On July 6, 2022, the U.S. Department of Education published a Notice of Proposed Rulemaking (NPRM) on student loans and affordability issues on a number of topics, including:

  1. Borrower defense to repayment (BDR);
  2. Prohibiting arbitration and class action waivers;
  3. Closed school discharges (CSD);
  4. Interest capitalization events;
  5. Total and permanent disability discharges;
  6. Public service loan forgiveness (PSLF); and
  7. False certification discharges.

These programs were included in the negotiated rulemaking process conducted by the Department in late 2021. Many of these issues are highly controversial and have been the subject of multiple rulemakings. On BDR alone, this is the Department’s third rulemaking effort in the last six years.

The proposed rule is expected to be published in the Federal Register the week of July 11, with a 30-day comment period beginning on the date of publication.

In short, the Department seeks to address concerns that “too many borrowers have been unable to access loan relief through these opportunities” and that, in some situations, “this has been due to regulatory requirements that have created unnecessary or unfair burdens for borrowers.” As a result, the Department expanded the current basis for a borrower to receive a discharge and clarified processes for BDR claims. In addition, the Department seeks to streamline its consideration of BDR applications while “affording institutions an opportunity to respond to allegations contained in borrower defense claims.” Finally, the Department concluded that the proposed regulations will improve school conduct and reduce costs to taxpayers “by holding individual institutions financially accountable for borrower defense discharges and deterring misconduct.”

Significantly, many of the barriers cited by the Department are, in fact, related to its lack of review and disposition of current borrower claims. For example, the Department admits in the NPRM that not a single claim has been adjudicated under the previous BDR rule.

Regardless, in order for the proposed regulations to be effective on July 1, 2023, the Department will need to publish a final rule by November 1, 2022.

What follows is a summary of the major provisions of the NPRM.

Borrower Defense to Repayment

Borrower Provisions

The Department’s proposal would:

Establish a framework for uniform borrower defense discharges based on applications received following, or already pending with the Secretary on, the effective date of these regulations, rather than based on a loan’s disbursement date.

Both individual and group claims will be accepted; the latter may be initiated by either the Department or a “State requestor,” defined as states, state attorneys general or state oversight or regulatory agencies with authority from the state (such as a consumer financial protection agency with civil investigative demand authority from that state).

The new regulations would apply to applications received on or after July 1, 2023, and to applications pending with the Department on that date. Regarding timelines, borrowers with outstanding loans would not be subject to any limitations period. For the first time, the Department is subjecting itself to adjudication timelines as well: State requestor group claims must be adjudicated in two years and individual claims in three years.

The proposal allows for BDR claims to be filed on the following grounds:

  • Substantial misrepresentation;
  • Substantial omission of fact;
  • Breach of contract;
  • Aggressive and deceptive recruitment; and
  • A federal or state judgment or departmental adverse action against an institution that could give rise to a borrower defense claim.

A violation of state law “could form the basis for a borrower defense claim, but only if the borrower or, in the case of a group claim brought by a state requestor, that state requestor requests reconsideration of the Secretary’s denial of a claim.”

The new “aggressive and deceptive recruitment” basis includes the following:

  • Obtaining the borrower’s contact information through websites that falsely present themselves as providing assistance with finding a job or obtaining government benefits;
  • Falsely claiming that enrollment spots are limited;
  • Taking advantage of a student’s lack of understanding to pressure the student to enroll;
  • Pressuring the student to make an immediate loan decision;
  • Discouraging the student or prospective student from consulting with an independent party prior to signing documents;
  • Failing to respond to a student’s request for additional substantive information on enrollment or loan obligations;
  • Using threatening or abusive language; or
  • Engaging in repeated unsolicited contact.

Regarding evidence, the Department would maintain the preponderance of evidence standard for both individual and group claims. Evidence considered will be the application itself, as well as:

  • Evidence submitted as part of the group application;
  • Evidence submitted in connection with individual claims that are part of the group;
  • Evidence within the Department’s possession;
  • Other information from the institution; and
  • Other relevant information.

The Department will also consider “Prior Secretarial actions” as a basis to initiate BDR claims to determine whether to form and approve a group borrower defense claim. Those actions include any findings related to the following actions:

  • Final program review determination;
  • Final audit determination;
  • A failure to meet administrative capability requirements that relate to provision of educational services;
  • An institution’s loss of eligibility due to a high cohort default rate;
  • A fine, limitation, suspension or emergency action to an institution’s misrepresentation or aggressive recruitment; and
  • Other final Department actions.

Regarding relief, the proposal maintains that partial relief is possible, but rejects any specific methodology for determining partial relief. In addition, the Department will apply a “rebuttable presumption” that a borrower or group of borrowers should receive a full discharge.

Borrower Defense to Repayment

Institutional Provisions

The Department:

[P]roposes to continue to provide for an institutional response process, but to clarify the role of an institutional response in the adjudication of a borrower’s claim, give institutions more time to respond, and ensure institutional responses are held to the same standards as what is expected of borrowers.

