Introduction

In
1994, Congress added to the Higher Education Act a provision directing the
Secretary of Education to establish rules to allow students who were misled by
their colleges to present a defense against repayment. The Department of Education established a
one-page—seriously!—regulation laying out the process, and although
the provision was included in all master promissory notes that students have to
sign to receive their loans, it lay largely unused for decades.

Then,
in 2015, the floodgates opened. Following years of complaints and serious
findings by the Department and others of misrepresentation, Corinthian
Colleges, Inc. was finally forced to shut down its Everest-, Wyotech-, and
Heald-brand colleges. Thousands of students were eligible to have their loans
discharged under a “closed school discharge” provision because they had been enrolled
when their schools suddenly closed. But thousands more who had enrolled based on
their reliance on promising—but falsified—job placement rates would be out the
time and money for their education unless they applied for and were granted a
borrower defense discharge. Suddenly, the Department of Education had an influx
of tens of thousands of borrower defense claims, with little regulatory roadmap
or infrastructure to resolve them.

So
it launched a rulemaking process. After months of negotiations and thousands of
public comments, it published a rule on November 1, 2016, which was (in
accordance with the Higher Education Act),
set to be implemented on July 1, 2017. But just weeks before then, the Trump
Administration reversed course and announced it would “delay” the rule,
indefinitely suspending its implementation, and renegotiate it anew. In other
words, before it ever took effect, Secretary DeVos announced she planned to
effectively kill the 2016 rule while establishing a new one.

Heading
into a new round of negotiations, the Department will need to balance the many
competing interests of stakeholders, including those of students who have been
wronged, institutions nervous about future liabilities, taxpayers who will
likely pay the bill, and the Department itself as the party responsible for
processing borrower defense claims. So it’s useful to understand the context of
the last negotiations, and the contents of the final rule. This post provides
a guide to what’s actually in the 164-page borrower defense rule published last
November and where many student advocates and affected institutions stood on its
provisions.

The Statute

Congress
dictated the following language for borrower defenses to repayment:

Higher
Education Act §455(h): Borrower defenses. 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. (Emphasis added.)

While
Congress wanted the Department to identify the what/when/where/why/how for
borrower defense, the public didn’t have guidance as to how they could access
this right afforded to them by the law. And with an influx of claims that
covered dozens of circumstances and thousands of students, the Department
needed to better meet Congress’ expectations that the Department would spell
out in which instances—and how—borrowers could present their claims. The new
rule attempted to address these issues. Here’s a summary of each of the main
elements of the final regulation (now delayed indefinitely).

The Standard

The
biggest question, of course, is what constitutes misconduct worthy of a
borrower defense claim. Under the 1994 regulation, the determining factor is
whether a cause of action—a basis to sue—could have arisen under state law.
It’s a complicated question that effectively required the Department of
Education to assess 50 separate standards, and that could lead to unequal
treatment for borrowers who experienced the same kind of misconduct but who
attended colleges located in different states. Interpreting states’ laws is a
tricky business under any circumstances, but when tens of thousands of
applications are on the docket, and tens of thousands of borrowers are
anxiously waiting to hear what will happen with their case, the pressure is on.
And borrowers are left with a task so challenging it requires a J.D. to even
attempt it: trying to figure out whether or not their state would consider the misconduct
a cause of action.

To
simplify and streamline that process, the 2016 rule established a new, federal
standard for borrowers and the Department moving forward. (The state standard
continues to apply to existing loans.) Under that rule, borrowers would be able
to argue they shouldn’t have to repay their loans under the following circumstances
related to the federal loan or the education it afforded a borrower:

1. A
   substantial misrepresentation (false, erroneous, or misleading statements that
   the borrower relied on, and that hurt him, like falsified job placement rates);  
2. A
   breach of contract (the school doesn’t live up to its obligations to students,
   as set forth in a contract, like if a school promised to offer tutoring
   services in a contract but failed to do so); or      
3. A
   favorable judgment against the institution (one in which, based on state or
   federal law, a judge sides with the borrower).

