. The Department's new MyStudentAid application allows the Department to provide more information to students who are completing their Free Application for Federal Student Aid (FAFSA) form online or interacting with the Department's Federal Student Aid office. Accordingly, we can ensure that more students are presented with useful information about the institutions included on their FAFSA application in a format that is user-friendly and does not require them to conduct an extensive search. Such information will help students become more informed consumers and, thus, be less likely to be deceived by an institution that provides information contradictory to the information that the Department makes available.

29

See
U.S. Dep't of Education, Secretary Devos Delivers on Promise to Expand College Scorecard, Provide Meaningful Information to Students on Education Options and Outcomes,
available at https://www.ed.gov/news/press-releases/secretary-devos-delivers-promise-expand-college-scorecard-provide-meaningful-information-students-education-options-and-outcomes
(May 21, 2019);
See also:
84 FR 31392, 31408.

Changes:
None.

Comments:
Many commenters did not support the proposed regulations, asserting that the proposed rule would undermine Congressional intent and shortchange students to benefit corporations with a history of fraud and abuse. These commenters assert that the 2018 NPRM contained errors and logical flaws and was colored throughout by a disturbingly cynical attitude about students, along with a naively charitable view of school owners and investors. They argued that the notion that borrower complaints of fraud result from poor choices in the marketplace and that information will cure the problem has been rejected by research and analysis and is not supported by the structure, text, or legislative history of the HEA. They further assert that the legislative history does not blame students for poor choices and recognizes that schools and the government have a role in helping students avoid poor-value programs. They predicted that the Department's proposed rule would have significant, negative implications for both defrauded borrowers and taxpayers. Another commenter predicted that the effect of proposed regulations would be to depress the percentage of tertiary-trained Americans and increase the rate of borrower bankruptcy filings. This commenter further asserted that the proposed regulations would lower the value of education in the U.S. and cause schools to treat students as economic pawns to be matriculated for profit motives over educational ones.

Some commenters stated that any time limitation should be waived in cases where borrowers could produce new evidence to assert a claim or reopen a decision.

Another commenter asserted that the 2016 final regulations benefit Latino and African American students, who are disproportionately concentrated in for-profit colleges and harmed by predatory conduct. This commenter urged the Department to retain the 2016 final regulations.

Many of the commenters who did not support the proposed changes urged the Department to withdraw the 2018 NPRM and allow for the full implementation of the borrower defense regulations published in 2016.

Discussion:
We appreciate the concerns raised by the commenters. Our goal in the NPRM and in these final regulations is to balance the interests of students with those of taxpayers. We need to ensure, for instance, that borrowers receiving relief have claims supported by evidence and to protect the taxpayer dollars that fund the Direct Loan Program. The Department does not agree that the NPRM portrays students or their behaviors in a negative manner or is overly charitable to schools and their investors.

To the contrary, we believe that students have the capacity to make reasoned decisions and that they should be empowered by information and shared accountability expectations. Students are not passive victims; they take an active role in making informed decisions. We describe in our response to comments, throughout this document, how we intend to support students and families in making informed decisions by disseminating information that will help students better evaluate their options.
30

30

See, e.g.,
U.S. Dep't of Educ., College Scorecard,
available at https://collegescorecard.ed.gov/;
U.S. Dep't of Educ., College Navigator,
available at https://nces.ed.gov/collegenavigator/.

We disagree with commenters that the proposed regulations do not align with the HEA or Congressional intent. Through section 455(h) of the HEA, 20 U.S.C. 1087e(h), Congress specifically provided the Department with the authority “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 loan made under [the Direct Loan Program].” The proposed regulations, and these final regulations, represent the Department's exercise of this authority, as intended by Congress. We believe that there must be a fair and balanced process for the Department to evaluate whether a borrower, as a result of a school's act or omission, may be relieved of his or her obligation to repay a Federal student loan as contemplated by the statute. We disagree with the commenters that our approach prioritizes schools over students and believe the approach is justified by the Department's obligation to balance the interests of the Federal taxpayers with its responsibility to student borrowers under section 455(h) of the HEA.

We believe we have reached a result in these final regulations that strikes the best possible balance between the different interests at hand. More details on the projected impact of these final regulations are included in the Regulatory Impact Analysis section of this Preamble. Further, we discuss in the sections that follow the changes we have made in the final regulations to achieve the balance and fairness commenters from all perspectives encouraged.

We believe that these final regulations will increase and not lower the value of education in the United States and do not see how these final regulations would depress the number of students attending an institution of higher education. These final regulations establish clear expectations for schools in their dealings with students, and greater certainty provides an economic incentive for schools to flourish and provide better and more diverse opportunities for students. Borrowers are consumers and their choices will impact which schools are most desirable for particular careers and professions.

While the Department cannot regulate the motives of schools, it can, and will, hold schools accountable for their acts and omissions.

Borrowers who are the victims of a misrepresentation by a deceitful institution will be able to obtain relief under these final regulations, after the Department has had the opportunity to weigh information and evidence from all sides, as discussed further below.

The Department asserts that these final regulations will benefit, not harm, all students, including Latino and African American students. These final regulations will provide more information to students regarding their borrower defense claims than the 2016 final regulations and allow students to fully flesh out their claims, as the process in these regulations more clearly provides a school with an opportunity to provide responses and information as to a borrower's borrower defense application, requires that the applicant receives a copy of any response that the school submits, and clearly establishes that the applicant has an opportunity to reply to the school's response.

In contrast, the 2016 final regulations allow a school to submit a response, but did not clearly afford a student the opportunity to reply to the response.
31

Additionally, under the 2016 final regulations, a student has to request that the Department identify the records that the Department considers relevant to the borrower defense to repayment claim, and the Department will only provide the borrower “any of the identified records upon reasonable request of the borrower.”
32

31
34 CFR 685.206(e)(3).

32

Id.

These final regulations, however, guarantee that the student will have a copy of the school's response and all the documents that the Department considers in adjudicating the borrower defense to repayment claim. Accordingly, these final regulations provide a more transparent process and afford due process for all borrowers no matter where they enroll in college and irrespective of race, religion, national origin, gender, or any other status or category.

For the reasons detailed throughout the preamble to these final regulations, we determined that withdrawing the 2018 NPRM and leaving the 2016 final regulations in place was not the best long-term approach. The Department has decided instead to take an approach that applies the 2016 final regulations and these final regulations to applicable time periods. The 2016 final regulations, thus, will apply to loans first disbursed on or after July 1, 2017 and before July 1, 2020, and these final regulations will apply to loans first disbursed on or after July 1, 2020. We describe our changes to each provision of those regulations in detail in the pertinent section of the preamble.

