NAICU Washington Update

Education Department Implements Obama-Era Borrower Defenses to Repayment Regulations

March 22, 2019

New guidance outlining plans to implement elements of the Obama-era borrower defenses to repayment regulations was recently issued by the Education Department.
The guidance follows a federal court ruling, delivered in September 2018, which determined that Education Secretary Betsy DeVos had violated certain administrative procedures in moving to delay the implementation of the regulations. As a result, the Education Department will enforce certain provisions of the borrower defenses to repayment final regulations published by the Obama Administration on November 1, 2016.
The return to the Obama Administration’s borrower defenses to repayment regulations is likely to be short-lived. The Education Department is expected to issue a new Notice of Proposed Rulemaking (NPRM) in the near future concerning the regulations. Following the publication of the NPRM and the receipt of public comments, the Trump Administration can move to publish final regulations. NAICU expects that the new regulations, as written by the Trump Administration, could be finalized in time for implementation for the 2020-21 academic year.
Class action waivers and pre-dispute arbitration
The Education Department will now enforce the Obama-era ban on pre-dispute arbitration provisions and class action waivers. Certain colleges and universities had included language in their program participation agreements which prevented a student from participating in a class action suit, as well as requiring arbitration rather than a judicial process for the resolution of other disputes. While the Obama Administration had proposed banning such requirements, the Trump Administration had previously sought to delay the policy. Colleges and universities with existing arbitration and class action waiver language will have 60 days from March 15, 2019 to revise or remove arbitration language from their institutional policies, and students will be given the option to opt-out of on-going arbitration.
Loan discharge for defrauded borrowers
The Department will also implement the more lenient loan discharge provisions associated with the Obama-era regulations. Judgment of whether borrowers will qualify for loan forgiveness by the federal government will based upon judgments against institutions, breaches of contract by institutions, and substantial misrepresentations by institutions. These provisions will apply only to federal loans disbursed after July 1, 2017.
Financial responsibility notifications
The Education Department is also returning to the standards outlined by the Obama Administration regarding notifications to the Secretary about financial responsibility standards.
While most of the notification requirements will not affect private nonprofits (e.g. withdrawal of ownership equity, 90/10 revenue requirements, publicly traded status), independent colleges will need to comply with certain requirements related to accreditation actions and lawsuit disclosures. Institutions required to submit a teach-out plan by their accrediting agency, and institutions which have a debt or liability arising from a final judgment/determination (judicial or administrative proceeding) or from settlement should carefully review the Department’s guidance for further instructions on compliance.