Throughout
the negotiations and public comment period, many of the student advocates
largely opposed a federal standard, because the terms in some states could be more favorable to
borrowers; and instead suggested that a federal standard should be a floor, so borrowers in states with more generous
laws could continue to access those benefits. The problem with this approach is
that it suffers from the same challenges of the original regulation: It
requires the Department to interpret states’ own laws, and creates confusion
for schools and for borrowers who need to assess how their states would
approach the fraud they’d experienced.

Other
commenters and negotiators—namely, for-profit colleges and Historically Black Colleges and
Universities
(HBCUs)—pushed to add “intent” to the regulation, arguing that
misrepresentations could be made accidentally, rather than maliciously. But
requiring borrowers or the Department to prove
the school acted intentionally is such a high threshold, it would render
the entire provision virtually unusable. And if borrowers are harmed by a
mistaken misrepresentation, they could have still been harmed and are therefore
could still be owed the right to have their loans discharged. Colleges have an
obligation to get it right for the borrowers investing years of their time and
thousands of dollars in higher education.

For-profit
colleges, during both negotiations and public comments, also raised the idea
that breach of contract should have a minimal threshold—a “materiality”
element. But the Department argued that borrowers who have experienced even a
minor breach of contract are owed at least minor relief, proportional to the breach.
For instance, in the earlier example of tutoring services, affected borrowers
would likely be owed relief commensurate to the cost of the tutoring
services—not a full discharge of all of their loans. (This issue comes back up
later.)

Statute of Limitations

Another
critical question the Department needed to grapple with was how long borrowers
could retain the right to a borrower defense discharge following a case of
fraud. To date, the Department has used state statutes of limitations that
aligned with the “state cause of action” standard. But like the state standard,
relying on a state statute of limitations can mean a burdensome, confusing,
uneven path to provide relief.

So
instead, with the 2016 federal standard came a federal statute of limitations.
The final rule established no statute of limitations for payments a borrower
still owed – as long as he still had a balance outstanding, he could raise a
claim against the remaining debt. This is a widely accepted structure in other
areas of the law. But for amounts already paid, borrowers had six years to file
the claim. Importantly, that six-year period was established from the date when
the misrepresentation was discovered or should have been discovered.

The
statute of limitations was one of the hotly debated items at negotiated
rulemaking. Student advocates felt strongly that borrowers should be able to
have all of their debt, paid and unpaid, discharged. But colleges—especially for-profits—felt just as strongly that no or too long
a statute of limitations would be wildly unfair and would lead to “stale claims,”
in which it would be tough to provide evidence. In the final rule, the
Department sought to find a reasonable middle ground and adopted a six-year
statute of limitations. Six years, it said, would give borrowers a fair shake
to file their claims, align with the statute of limitations in the plurality of
states, and preserve institutions’ due process rights with respect to
recovering paid-out funds.

FFEL Borrowers

Another
big question was whether or not borrowers in the now-defunct bank-based lending
program (FFEL) would be able to access the borrower defense rule. But according
to the law, the borrower defense provision exists only in the Direct Lending
(DL) program. The Department clarified that FFEL borrowers could consolidate
their loans into the DL program to access the benefit, as they can for other
benefits, like Public Service Loan Forgiveness. Unlike DL borrowers, they
wouldn’t be able to recover amounts already repaid on their loans if they
consolidated (unless they could prove collusion between their lenders and their
institution), but they could stop making payments on the remaining balances if
the Department approved their claim. While advocates weren’t thrilled with FFEL borrowers being forced to take an extra step to
access the benefit and still not being able to receive a full loan discharge,
the Department argued its hands were effectively tied by how Congress wrote the
law. Instead, the Department made changes to support FFEL borrowers, including
offering them forbearance while their claims were under review.

The Process

The
rule spelled out a few pathways to relief for defrauded borrowers—one for
small-scale cases, with an individual applicant or two at a given institution;
one for more widespread claims, which carry a larger fiscal impact to the
federal government, and where the school remained open so the Department could
recover the costs; and one for widespread instances where the school was closed
and any recovery of the costs to taxpayers and the Department was effectively a
lost cause. The separate pathways grew out of the Department’s experience
attempting to resolve claims, and in anticipation of future claims: a massive
backlog of tens of thousands of undetermined claims begged for a streamlined
process that would let the Department group common sets of facts and power
through some of the less-contested cases, while retaining its ability to
protect taxpayers who would bear the costs of providing relief to affected
borrowers.