Changes:
As explained more fully below, the Department revises the proposed regulations to allow the Secretary to extend the limitations period when a borrower may assert a defense to repayment or may reopen the borrower's defense to repayment application to consider evidence that was not previously considered in two exceptional circumstances (relating to a final, non-default judgment on the merits by a State or Federal Court that has not been appealed or that is not subject to further appeal or a final decision by a duly appointed arbitrator or arbitration panel) as described in 34 CFR 685.206(e)(7). We also add a new paragraph (d) in § 685.206 and language to § 685.222 and Appendix A to subpart B of part 685 to clarify that the 2016 final regulations apply to loans first disbursed on or after July 1, 2017 and before July 1, 2020. These final regulations will apply to loans first disbursed on or after July 1, 2020.

Comments:
Some commenters expressed concern and confusion about the structure of the 2018 NPRM, particularly the regulations the Department used as the starting point for the preamble discussion and amendatory language as well as the baseline used for the Regulatory Impact Analysis. They asserted that using the pre-2016 regulations as the basis for the amendatory language raises issues under the APA. They also stated that using the 2019 President's Budget Request as the baseline for the Regulatory Impact Analysis, raises issues under the APA in part because the President's Budget Request assumed the implementation of the 2016 final regulations.

Discussion:
We welcome the opportunity to provide additional clarification about the structure of the 2018 NPRM and the reasons for the structure. First, with respect to the amendatory language, the
Federal Register
requires amendatory language to be drafted as amendments to the currently effective text of the Code of Federal Regulations.
33

For that reason, because the effective date of the 2016 final regulations was delayed, our amendatory language in the 2018 NPRM was drafted to reflect changes to the pre-2016 regulatory text. In the preamble, to properly fulfill our obligations under the APA, we discussed our proposed changes as related to both the pre-2016 regulatory text and the 2016 final regulations.

33

See
1 CFR part 21. “Each agency that prepares a document that is subject to codification shall draft it as an amendment to the Code of Federal Regulations . . .” 1 CFR 21.1.

In the Regulatory Impact Analysis (RIA) section of this document, we discuss in detail why we were required to use the President's 2019 Budget Request as the baseline for the RIA in the 2018 NPRM.

Changes:
None.

Borrower Defenses—Claims (§ 685.206)

Affirmative and Defensive Claims

Comments:
Many commenters, and groups of commenters, advocated for the inclusion in the final regulations of affirmative borrower defense claims, meaning claims asserted before a borrower has defaulted on a Federal student loan. These commenters objected to the proposal that would have limited the Department's consideration of borrower defense claims to those asserted as a defense in collection proceedings. The commenters noted that limiting the consideration of borrower defense claims to defensive claims might encourage some borrowers to default on their loans to become eligible to file a claim.

Commenters representing military personnel and veterans noted that limiting borrower defense claims to defaulted borrowers would fail to recognize the significant risk such a limit would place on service members, veterans, and their dependent family members. The commenters requested clear and reasonable protections from schools with predatory practices and misleading promises. These commenters noted that many jobs held by service members, veterans, spouses, and their adult children require government security clearances. Defaulting on a student loan could result in denial or loss of clearance and, therefore, a loss of employment. In such instances, the commenters asserted that the proposed regulations would increase the likelihood of devastating and, potentially, cascading consequences for military and veteran families.

Some commenters, who supported the inclusion of both affirmative and defensive claims, did so with a caveat that these claims should be combined with a requirement that the claim be supported by clear and convincing evidence, rather than a preponderance of the evidence. One commenter, who supported the inclusion of affirmative claims, did so with a caveat that these

claims should be supported by evidence that is beyond a reasonable doubt.

One commenter suggested that borrowers whose loan payments are current should be afforded priority over borrowers in default in the adjudication process.

In opposing the proposal to only allow consideration of defensive claims, several commenters rejected the Department's assertion that we did not accept affirmative borrower defense to repayment claims prior to 2015 and alleged that the Department's explanation for proposing that the final regulation only allow for the consideration of defensive claims was insufficient. Another commenter who supported the inclusion of affirmative claims provided evidence that the Department considered borrower defense claims before the borrower was in default prior to 2015.

A number of commenters, however, supported the proposal to consider only defensive claims. One such commenter stated that the regulation was intended to only address claims raised in debt collection actions. Another commenter argued that the proposal to accept both affirmative and defensive claims exceeds the statutory authority conferred upon the Department by the HEA and that any such change can only be addressed by Congressional action. This commenter stated that it shared the concern raised by the Department in the NPRM that allowing consideration of affirmative claims would make it relatively easy for a borrower to apply for relief, even if the borrower had suffered no financial harm, resulting in a significant burden on the Department and institutions to address numerous unjustified claims. This commenter also contended that if the Department allows affirmative claims, borrowers would have nothing to lose by filing for loan relief.

Discussion:
In the 2018 NPRM, the Department explained that we were seeking public comment as to whether we should only allow defensive claims, as opposed to both affirmative and defensive claims.
34

The Department stated that it believed that accepting defensive claims, and not affirmative claims, might better balance the competing interests of the Federal taxpayer and of borrowers. The Department sought comment on how it could continue to accept and review affirmative claims, but at the same time discourage borrowers from submitting unjustified claims.

34
83 FR 37253-37254.

After consideration of the public comments received in response to the NPRM, the Department agrees that it is appropriate to accept both affirmative and defensive claims. The Department understands the concerns raised by the commenters who argued that allowing only defensive claims may provide borrowers with an incentive to default, which, in turn, would have negative consequences for the borrower. In addition, we are concerned about the potential negative impacts on military servicemembers, their families, and borrowers, in general, which could result from increased instances of loan default triggered by borrower efforts to become eligible to assert defensive claims.

The Department acknowledges that the Department did accept affirmative borrower defense in limited circumstances before 2015. However, the Department's interpretation of the existing regulation has been that it was meant to serve primarily as a means for a borrower to assert a defense to repayment during the course of a collection proceeding. After further review of the information submitted by commenters and our own records, the Department acknowledges that throughout the history of the existing borrower defense repayment regulation, the Department has approved a small number of affirmative borrower defense to repayment requests.

The Department's representation of its history of approving borrower defense to repayment loan relief in the NPRM was included as background to our explanations and reasoned bases for two alternative proposals. With these alternatives, we gave the public notice and opportunity to provide feedback on whether the Department should distinguish between affirmative and defensive borrower defense to repayment claims.

As intended by the APA, the Department provided sufficient notice and the public provided comments, and the Department weighed such comments and has decided to allow the consideration of both affirmative claims and defensive claims in these final regulations. However, as explained further in this preamble at Borrower Defenses—Limitations Period for Filing a Borrower Defense Claim, we are establishing a three-year limitations period, that begins to run when the student leaves the school, for all defense to repayment claims under the new standard.