Regarding recoupment standards, while the newly proposed BDR rule would apply to all pending BDR claims―effectively negating the 2019 BDR Rule―the Department proposes to retain the pre-2016, 2016 and 2019 BDR Rule frameworks for the recoupment process against institutions:

Institutions would only face recoupment for conduct that would have been approved under the regulation that governed the conduct at the time it occurred in the amount that would have been granted under that regulation. In other words, for loans first disbursed in 2018 that are part of an approved claim, the institution would only face a recoupment action if the claim would have been approved under the 2016 regulation. And, if the claim would have resulted in a partial discharge under the prior regulation but received a full discharge under these proposed rules, then the Department would only seek recoupment for the partial amount.

Regarding time limitations, the Department proposes a six-year limitation period to recover for loans disbursed on or after July 1, 2023, which starts on the date that the institution reported that the borrower graduated or withdrew or at any time if the act or omission was a judgment against an institution. The limitations period would not apply if, during the period the institution received notice of the claim from the Department, a class action lawsuit or written notice from a federal or state agency with the ability to investigate the institution for issues that could relate to a borrower defense claim.

Prohibition on Arbitration and Class Action Waivers

The Department’s proposal returns to the 2016 BDR Rule’s prohibition on the use of pre-dispute arbitration agreements and class action waivers. As part of their participation in the Title IV program, under the proposed rules, institutions would have to agree to not require students to use internal dispute resolution before pursuing a BDR claim. While the prohibition would apply to all program participation agreements executed after the rule’s effective date and the Department states that it would not invalidate agreements currently enforced, the proposal would “condition the institution’s future participation in the Direct Loan program on the institution not enforcing certain provisions in those contracts going forward.” (Emphasis added.)

The Department would require certain provisions regarding class action bans be included in any agreement with a student who receives a Direct Loan. The proposed rule also includes a nonexhaustive list of what would constitute reliance on a mandatory pre-dispute arbitration agreement with respect to a class action, including: seeking dismissal, deferral or stay of a class action; excluding a person or persons from joining a class action; avoiding discovery; and/or filing an arbitration claim.

Finally, institutions would be required to submit certain arbitral records and judicial records connected with any borrower defense claim filed against the school to the Secretary by certain deadlines. The Department would maintain a centralized, publicly accessible database of these records.

Closed School Discharges

The NPRM would make a number of significant changes to the current closed school discharge regulations. First, the proposal defines a school’s closure date as the earlier of the date that the school ceases to provide educational instruction in most programs, as determined by the Secretary, or a date chosen by the Secretary that reflects when the school had ceased to provide educational instruction for most of its students.

Second, automatic closed school discharges are made available:

[I]f the borrower did not complete an institutional teach-out plan implemented by the school or a teach-out agreement at another school, approved by the school’s accrediting agency and, if applicable, the school’s State authorizing agency.

Third, the proposal removes the current requirement that a borrower may only qualify for a closed school discharge without an application if the borrower does not reenroll in an eligible Title IV school within three years of the school’s closure date. The NPRM states that if a borrower accepts, but does not complete, an institutional teach-out plan implemented by the school or a teach-out agreement at another school, approved by the school’s accrediting agency and, if applicable, the school’s state authorizing agency, the Secretary would discharge the loan within one year of the borrower’s last date of attendance in the teach-out program.

Fourth, the NPRM provides that a borrower who withdrew from the school not more than 180 days before the school closed may qualify for discharge. The Secretary would be able to extend the 180-day period if exceptional circumstances justify an extension.

Finally, the proposal expands the list of examples of exceptional circumstances that justify extending the 180-day window for a discharge, including: a school discontinuing a significant share of its academic programs; placement of the school on probation by its accreditor; and the Department placing the school on heightened cash monitoring.

False Certification Discharges

The Department’s proposal seeks to streamline regulations for situations where an institution falsely certified that a student was eligible for Title IV student loans. These changes include an easier path to discharge and expanding acceptable documentation and eligibility windows. The proposal also creates a group false certification claim process, not present in any of the previous rulemakings.

Public Service Loan Forgiveness

Building from the October 2021 limited PSLF waiver, the Department seeks to make it easier for borrowers working in public service positions to obtain forgiveness under the PSLF program, including adding provisions allowing for lump sum payments, late payments and certain kinds of deferments and forbearances to count toward the necessary 120 required payments. The Department also proposes to amend the regulations to better provide a carveout for nontenured instructors, per negotiator input. The proposal also creates a formal reconsideration process for borrowers whose applications are denied.

Interest Capitalization Events

The Department proposes to remove any regulatory instances of interest capitalization events wherever it is not required by statute. The eliminated events would include when a borrower enters repayment, exits forbearance, defaults on a student loan and upon exiting most income-driven repayment plans.

Total and Permanent Disability Discharges

The Department’s proposal would enable more borrowers who are totally and permanently disabled to receive and keep student loan discharges by allowing for a broader set of disability statuses recognized by the Social Security Administration, eliminating the three-year income monitoring period and broadening the types of documentation and signatures borrowers may submit to demonstrate that they are eligible for relief.