Student
advocates were particularly concerned with the possibility that the Department would attempt to
recover funds from the school, especially before it agreed to grant relief to
borrowers. Those cases would require more fact-finding from the school, where
the college would obviously have an advantage (and likely more legal firepower)
in a he-said-she-said situation. Advocates were also concerned it would delay
decisions on the borrowers’ applications while a more thorough investigation
was conducted. But any process that didn’t include fair consideration of the
school’s actions would mean it would be impossible to recover the funds, leaving
the taxpayers on the hook for potentially millions of dollars in debt relief.
So instead, the Department required potentially high-cost cases (ones with
widespread misconduct) to undergo a more in-depth process, while cases of
closed schools and individual applications could be resolved more quickly.

See
Figure A for a graphic describing the process for borrower defense claims.

Figure A:

Determination of Relief

With
a thousand permutations of ways in which students could be defrauded, one of
the biggest concerns was how to calculate the amount of relief for which they
should be eligible. Should the Department assume that any misrepresentation is
sufficiently bad that the borrower deserves a clean slate—full relief? Or
should it try to account for every dollar, requiring it to calculate each
element of value received and relief owed? Could it find a way to give both
borrowers and institutions guidelines for what to expect, but provide enough
flexibility for officials to accommodate the huge range of experiences they
might find?

Student
advocates argued for the Department to assume full relief in all cases (requiring it to make
exceptions for cases that seemed less worthy of full relief). But aside from
the question of fairness—providing reasonable assessments of educational value
received—the Department noted the costs of doing so would be astronomical. On
the other hand, institutions wanted a more prescriptive formula laid
out in the rule—one that excluded borrowers’ ultimate employment outcomes and excluded
debt borrowed beyond tuition and fees, for living costs and other expenses.

Ultimately,
the Department opted for a middle-ground: Rather than assume full relief or
provide a strict formula, the rule lays out examples for the Department and/or
hearing official to rely on in calculating the amount of relief owed to a
student, but allows for the possibility that the hearing official might instead
need to go outside the examples, depending on the circumstances. It requires
the Department to consider both the cost of attendance—the amount a student paid
to attend the school based on the information he had at the time—and the value
of the education the borrower received. In cases where the value of the
education received is high, the borrower is not likely to receive debt relief,
even if the cost of attendance is also high and the student was, indeed, misled
by the school.

The
examples provided in the final rule include a school that misrepresents in its promotional
materials that its program will lead to employment in a field that requires
licensure, when the program actually doesn’t meet the minimum requirements for
students to take the licensure exam. In this case, borrowers got little to no
value from the education, so the guidance provides full relief. But in another
example, if a borrower enrolls at a selective liberal arts school that he later
learns gave falsified data to U.S. News
and World Report’s college rankings that inflated the school’s standing in
the rankings, there’s no relief owed – the borrower got a quality education
anyway, of the level he could reasonably expect. Despite being harmed by the
college’s falsified data, the value of the education outweighs any harm.  

In
other words, a misrepresentation alone doesn’t grant a borrower a right to
relief—full or otherwise. Rather, the Department or hearing official must take
into account the degree of the misrepresentation relative to the value of
education received.

Financial Responsibility

In
addition to establishing a process on the back end for borrowers to apply for
discharges after they had already suffered from misconduct, the rule sought to
prevent more of these cases on the front end by identifying some of the riskiest
behaviors among schools and requiring the school to post a letter of credit as
soon as those behaviors are identified, as insurance that taxpayers wouldn’t be
left holding the bag. These behaviors suggest a school might be at risk of significant
financial liabilities that could ultimately force it to close – leaving
taxpayers at risk for the closed school discharges and any potential borrower
defense discharges given to students.