The Department continues to be concerned about the burden to the Department and the taxpayer from a large volume of claims. However, as explained later in this document, the Department does not believe that a different evidentiary standard for affirmative claims versus defensive claims is appropriate. Different evidentiary standards might lead to inconsistency in the Department's adjudication of factually similar borrower defense claims, but for the timing of a borrower's application and loan status. Similarly, the Department does not agree that priority in adjudication should be given to borrowers whose loan payments are current over borrowers whose loans are in default. The Department believes it is appropriate for a borrower to have his or her claim adjudicated based upon the facts underlying his or her application, rather than repayment status. We also believe that the standard we adopt in these final regulations is properly calibrated to allow borrower defense relief only where it is merited, and not to open the door to a large volume of unjustified claims.

The Department disagrees with the commenters who stated that the consideration of affirmative claims is outside of the Department's statutory authority or the purpose of the borrower defense regulations. We stated in the NPRM that the proposal to consider only defensive claims was within the Department's authority under section 455(h) of the HEA.
35

However, by such a statement the Department did not imply that it does not have the authority to consider affirmative claims and, in fact, by proposing that borrowers could submit affirmative claims on loans first disbursed before the effective date of the final regulations, clearly indicated that it does have such authority.

35
83 FR 37253-37254.

The Department has broad statutory authority to make, promulgate, issue, rescind, and amend regulations governing the manner of, operations of, and governing of the applicable programs administered by the Department and functions of the Department.
36

Further, by providing that the Department may regulate borrowers' assertion of borrower defenses to repayment, section 455(h) of the HEA grants the Department the authority to not only identify borrower causes of action that may be recognized as defenses to repayment, but also to establish the procedures for receipt and adjudication of borrower claims—including the type of proceeding through which the Department may consider such a claim. This regulatory scheme reflects the Department's history in considering borrower defense claims, whether prior to 2015, as pointed out by some commenters, or after 2015.

Accordingly, the Department does not agree that congressional action is necessary for the Department's consideration of affirmative claims.

36

See
20 U.S.C. 1221e-3.

Changes:
We are adding § 685.206(e) to provide, with regard to loans first disbursed on or after July 1, 2020, that borrowers may submit a defense to repayment claim, both on affirmative and defensive bases, as long as the claim is submitted within three years from the date the borrower is no longer enrolled at the institution.

Application

Comments:
Some commenters supported the proposed regulatory provisions which would require the borrower to specify the misrepresentation being asserted for the defense to repayment, certify the claim under penalty of perjury, list how much financial harm was incurred, and acknowledge that if they receive a full discharge of the loan, the school may refuse to provide an official transcript. These commenters believe these requirements will reduce the number of unsubstantiated claims.

One commenter suggested that the application also require borrowers to provide their grade point average (GPA) at the time of their termination or leaving the school and to state, if they failed the academic program, why they failed.

One commenter suggested the Department start a process to consumer test the application, with input from other Federal agencies, to ensure that students of all institutional levels are able to comprehend and complete the application.

Several commenters objected to a proposed requirement that borrowers making a defense to repayment claim provide personal information, including confirmation of the “borrower's ability to pass a drug test, satisfy criminal history or driving record requirements, and meet any health qualifications.” The commenters asserted that this would effectively require borrowers to waive their right to privacy and treats the borrower like a criminal, not an injured party. One of these commenters argued that these requirements are irrelevant to the question of school misconduct and are clearly intended to dissuade borrowers from asserting claims of fraud.

Discussion:
The Department thanks the commenters who supported the proposed regulations pertaining to the application. We believe the proposed regulation set forth clear borrower defense to repayment application requirements that would allow a borrower to understand and provide the information needed for the Department to accurately evaluate the borrower's claim. As proposed in the NPRM, this application requires the borrower to sign a waiver permitting the institution to provide the Department with items from the borrower's education record relevant to the defense to repayment claim. Such a waiver gives the borrower notice that the school may release information from the borrower's education records to the Department.

We do not agree that it is appropriate to
require
that a borrower, submitting a borrower defense claim, include their GPA or other information regarding their success or failure in any course or program. The Department does not view that information as dispositive as to whether the borrower was harmed by a misrepresentation or an omission by the school. Including this information, however, could have an impact on determining the harm suffered by a student as a result of a misrepresentation. In considering the harm the student suffered as a result of an institution's misrepresentation, the Department must ascertain how much of that harm is the fault of the institution and how much of it is the result of a student's choices, behaviors, aspirations, and motivations.

The Department does not adopt the commenter's suggestion regarding consumer testing the borrower defense application. The Department has significant experience developing and publishing applications similar to the one required in these final regulations and will rely on that experience in creating an appropriate and effective application for this purpose. We disagree with the commenters who objected to the proposed requirement that borrowers supply information relevant to assessing the borrower's allegation of harm as a violation of borrowers' privacy rights. Under the Privacy Act, an agency may “maintain in its records only such information about an individual as is relevant and necessary to the accomplish a purpose of the agency required to be accomplished by statute . . .”
37

While the information relevant to assessing the borrower's allegation of harm may be private, it is also necessary for the Department to have it in order to carry out its purposes. We will maintain the borrower's privacy, except for the limited purpose of resolving the borrower's claim.

37
5 U.S.C. 552a(e)(1).

As explained earlier, the HEA provides the Department with the authority to establish regulations on all aspects of the borrower defense to repayment process, including how relief should be provided and determined. It is relevant to the Department's determination of relief to require a borrower to provide a complete picture of the financial harm caused by a school's misrepresentation, by providing information such as: Whether the borrower failed to actively pursue employment if he or she is a recent graduate; whether the borrower was terminated or removed from a job position as a result of job performance issues; or whether the borrower failed to meet other job qualifications for reasons unrelated to the school's misrepresentation.

With respect to the borrower's attempts to pursue employment, the Department revised the final regulations to clarify what the Department expects the borrower to provide as part of the application. The borrower should provide documentation that the borrower actively pursued employment in the field for which the borrower's education prepared the borrower. Examples of this documentation include but are not limited to: Job application confirmation emails; correspondence with potential employers; registration at job fairs; enrolling with a job recruiter; and attendance at a resume workshop. Failure to provide such information could result in a presumption that the borrower failed to actively pursue employment in the field. The Department would like borrowers to have notice of what documentation the Department expects in support of an application for a borrower defense to repayment and what the consequences of failing to provide such documentation will be. The Department must rely on the borrower to supply such information, as the Department will not be aware of any attempts the borrower has made to seek employment. Such documentation will help support the relief that a borrower receives.

While such information about pursuing employment may not be related to whether a school made a misrepresentation, as defined in these final regulations, it does relate directly to whether the borrower was financially harmed by the institution, as required by the standard for a borrower defense claim. Information on intervening causes of a borrower's circumstances that cannot be said to be even related to a borrower's education, much less the misrepresentation at issue, will be relevant to the Department's assessment of the amount of relief to provide to the borrower as a result of the harm that has been caused by the misrepresentation.

