NAICU Washington Update

Education Department Deluged by Comments on Borrower Defenses NPRM

August 18, 2016

Proposed new rules outlining borrower defenses to loan repayment obligations of students defrauded by colleges resulted in a flood of more than 10,000 comments into the Education Department by August 1.  The Education Department issued the Notice of Proposed Rule-Making (NPRM) on borrower defenses in mid-June, following inconclusive negotiated rule-making sessions conducted last spring.  The Department intends to review the comments and publish a final rule by November 1, 2016, with provisions effective July 1, 2017.

The need for regulations on borrower defenses to loan repayment became evident after Corinthian College collapsed in 2015, stranding thousands of defrauded students. To improve consideration of loan forgiveness applications, the NPRM proposed three bases upon which a borrower(s) could file for loan forgiveness: a court judgment, a breach of contract, or substantial misrepresentation by the college. The NPRM also laid out the processes by which individuals, groups, and the Department itself could bring cases deserving consideration for loan forgiveness.

Although a basis for borrower defenses has been in statute since the mid-1990s, (HEA Sec. 455(h)),  the existing regulation says only that a borrower could raise a defense to repayment because of an act or omission of the institution attended that would give rise to a cause of action under state law. Until recently only a handful of cases were brought for this reason and more detailed regulations were never written. This changed dramatically after the collapse of Corinthian and the finding that it had been deceptive about its graduates’ employment statistics. 

With the assistance of consumer advocacy groups, applications for loan forgiveness came rolling into the Department. The Department has coped with this onslaught by appointing a “Special Master” and reviewing the applications individually, a slow and cumbersome process. According to the Special Master’s final report in June 2016, the Department had received 26,603 borrower defense claims, including 87 percent from former Corinthian students.  Some 4,000 claims by these Corinthian students, totaling $73 million, have been approved for discharge based on misbehavior of the institution. In addition, 7,386 of these students have received loan forgiveness of $97,613,525 under closed school borrower defense provisions. 

Although the regulations focus on misconduct common in the for-profit sector, students from all college sectors are eligible for loan forgiveness based on a school’s improper actions related to the making of a direct loan or the provision of education services. While NAICU, ACE, NACUBO and individual institutions have expressed support for the students who have been harmed, all have raised concerns about the breadth of some parts of the borrower defense regulations, the lack of due process for institutions, and the possible unintended consequences of the new regulations. Institutions are concerned that they could suffer adverse reputational damage if their students accuse them of misrepresentation and apply for loan forgiveness, even if the cases turn out to be frivolous. There are also likely to be financial costs if, as proposed, the Department requires institutions to reimburse it for students’ successful pursuit of loan forgiveness.

Without addressing concerns with existing accounting problems in the compilation of financial responsibility composite scores, the NPRM also contained a series of financial responsibility triggers that if met would deem a private nonprofit or a for-profit school as not financially responsible and required to purchase a letter of credit.  NAICU was especially concerned about these proposed changes and additions to the financial responsibility regulations. Several of the financial responsibility triggers have no direct relevance to an institution’s financial strength.  Instead they provide the Department insurance against further losses based on the past behavior typical of institutions like Corinthian. In addition, some of the financial responsibility triggers have been converted from processes currently used to monitor schools with “in-the zone” financial responsibility to help them improve their financial standing into causes for automatic letters of credit for 10 percent of the value of the institution’s federal student aid. 

NAICU collaborated with ACE and NACUBO in drafting responses detailing various concerns.  ACE wrote separate letters on borrower defenses, expressing concern about confusing passages and possible abuse related to the expansion of the definition of misrepresentation, and on the financial responsibility trigger provisions, noting they were not indicators of financial responsibility.

NACUBO’s letter dealt with both issues and provided more technical and financial background about them.  There were no financial or non-profit accounting experts at the negotiated rule-making sessions.

NAICU also wrote its own letter focusing on the difference in governance structure between nonprofit and for-profit institutions, and recommending nonprofit institutions be exempt from the financial responsibility triggers.  

Also noteworthy were comments from The Institution for College Access and Success (TICAS) and Century Foundation which discussed the distinction between nonprofit and for-profit institutions. However, they did advocate for maintaining the borrower defense provisions and greater ease in applying for loan forgiveness for defrauded borrowers. These letters and the remaining 10,000 can be found here.  

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