The
proposed rule established a series of triggers which, when tripped, would
require colleges to submit a letter of credit as financial protection
preemptively in the amount of 10 percent of annual revenue from federal
financial aid. And the letters of credit were stacking: A school with three
violations would owe 10 percent for each, for a total 30 percent letter of
credit. While some of the triggers were left to the Department’s discretion,
they would mostly happen automatically – a way to ensure consistency across all
affected schools.

But
noting that some of the triggers were overlapping and might be redundant, and
to further embed the financial protection into an existing framework where it
fit more neatly, the Department made some changes. Specifically, the final rule
shifted some of the triggers around and established a new structure for the
financial protection to better align with the existing financial responsibility
infrastructure. Instead of cumulative, 10 percent letters of credit, the
potential liabilities from each trigger would be factored into the Department’s
existing composite scores – a -1 to 3 scale that shows the financial
health of the school. (Public institutions are exempt from both composite
scores and the financial responsibility structures; in the event of closure or
borrower defense liabilities, they are instead backed by the full faith and
credit of the state.) A score below 1 is considered not financially responsible.
If the potential liabilities from the trigger caused the school to fail, it
would be required to post a 10 percent letter of credit or other financial
protection.

Perhaps
as importantly as the additional taxpayer protection, the triggers mean the
Department would receive more timely information about colleges’ interactions
with accreditors, state authorization and licensure bodies, and other federal
agencies. Given the Department’s role in overseeing the approximately $130
billion in aid that flows to institutions each year, the fact that it doesn’t
already receive basic warning signs at relevant moments, such as notifications
of citations from state licensure boards, makes it difficult for the Department
to provide a basic level of oversight.

But
not everyone agreed. While the for-profits strenuously opposed many of these items during negotiations
and in public comments, they let HBCUs do the lion’s share of the arguing. HBCUs’ visibility on this debate allowed for-profits to
stand somewhat in the background; even though for-profit colleges are probably
far more likely to trip these triggers, the HBCUs presented a more sympathetic
audience. In particular, HBCUs raised serious concerns about proposed automatic
triggers related to accreditor sanctions (such as probation or show-cause),
high cohort default rates, and debts or liabilities owed from a court judgment
or administrative hearing. The for-profit lobby raised these and other concerns
in their comments, as well.

See
Figure B for a final list of the triggers.

Figure B:

False Certification

Separate
from the borrower defense process, in certain cases, borrowers who never should
have been able to take out the loan a school gave them can receive a false
certification discharge. For instance, if the school forges the borrower’s name
on a loan application, the borrower can receive a full discharge (one including
both a refund of amounts paid and forgiveness of the outstanding balance).

The
borrower defense rule added a few new circumstances in which borrowers may be
eligible for a false certification discharge—all no-brainers based on straightforward
falsification examples the Department had seen. If the school falsified a
borrower’s high school graduation status or diploma, or sent the borrower to a
third-party for a falsified diploma, after he said he didn’t have a diploma, that
borrower can get a false certification discharge. And if the school falsified
the student’s Satisfactory Academic Progress (SAP)—and the Department has
evidence showing it had done so—borrowers would be eligible. It also clarified
that, where the Department has enough information to determine that a borrower
is eligible for a false certification discharge (including when the school
falsified SAP for its students), the Secretary would discharge the loan automatically,
without requiring an application from the borrower.

These
relatively minor additions fell short of the requests of some advocates, who
wanted to expand false certification discharges to include acts like enrolling students in
programs that lack a necessary accreditor approval to get employment in the
field, enrolling non-English speakers in English-only courses, or enrolling
students with criminal records. Advocates had pushed for inclusion of these
categories because false certification carries a far easier application process
than borrower defense, and no time limit. But these cases are more appropriate
for a fact-finding process like that in borrower defense, rather than in the
false certification process. Moreover, colleges raised concerns about the
burden and appropriateness of such sources of discharge.