With regards to criminal history, we carefully reviewed the public

comments. We do not adopt the commenters' logic that such a provision would treat borrowers like criminals, require borrowers to waive their right to privacy, or that these questions are “clearly intended” to dissuade borrowers from asserting borrower defense claims. However, after our review, the Department decided that the inclusion of the “criminal record” language is contrary to the Department's priorities and does not properly support individuals who are attempting to transition out of the criminal justice system through higher education, job training, or other career pathways.

Despite this change, the Department believes that requiring borrowers to provide a complete picture of the financial harm caused by a school's misrepresentation—including whether unrelated factors may have contributed to the borrower's financial circumstances—is appropriate to help the Department satisfy its fiduciary responsibility to taxpayers and to provide just relief for borrowers.

Changes:
The Department revised the regulations about the documentation the borrower should provide as part of the borrower defense to repayment application. The borrower still must provide documentation that the borrower actively pursued employment in the field for which the borrower's education prepared the borrower. The Department will presume that the borrower failed to actively pursue such employment, if the borrower fails to provide such documentation. As explained below, the Department also is revising § 685.206(e)(8) to clarify the borrower defense to repayment application will state that the Secretary will grant forbearance while the application is pending and will notify the borrower of the option to decline forbearance. The Department removes “criminal history or” from § 685.206(e)(8)(v).

Definition of “Borrower”

Comments:
A group of commenters recommended that the proposed regulatory language in the 2018 NPRM at § 685.206(d)(1)(i), define “borrower” to include the student on whose behalf a parent borrowed Federal funds. The purpose of this inclusion is to specifically address whether a parent borrower may raise a defense to repayment claim.

Discussion:
The Department regrets the omission of parent borrowers from the borrower defense provisions in the 2018 NPRM. We have amended the definition to reflect the approach taken in the 2016 final regulations, so that a parent borrower may raise a defense to repayment claim based on a misrepresentation or omission made to the parent or to the student on whose behalf the parent borrowed Federal funds. In the final regulations, § 685.206(e)(1)(ii) mirrors § 685.222(a)(4), the definition applicable for loans first disbursed on or after July 1, 2017 and before July 1, 2020, which provides that the term “borrower” includes the student who attended the institution, any endorsers, or the student on whose behalf a parent borrowed.

Changes:
The definition of “borrower” in § 685.206(e)(1)(ii) now includes both the borrower and, in the case of a Direct PLUS Loan, any endorsers, and for a Direct PLUS Loan made to a parent, the student on whose behalf the parent borrowed.

Definition of Direct Loan

Comments:
None.

Discussion:
The Department would like to clarify that “Direct Loan” in § 685.206(e) means a Direct Unsubsidized Loan, a Direct Subsidized Loan, or a Direct PLUS Loan. With respect to both the pre-2016 final regulations and 2016 final regulations, the Department interprets “Direct Loan” to mean a Direct Unsubsidized Loan, a Direct Subsidized Loan, or a Direct PLUS Loan in §§ 685.206(c) and (d) and 685.222. These final regulations clarify that “Direct Loan” continues to have the same meaning as in the pre-2016 final regulations and 2016 final regulations.

Changes:
The Department expressly defines a Direct Loan in § 685.206(e)(1)(i) as a Direct Unsubsidized Loan, a Direct Subsidized Loan, or a Direct PLUS Loan.

Group Claims: Support for Revisions

Comments:
Several commenters supported the Department's proposal to eliminate the group claim process for borrower defense claims. They expressed concern that allowing for group claims would incentivize attorneys and advocacy groups to file claims on behalf of a class of students. One commenter asserted that outside actors could attempt to monetize borrower defense claims to their own benefits, especially if the Department were to accept group claims. However, the commenter noted that there are options that the Department could consider to limit this possibility as an alternative to disallowing group claims entirely.

Discussion:
The Department thanks the commenters for their support of the regulations that require individuals to assert borrower defense claims. To an extent, we understand the commenters' concerns about, and have already become aware of evidence of, outside actors attempting to personally gain from the bad acts of institutions as well as unfounded allegations. The evidence standard and the fact-based determination of the borrower's harm and resulting reliance requirements in the federal standard in these regulations for loans first disbursed after July 1, 2020, necessitates that each claim be adjudicated separately. While, depending on the circumstances, borrower defense claims brought under those other standards might be amenable to a group process or for expedited processing if there are similar facts and claims among a number of borrowers, the new federal standard envisions a more fact-specific inquiry. As a result, the Department no longer believes that a group process is appropriate.

Changes:
None.

Group Claims: Opposition to Revisions

Comments:
Many commenters encouraged the Department to include a process in the final regulations for group claims. These commenters noted that students who were at the same school at the same time, who were subject to the same misrepresentation, could expect their claims to be adjudicated more expeditiously, if considered as a group.

Some commenters were not persuaded by the Department's assertion in the 2018 NPRM that a group claim process places an extraordinary burden on both the Department and the Federal taxpayer, given that the 2016 final defense regulations asserted that a group adjudication process with common facts and claims would conserve the Department's administrative resources. These commenters further noted that no undue burden would be placed on the taxpayer so long as the Department is holding institutions financially accountable.

Some commenters suggested that when the Department knows that a school engaged in misrepresentation to a group of students, debt relief should be granted to all of them.

The commenters further recommended that the regulation require the Department to process any relevant and substantiated information in its possession in the same manner as a Freedom of Information Act (FOIA) request and make that information, to the extent permitted by law, available to the borrower and the school.

The commenters suggested that the Department consider significant and plausible allegations of misrepresentation by multiple

borrowers sufficient impetus to launch its own investigation, the outcome of which may be used to substantiate pending borrower defense claims and enable such claims to move to the determination of harm phase. They assert that the Department could use compliance determinations by the Department, or other oversight bodies, as an alternative to a group process that would alleviate some of the burden associated with examining individual claims and focus such reviews on harm to borrowers rather than institutional intent, without curtailing due process rights for schools.

Another commenter noted that allowing for group claims would strengthen the usefulness of the regulation as an accountability measure, as schools would know that efforts to defraud students could result in large groups of students being given relief, with the associated financial impact on the school.

A commenter cited
Federal Trade Commission
v.
BlueHippo Funding, LLC,
762 F.3d 238 (2nd Cir. 2014) for the proposition that consumer protection agencies need not show that each consumer individually relied on a misrepresentation. Similarly, another commenter stated a limitation on group claims will limit access to relief exclusively to students who have the financial resources to obtain legal representation.

One commenter stated that a ban on group claims places undue burden on individuals who have been defrauded where there is widespread evidence of mistreatment.

Other commenters who supported the inclusion of group claims noted that, while the proposed regulations make explicit that the Department has the authority to automatically discharge loans on behalf of a group of defrauded borrowers, the regulations do not include guidance to ensure that this authority is exercised by the Secretary.

