NAICU Washington Update

Borrower Defense Rulemaking May Hold Problems for NAICU Schools

July 13, 2016

Given the thousands of borrowers harmed by the 2015 collapse of Corinthian, the Department of Education felt the need for more comprehensive regulations to determine how to forgive the loans of borrowers who have been defrauded. Precipitated by Corinthian, and the fact that current regulations, written in 1995, had little detail and been used so infrequently, the Department published a notice of proposed rule-making (NPRM) on the borrower defenses to loan repayment regulations.

The negotiated rule-making that preceded the NPRM failed to reach consensus, leaving a number of contentious issues unresolved. The NPRM includes several important, and interconnected, issues that potentially could be harmful for nonprofit colleges, and should be reviewed carefully by institutional aid administrators, business officers, and legal counsel.

NAICU will be filing comments by the August 1, 2016 deadline. Information for submitting comments on the proposed rules is provided in the Federal Register.


As the Department proceeded toward developing regulations, it established a temporary process for Corinthian students, and has already considered hundreds of cases individually through a Special Master who adjudicated the cases. In the meantime, the Department held negotiated rule-making sessions in the spring of 2016, to develop the official bases for, and processes by which borrowers would qualify, and could apply for loan forgiveness.

In addition to the borrower defenses provisions, the rule-making was to consider some technical loan issues. Just as the negotiated rule-making session was about to begin, the Department added new language establishing a relationship between borrower defense and the controversial financial responsibility standards that NAICU has been concerned about for many years. The negotiated rule-making committee did not reach consensus on the package of regulatory issues and thus the Department was able to write the NPRM as it saw fit.

Key Provisions of the NPRM

1. Changes to the Financial Responsibility Regulations

Secretarial Discretion: A significant number of changes are proposed to how institutional financial responsibility is assessed, but the underlying problems of financial responsibility have not been addressed. The Secretary of Education is given greater leeway in determining what constitutes “financial” under the financial responsibility general standards, and establishes new triggers by which an institution could be deemed not financially responsible.

Triggers: A number of events, or triggers, have been included in the NPRM. If met, an institution is considered not financially responsible and must obtain a letter of credit. An institution may have to purchase multiple letters for the same general condition, if multiple triggers are reached. While the triggers target for-profit institutions, and some of the triggers are exclusive to for-profits, some nonprofit institutions may hit the trigger thresholds. The triggers include:

  • Debt payments/liabilities which exceed the lesser of $750,000 (current audit threshold in 2 CFR part 200) or 10 percent of an institution’s current assets brought by a federal, state, or other oversight entity (or suits for such amounts) during the three most recently completed award years, related to making a federal loan or the provision of educational services, or suits for other claims of that amount.
  • The institution is being sued under the False Claims Act by a private party/ies related to making loans for enrollment or the institution’s provision of educational services – under certain conditions.
  • Repayment to the Secretary for losses from borrower defense claims within three years that exceed specified threshold, as specified above for other debts.
  • Accrediting actions such as being placed on probation or issued a show-cause order.
  • Violation of a provision in a loan agreement with the creditor of institution’s largest loan.
  • Cohort default rates for two most recent years of 30 percent or above.
  • Low performance in gainful employment requirements by institutions with more than 50 percent of students in gainful employment programs.
  • Other events or conditions determined to have a material adverse effect on the financial condition of the institutions, such as significant fluctuation in consecutive years of student aid funds, or the institution is cited by a state licensing or authorizing agency for failing state or agency requirements.
  • 90/10 violation, SEC warnings, withdrawal of owner’s equity. (Applies only to for-profits.)

An institution must notify the Secretary of any of these occurrences within 10 days. The institution is subject to certain administrative actions if the institution fails to report in a timely fashion, or if the Secretary determines that the institution is not financially responsible under any of the triggers, or an alternative standard.

For the Department the triggers provide insurance against any institution that it deems potentially harmful to students, or financially unstable, and whose students might use the borrower defenses to receive loan forgiveness.

2. Borrower Defenses (Sec. 685.222)

The NPRM divides borrower defenses into those cases about loans disbursed prior to July 1, 2017, and those on or after that date. The bases and conditions for the two categories are slightly different. It appears the Department intends to have cases related to the earlier loans fall under the conditions of current regulations, which use a state cause of action standard and a statute of limitation based on record-keeping requirements. On the other hand, defense cases based on the later loans are founded on three conditions: a judgment against the school, a breach of contract, or misrepresentation. In all three cases, the statute of limitations can be longer.

Loan forgiveness for false certification is also expanded. It now includes certifying aid eligibility of a student who, because of a variety of reasons, including mental condition or criminal record, would not meet home state requirements for the employment for which the program was intended. Timing of the implementation of this provision, and others in the NPRM, would be established in the final regulations. It is likely to be July 1, 2017, if the final regulations are published by November 1, 2016.

3. Claim Filing Processes

Individuals, groups, and the Secretary can bring cases for borrower defense against repayment. The NPRM provides details on the various processes for each. There is concern that the processes do not provide institutions adequate and fair representation.

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