Repayment Rate

The
borrower defense rule also included a new disclosure requirement. For-profit
colleges at which fewer than half of borrowers had paid down at least $1 of
their loans three years after leaving school would be required to disclose a
warning through all promotional materials. During negotiations, the Department
proposed requiring the repayment rate for all institutions, and relying on a
new data collection. The proposal wasn’t a priority for student advocates, who
were more concerned with other provisions of the borrower defense rule; and had
great opposition from institutions, including HBCUs, community colleges, and
for-profit institutions. But it was proposed as a way to give students easy
access to information that could inform their decisions and potentially help
them steer away from institutions that have poor outcomes.

During
negotiations and in the proposed rule published afterwards, the Department
instead proposed limiting the repayment rate to for-profit institutions. One of
the biggest concerns from institutions was the burden required to engage in
another data challenge process. Analysis showed that for-profit colleges had
notably worse repayment outcomes than other sectors, so limiting it to only
for-profit institutions would reduce burden on sectors where all schools would
have to report and check the data but few would ultimately fail the test. In
their public comments on the proposed rule, for-profits unsurprisingly continued to strenuously oppose the measure.

In
the final rule, the Department retained the measure, applied it only to
for-profit institutions, and switched from requiring a new data collection to
basing the measure on existing Gainful Employment (GE) data to eliminate
virtually all burden on proprietary institutions short of providing the required
warning in advertising and promotional materials. Later, for-profit colleges
made the repayment rate one of the bases of their lawsuit against the borrower defense rule that
closely preceded its delay; an error in College Scorecard repayment rates undermined the argument
that the warnings could be applied only to the for-profit sector, they argued
(though the rule itself relies on GE, not Scorecard, data to highlight poor
performance on repayment outcomes in the sector).

Closed School Discharge

The
Secretary already had the authority to discharge loans without an application
when s/he had evidence that the borrower was eligible for a closed school
discharge—i.e., he had been enrolled when the college or campus closed, or
withdrew within 120 days prior to closure, and hadn’t transferred his credits
to another college or teach-out. Yet the provision had only rarely been used,
and exceedingly low take-up of the application process by borrowers suggested
that thousands of borrowers whose schools had closed while they were enrolled were
entirely missing the benefit Congress granted them of having their loans
discharged.

The
borrower defense rule added a provision that, if an otherwise-eligible borrower
hadn’t reenrolled at another financial aid-eligible institution within three
years of his school closing, the Department would automatically discharge his
loans. In just the time period from 2008 through 2011, nearly 2,300 borrowers
were enrolled when, or withdrew shortly before, their schools closed, and
almost half of those (47 percent) hadn’t re-enrolled or received a discharge.

During
negotiated rulemaking, there was some discussion of the appropriate time period
before the Department would automatically discharge the loans. But many of the
major comments addressed the issue only briefly. Some schools raised concerns
about the liabilities that would result from automatic discharges, and student
advocates remained strongly supportive of the provision. But while it was
scheduled for early implementation prior to July 1, 2017, it was instead made part
of the overall delay of the borrower defense rule announced by Secretary DeVos
prior to July 1.

Arbitration

The
Department also added a prohibition on predispute arbitration
agreements—fine-print in
students’ enrollment contracts requiring them to enter into closed-door
arbitration proceedings with a school in the event they have a borrower
defense-related complaint. While unquestionably a win for student advocates who
wanted students to have the right to go to court when harmed by a
school, the provision serves a substantive purpose for the Department, as well.
In arbitration cases, borrowers’ grievances are typically hidden from the
public. Where those cases might relate to more widespread instances of misconduct
that could wind up as borrower defense liabilities for the school, more time
hidden from public view means those liabilities pile up while the Department and
other law enforcement bodies remain unaware and unable to take action.

There’s
no question the institutions still using these clauses would rather not be
required to air their dirty laundry. But the Department argued in the final
rule that states, accreditors, and the Department of Education—not to mention
other state and federal law enforcement bodies—need transparency to perform
their oversight responsibilities well.

Conclusion

As
the Department of Education prepares to undertake a rewrite of the borrower
defense rule, it’s important to remember the context of its recent past. With
hours of public hearings, lengthy negotiations, and over 10,000 public comments
received on an early draft of the rule, the lessons learned from this
experience are invaluable—and show the borrower defense rule is a reasonable
balance of the competing demands of borrowers, institutions, and taxpayers.