These commenters also advocated including a process in the final regulations that would enable State attorneys general (AGs) to petition the Department to provide automatic group loan discharges to students based on the findings of an AG's investigation. Another commenter also advocated for the rule to permit third parties, such as state AGs or legal aid organizations, to file group claims when they possess evidence of widespread misconduct.

One commenter suggested that group discharges should include borrower defense claimants' private loans and Federal Family Education Loan (FFEL) Program loans.

Discussion:
After careful consideration of the comments, the Department retains its position that it is unnecessary to provide a process for group borrower defense claims.

In 2016, the Department decided that a group process would conserve the Department's administrative resources. However, the standard for a borrower defense claim and the process that we are adopting in these final regulations is much different from the standard and process in the 2016 final regulations.

Determinations under these final rules will be highly reliant upon evidence specific to individual borrowers, which requires the Department to reconsider its previous burden calculation. Under these final regulations, a school engaging in misrepresentation alone will not be sufficient for a successful claim. Relief will be granted based upon a borrower's ability to demonstrate that institutions made misrepresentations with knowledge of its false, misleading, or deceptive nature or with reckless disregard and to provide evidence of financial harm. This evidentiary determination and harm analysis require that the Department consider each borrower claim independently and on a case-by-case basis.

The Department declines to accept the commenter's recommendation to process relevant and substantiated information in the same manner as a FOIA request. The purpose of the FOIA process is to allow the release of information for the public. Information submitted for a borrower defense claim is provided to the Department, and it is unclear how the FOIA process could be applicable to the process created by these final regulations. While the Department welcomes information from the borrower and encourages the submission of such information, the process outlined in these final regulations allows for sufficient access to the required information and documentation for the concerned parties to a claim.

While the Department shares and understands the concerns that commenters expressed regarding the expeditious resolution of borrower claims, we believe it is prudent to balance the need for speedy recovery for students against the need to properly resolve each claim on the merits and provide relief in relation to the claimant's harm. To make this determination, it is necessary to have a completed application from each individual borrower, to consider information from both the borrower and the institution, and to examine the facts and circumstances of each borrower's individual situation.

Additionally, the Department does not believe that the elimination of group claims reduces the usefulness of the regulation as an accountability measure. Schools are still subject to the consequences of their misrepresentation and, if necessary, the Secretary retains the discretion to establish facts regarding misrepresentation claims put forward by a group of borrowers.

The Department does not agree that it is too burdensome for a borrower to submit an individual application to provide evidentiary details in order to receive consideration for a full or partial loan discharge or that a borrower must retain legal services in order to file a successful claim. Considering that a student had to sign a Master Promissory Note—a complicated legal document—as well as other documents in order to obtain a student loan, we have determined that the burden upon students to provide documentation and to complete an application is appropriate. In order to properly review the borrower's allegations and calculate the level of relief to which a student is entitled, based on the need to balance the interests of borrowers and taxpayers, the Department must collect information from borrowers through an application form.

Further, presuming reliance on the part of the students would not properly balance the Department's responsibilities to protect students as well as taxpayer dollars.

We appreciate, but do not adopt, the suggestions regarding the Department's consideration of allegations from multiple borrowers as an impetus to launch an investigation (though certainly such allegations could trigger an investigation) and the use of compliance determinations, by the Department or other oversight body, as an alternative to the group process. The Department believes that the most appropriate and fairest method of determining if a student was subject to a misrepresentation, relied on that misrepresentation, and was subsequently harmed by it, is through the individual claim process in these final regulations.

Regarding any evidence from audits, program reviews, or investigations, the Department may, at the Secretary's discretion, determine if it is warranted and more efficient to establish facts regarding claims of misrepresentation put forth by a group.

The Department rejects the commenter's suggestion to include regulatory language to ensure that the authority extended to the Secretary to automatically discharge loans on behalf of a group is exercised. Even if the

Department determines that it is more efficient to establish facts regarding claims of misrepresentation put forth by a group of borrowers, the Secretary will still need to determine that the borrower was harmed as a result of a decision based upon a misrepresentation.

While we reject the suggestion of a process for State AG or legal aid organization petitions, the Secretary may determine that evidence of widespread misconduct, obtained by State AGs or legal aid organizations, merit a broader review of a school's actions in order to establish facts regarding misrepresentation to a group of borrowers. However, the Department has an obligation to taxpayers to independently assess the strength of each borrower defense claim. Consequently, we will not be compelled to take action at the recommendation or petition of a State AG, especially if those allegations have not resulted in a judgment on the merits in an impartial court of law, nor will the Department automatically treat State AG submissions as group claims. Instead, if a State AG has concerns about a particular institution, we would recommend that it work with their State agencies responsible for authorizing and regulating institutions. Those entities are a crucial part of the regulatory triad, which includes the Department, State authorizing agencies, and accreditors, and have the right and responsibility to enforce applicable State laws.

The Department does not have the authority to discharge private student loans or FFEL loans for borrowers who assert borrower defense to repayment claims with respect to their Direct loans. Section 455(h) of the HEA specifically provides that a borrower may assert a borrower defense to repayment to “a loan made under this part,” referring to the Direct Loan Program. Private loans are not part of the Direct Loan Program and thus may not be discharged under the Department's borrower defense process by statute. Similarly, FFEL loans are made under the FFEL Program, and not the Direct Loan Program. As a result, a FFEL loan also cannot be discharged through the Direct Loan borrower defense process, unless the FFEL loan has consolidated into a Direct Consolidation Loan under 34 CFR 685.220. In that situation, the FFEL loan would be paid off with the proceeds of the Direct Consolidation Loan, and the borrower's Direct Consolidation Loan—as a loan made under the Direct Loan Program—would allow the borrower to apply for relief through the borrower defense process. Unless consolidated into a Direct Consolidation Loan, as described in 34 CFR 685.200, Private and FFEL loan funds are provided by lenders other than the Department and cannot be discharged through the Direct Loan Program's regulatory or statutory provisions that apply to the Direct Loan Program.

The Department notes that the group process from the 2016 final regulations, at 34 CFR 685.222(f), will still be available for loans first disbursed on or after July 1, 2017, and before July 1, 2020.

Changes:
None.

Unsubstantiated Claims

Comments:
One commenter stated that the Department's concern regarding the receipt of many frivolous claims is unfounded, wrong-headed, and not supported by research or complaints from dissatisfied consumers. Another commenter noted that in the NPRM, we stated that there was insufficient information to know whether the fear of frivolous claims was legitimate. The commenter also referred to the Department's position in the preamble to the 2016 final regulations, where we held that defense to repayment proceedings will be not be used by borrowers to raise frivolous claims.

Referring to consumer products research, a commenter asserted that the Department's concern regarding frivolous claims ignores good-government practices followed by peer agencies like the Veterans Administration, such as publishing complaints against schools, and does not reflect the overarching goals of the HEA.

A group of commenters objected to the actions taken to mitigate frivolous claims. These commenters expressed a need to balance student protections with expectations of student responsibility, suggesting that the rule must emphasize that students have a right to accurate, complete, and clear information so that they can make sound decisions. The commenters also asserted that students should not be abandoned to the principle of
caveat emptor
and that the higher education community should work with students to avoid bad choices that result in lost time and opportunities.

Another group of commenters expressed concern that those who are ideologically opposed to the existence of privately owned and operated schools may file frivolous claims as a means of harassing schools and harming the schools' reputations, before the claims could be adjudicated by the Department. These commenters encouraged the Department to establish a balanced adjudication process that includes procedural protections that provide for the quick dismissal of frivolous or unsubstantiated claims.

Discussion:
The Department agrees with the commenters that the defense to repayment regulations must provide student protections and not endorse a caveat emptor approach, while encouraging fiscal responsibility for students and the Department. As a policy matter, we do not believe that, in practice, the 2016 final regulations will effectively prevent unsubstantiated claims, which is why these final regulations are drafted to build-in further deterrents.

The Department does not possess an official definition of “frivolous” or “unsubstantiated” claims. In typical usage, however, a frivolous claim is one with little or no weight or not worthy of serious consideration.
38

We use the term, here, to describe claims provided by borrowers that allege misrepresentations that actually did not occur, that seek discharge from private rather than Federal loans, or that seek relief from a school not associated with any of the borrower's current underlying loans.

38
Webster's Dictionary defines frivolous as: “of little weight or importance; having no sound basis; lacking in seriousness.”
Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/frivolous?src=search-dict-hed.
Black's Law Dictionary defines “frivolous” as when an answer or plea is “clearly insufficient on its face, and does not controvert the material points of the opposite pleading, and is presumably interposed for mere purposes of delay or to embarrass the plaintiff.”
https://thelawdictionary.org/frivolous/.
The Supreme Court has held that a complaint is frivolous when it lacks “an arguable basis either in law or in fact.”
Neitzke
v.
Williams,
490 U.S. 319 (1989).

Although we understand that some commenters may disagree with our approach, the Department's policy seeks to balance the needs of borrowers to have their claims resolved expeditiously against the needs of the Department to resolve claims fairly and efficiently without overburdening the Department, institutions that are operating and serving students, or taxpayers.

The Department has examined the issue of unsubstantiated claims and has concluded that it remains a concern in terms of costs, burden, and delays. Processing unsubstantiated claims would place an administrative burden on the Department. Defending against unsubstantiated claims would be costly to all institutions, particularly smaller institutions. The Department has processed only a small percentage of the claims filed thus far. Of those, around 9,000 applications have been denied as unsubstantiated for reasons that include, but are not limited to, the following: (1) Borrowers who attended the institution, but not during the time

period that the institution made the alleged misrepresentation; (2) the borrower submitted the claim without any supporting evidence; and (3) on its face, the claim lacks any legal or factual basis for relief. This high number of unsubstantiated claims, as a practical matter, strains Department resources and delays relief to borrowers who have meritorious claims.

The Department finds that the comment regarding consumer products research and borrower defense claims does not make explicit why such a comparison is an apples-to-apples comparison. It is not apparent from the commenter's argument that, in fact, they are.

The Department believes that by taking seriously its dual responsibilities to students and taxpayers, we are employing good-government practices in accordance with our statutory and regulatory responsibilities.

Contrary to some commenters' suggestions, the Department believes that the regulation appropriately emphasizes disclosure insofar as students, who are themselves taxpayers, have a right to accurate, complete, and clear information that will enable them to make sound decisions.

The Department further believes that requiring borrowers to sign an application claim under penalty of perjury will help deter unsubstantiated claims, as will the opportunity for institutions to respond to such claims, including by providing relevant documents from the student's academic and financial aid records.

The Department reserves the ability to take action against borrowers who perjure themselves in filing a substantially inaccurate claim.

We acknowledge that there is a risk that unsubstantiated claims could be filed in large numbers to target institutions for the purpose of damaging their reputations before the Department can adjudicate the claims as unsubstantiated. Indeed, we are aware of firms and advocacy groups that are engaging in such coordinated efforts against certain institutions.

Nevertheless, by allowing institutions to respond in the adjudication process to all claims—substantiated and unsubstantiated—asserted against them as part of the adjudication process, the Department will be able to mitigate this risk for institutions and make informed decisions on individual claims.

Changes:
None.

Retroactive Standards and Bases for Claims

Comments:
Several commenters also advocated that borrowers whose loans were disbursed prior to July 1, 2019, should be allowed to initiate both affirmative and defensive borrower defense claims.

These commenters assert that this is especially important when a claim has failed under the current State law standard. The commenters argue that, as a matter of equity, those borrowers should be permitted to refile a claim under the Federal standard.

Discussion:
The date of loan disbursement determines which standard applies to the borrower defense claim. For loans first disbursed on or after July 1, 2020, these final regulations include opportunities for borrowers to make both affirmative and defensive claims under a Federal standard within the three-year limitations period.

Likewise, for loans disbursed on or after July 1, 2017 and before July 1, 2020, borrowers may assert both affirmative and defensive claims, but pursuant to the 2016 final regulations. Borrowers of loans first disbursed prior to July 1, 2017, may assert a defense to repayment under the State law standard set forth in 685.206(c). Neither these final regulations nor the 2016 final regulations provide a borrower whose loans were disbursed when the State law standard was in effect the ability to refile a borrower defense claim under a later-effective Federal standard, unless the loans were consolidated after July 1, 2020.

Changes:
None.

Borrower Defenses—Federal Standard (Section 685.206)

Comments:
Several commenters supported the establishment of a Federal standard for borrower defense to repayment claims, noting that a Federal standard would provide clarity and consistency and enhance Department officials' ability to work with schools to prioritize the delivery of quality education to students.

Several commenters asserted that the proposed Federal standard makes it substantially more difficult for defrauded borrowers to assert a claim. The commenters argue that by eliminating the State law standard, and excluding final judgments made by Federal or State courts against a school from the list of acceptable defenses, the Department effectively nullifies State consumer protection laws and requires a borrower who successfully sues their school for fraud in a State court to continue repaying loans used to attend the school while the school continues to reap the benefit of the borrower's Federal student aid.

Several commenters suggested that the Department establish the Federal standard as a floor and allow borrowers who choose to do so to assert claims based on a State standard.

Other commenters asserted that any Federal standard should not limit the rights a borrower has in his or her own State. The commenters opined that States should have the right to protect their own consumers and ensure the quality of schools licensed to operate in their States. Several other commenters agreed, noting that the proposed standard would destroy the working relationship between the Federal government and States' attorneys general by limiting their role in protecting borrowers.

Another commenter stated that there is no good basis for expanding the reach of the Federal government and supplanting State laws with Federal regulations.

Discussion:
We appreciate the support for adopting a Federal standard and agree that a Federal standard provides consistency.

Section 455(h) of the HEA expressly states: “
Notwithstanding any other provision of State or Federal law,
the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan.” (Emphasis added). Congress did not require the Secretary to use State law as the basis for asserting a defense to repayment of a loan. Instead, Congress expressly required the Secretary to specify in regulations which acts or omissions constitute a borrower defense to repayment. Loans under title IV are a Federal asset, which means that the Secretary must maintain the authority to make determinations about when and how a student loan should be discharged.

The Department disagrees now, as it did in promulgating the 2016 final regulations, that moving to a Federal standard interferes with the ability of States to protect students. State authorizing agencies will remain an integral part of the regulatory triad, and State AGs may exercise their separate authority and pursue a legal process to take action against institutions. These final regulations do not nullify, abrogate, or derogate the authority of States to enforce their own consumer protection laws. A borrower defense to repayment application filed with the Department is only one of several available avenues for potential relief to borrowers, and borrowers may choose the best avenue of relief available to them.

These final regulations continue to allow borrowers to submit the factual findings supporting a final judgment in a State AG enforcement action against their schools as evidence to support their borrower defense to repayment claims. However, the Department notes that, as a practical matter, factual findings in state AG enforcement actions often are of limited utility to borrower defense claims because State consumer protection laws cover broader issues than Department-backed student loans or even the provision of educational services. Accordingly, a judgment against an institution in an action brought by a State AG to enforce State law may not be relevant to a title IV defense to repayment claim. Therefore, the Department's final regulations expressly state that certain categories of State law claims which are enumerated in 34 CFR 685.206(e)(5)(ii)—including but not limited to, claims for personal injury, sexual harassment, civil rights violations, slander or defamation, property damage, or challenging general education quality or the reasonableness of an educator's conduct in providing educational services—are not directly and clearly related to the making of a loan or the provision of educational services by a school. For example, the reasonableness of an educator's conduct in providing educational services, such as the educator's teaching style, preparation for class, etc., is irrelevant to whether the educator made a misrepresentation as defined in these final regulations. When a borrower points to a final judgment in a State law action in support of an application for borrower defense to repayment, the Department must consider the final judgment's relevance to the borrower defense claim.

A Federal standard assures borrowers equitable treatment under the law regardless of where they live or where their institutions are located. In considering claims under the 1995 borrower defense regulations, the Department found it unwieldy to navigate the consumer protection laws of 50 different States. Researching and applying the consumer protection laws of the 50 States requires significant resources and, thus, delays the adjudication of borrower defense to repayment claims. Further, applying disparate State law could result in differential and inequitable treatment of similarly situated borrowers. For instance, two borrowers who were exposed to identical misrepresentations and suffered the same hardship could have their borrower defense claims resolved inconsistently simply because the borrowers reside in different States.

We do not agree that it would be beneficial to allow borrowers to select the State standard under which their claims would be reviewed. Most borrowers would lack the expertise and information to make such a choice-of-law determination. Moreover, this approach undercuts our objective to adjudicate claims swiftly and equitably.

Separately, we do not believe that the Department should share with State AGs sensitive academic and financial information for borrowers who seek individual loan discharges through borrower defense to repayment claims, the work of State AGs may inform and advance the Department's efforts to ensure accountability at the institution level because of the important role State AGs play in enforcing consumer protection laws. That being said, title IV Federal student loans are Federal assets, backed by Federal tax dollars and governed by federal law. As a result, the Department must work independently to fulfill its fiduciary responsibilities to the American taxpayer.

There is nothing in our final regulations that preempts State consumer protection laws or diminishes the State role in consumer protection. As explained above, States play a vital role in enforcing consumer protection laws that hold institutions accountable outside the realm of Federal student loans.

Changes:
The Department adopts, with changes for organization and consistency, the Federal standard as articulated in Alternative B for § 685.206(e).

Alignment With Definition of Misrepresentation

Comments:
None.

Discussion:
The Department seeks to better align the Federal standard for borrower defense claims with the definition of misrepresentation. The 2018 NPRM proposed different alternatives,
39

not all of which expressly incorporated the definition of misrepresentation. The Department adopts language that expressly incorporates the definition of misrepresentation in 685.206(e)(3). The Department also expressly includes a reference to the provision of educational services, which appears in the definition of misrepresentation, in the Federal standard. The Department sought to streamline the Federal standard and definition of misrepresentation and make them parallel to each other.

39
83 FR 37325-28.

Changes:
The Department is revising the proposed regulations creating a Federal standard for a borrower defense claim to state that the borrower must establish by a preponderance of the evidence that the institution at which the borrower enrolled made a misrepresentation, as defined in 685.206(e)(3), and also expressly to reference the provision of educational services.

Borrower Defenses—Misrepresentation

Definition of Misrepresentation and Intent as Part of the Federal Standard

Comments:
Many commenters wrote in support of the proposed definition of misrepresentation, noting that it is clear and focuses on actions that are commonly accepted as dishonest. Some of these commenters noted that the definition would separate inadvertent errors from intentional actions by the school. Other commenters noted that the definition of misrepresentation will help ensure that frivolous claims will be prevented or rightly rejected. Another commenter asserted that the Department should allow for an institution's innocent mistake and that allowing students to discharge their loans for innocent mistakes would create an incredible risk to schools, taxpayers, and ultimately the workforce.

Many other commenters objected to the definition of misrepresentation, arguing that the requirement for intent, knowledge, or reckless disregard was too difficult for borrowers to meet, effectively denying access to relief to most borrowers. These commenters asserted that such evidence would likely be available only if a borrower had legal counsel and access to discovery tools, such as subpoenas for documents and testimony. They also noted that misrepresentations need not be intentional to harm students and suggested that negligent misrepresentations be incorporated into the definition as well.

One commenter requested that the Department provide a more fulsome justification for why its view of misrepresentation has changed since the 2016 final regulations. Similarly, another commenter contended that the Department has not provided adequate justification for its view that misrepresentation requires intentional harm to students. One commenter asserted that if the Department can adjudicate allegations of fraud and misrepresentation in an administrative proceeding against a school, then students should be able to benefit from

the same standard for borrower defense to repayment.

Another commenter argued that the proposed Federal standard would be arbitrarily difficult for borrowers to satisfy and seems designed to keep borrowers from receiving relief available to them under the law. This commenter asserted the Department should simplify the process and ensure that borrowers have equitable access to relief.

Some commenters noted that the Department in the 2018 NPRM acknowledged that it is unlikely that a borrower would have evidence to demonstrate that a school acted with intent to deceive, but borrowers are more likely to be able to demonstrate reckless disregard for the truth. The commenter recommends that, as an alternative, the regulation allow borrowers to submit sufficient evidence to prove that a substantial material misrepresentation was responsible for their taking out loans, regardless of whether the misrepresentation was made with knowledge or recklessness by the school.

According to one commenter, the proposed definition of misrepresentation adds a substantial amount of burden without distinguishing among the types of misrepresentations borrowers may have experienced. This commenter noted that the Department itself assumes that only five percent of misrepresentations are committed without intent, knowledge, or reckless disregard; or do not fall under the breach of contract or final judgment components of the standard in the 2016 final regulations. The commenter opined that the Department, through its proposed definition of misrepresentation, was attempting to prevent borrowers who have been harmed by their institutions from accessing relief simply because of asymmetry between borrowers and the school about the nature of the misrepresentation.

One commenter criticized the proposed definition of misrepresentation for exceeding the standards under State and Federal consumer protection laws.

Another commenter asserted that all fifty States have a version of consumer protection laws that prohibit certain unfair and deceptive conduct, commonly known as “unfair and deceptive trade acts and practices” (UDAP). According to this commenter, these UDAP laws are modeled after the Federal Trade Commission Act and track the CFPB's statutory authority. This commenter asserts that the UDAP laws address both deception and unfairness and offer a common, stable structure, and pedigree that the Department should adopt. This commenter asserted that a scienter requirement is inconsistent with the state of mind requirements in other Federal laws governing unfair and deceptive practices. The commenter notes that, for example, the deception standard used by the FTC does not require a showing of intent by the party against whom a deception claim is brought. The commenter further notes that the CFPB, uses a similar standard for determining whether an act or practice is deceptive. According to the commenter, under both the FTC and CFPB's standard, a practice is deceptive if, among other things, it is likely to mislead a consumer.

Discussion:
We appreciate the commenters' support for the proposed definition of misrepresentation. We agree that it is important to differentiate between acts or omissions that a school made unknowingly or inadvertently and acts or omissions that a school made with knowledge of their false, misleading, or deceptive nature or with reckless disregard for the truth. The Department agrees with negotiators and commenters that it is unlikely that a borrower would have evidence to demonstrate that an institution acted with intent to deceive, and we are revising these final regulations to remove the phrase “with intent to deceive” from the Federal standard. It is difficult to prove what an officer's or employee's intent is, but it is not as difficult to prove that a statement was made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth. For example, a student may demonstrate that an officer of the institution or employee misrepresented the actual licensure passage rates because the employee's representations are materially different from those included in the institution's marketing materials, website, or other communications made to the student. The officer or employee need not have an intent to deceive the student in making the misrepresentation about actual licensure passage rates. The student may use the institution's marketing materials, website, or other communications to demonstrate that the institution's officer or employee made the representation with knowledge of its false, misleading, or deceptive nature or with reckless disregard for the truth.

To address concerns about the definition of misrepresentation and the Federal standard, the Department is revising the Federal standard to provide greater clarity. The Federal standard proposed in the 2018 NPRM requires borrowers to demonstrate that the institution made a “misrepresentation of material fact, opinion, intention, or law.”
40

The Department realizes that it will be difficult to demonstrate a misrepresentation of “opinion, intention, or law” and, thus, is removing “opinion, intention, or law” from the Federal standard. It could be very difficult to demonstrate a misrepresentation of opinion or intention as opinions and intentions may change and do not constitute facts that may be proved or disproved. Similarly, it would be difficult to demonstrate that the institution made a material misrepresentation of law as laws are subject to different interpretations. Laws that are clearly stated and that are not subject to different interpretations may constitute a material fact. For example, if an institution made a material misrepresentation that these final regulations require a pre-dispute arbitration agreement and class action waiver, then the misrepresentation concerns a material fact. Accordingly, the Federal standard will only require borrowers to demonstrate a misrepresentation of a material fact.

40
83 FR 37325.

Additionally, the Department is revising the definition of misrepresentation to better align with the Federal standard. The Federal standard in these final regulations requires, in part, a misrepresentation, as defined in § 685.206(e)(3), of material fact upon which the borrower reasonably relied in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan, and “that directly and clearly relates to: (A) [e]nrollment or continuing enrollment at the institution or (B) [t]he provision of educational services for which the loan was made.”
41

The definition of “misrepresentation” proposed in the 2018 NPRM, however, requires the statement, act, or omission of material fact to directly and clearly relate “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.”
42

Requiring the statement, act, or omission to directly and clearly relate to the making of a Direct Loan, or a loan repaid by a Direct Consolidation Loan, does not align with the Federal standard, which requires the misrepresentation to directly and clearly relate to enrollment or continuing enrollment at the institution or the provision of

educational services for which the loan was made.

41
§ 685.206(e)(2).

42
83 FR 37326.

Accordingly, the Department is revising the definition of misrepresentation to include a statement, act or omission that clearly and directly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made. Of course, a misrepresentation about the making of a Direct Loan, or a loan repaid by a Direct Consolidation Loan, will qualify as a misrepresentation because such a misrepresentation clearly and directly relates to enrollment or continuing enrollment at the institution or the provision of educational services for which the loan was made.

The Department, however, does not wish to limit a misrepresentation of material fact to only a statement, act, or omission that directly and clearly relates to the making of a Direct Loan, or a loan repaid by a Direct Consolidation Loan. As the examples of misrepresentation in § 685.206(e)(3)(i) through (xi) demonstrate, the misrepresentation of material fact may, for example, directly and clearly relate to the educational resources provided by the institution that are required for the completion of the student's educational program that are materially different from the institution's actual circumstances at the time the representation is made.
43

The Federal standard already provides that the borrower must have reasonably relied on the misrepresentation of material fact in deciding to obtain a Direct Loan, or a loan repaid by a Direct Consolidation Loan.

43
§ 685.206(e)(3)(x).

We agree with the commenters who argued that a school should not be held liable if it committed an inadvertent mistake. Schools should work with students when an inadvertent mistake has occurred. As explained below, an inadvertent or innocent mistake should not, and will not, be treated as an act or omission that is false, misleading, or deceptive by an institution. In the preamble to the 2016 final regulations, we took the position that institutions should be responsible for the harm to borrowers as the result of even inadvertent or innocent mistakes. However, as reiterated throughout this document, in these final rules the Department is seeking to empower students by providing them with information and encouraging them to resolve disputes directly with schools in the first instance. Treating innocent mistakes in the same manner as acts or omissions made with knowledge of their false, misleading, or deceptive nature, places well-performing schools at risk unnecessarily, potentially limiting postsecondary opportunities for students or increasing costs. Balancing the Department's dual role to protect Federal tax dollars with its responsibility to borrowers, the Department is incorporating a scienter requirement into borrower defense to repayment claims. Any claim based on misrepresentation will require proof that the institution made the misrepresentation with knowledge that it was false, misleading, or deceptive or that the institution, in making the misrepresentation, acted with reckless disregard for the truth.

The Department does not adopt the commenter's suggestion that the final regulations include a negligence standard. We view our definition of misrepresentation as similar to, but not the same as, the common law definitio

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-19309. Public record. Not legal advice.