Borrower Defense

Under the Higher Education Act (Sec. 455(h)), a student loan may be forgiven under certain circumstances: borrower’s death or disability; closure of the school the borrower attends; public service over time; false certification by the institution of the borrower’s eligibility for federal student aid; and certain institutional misconduct harmful to the student. The last of these is referred to as a borrower defense.

While the borrower defense provision received little attention during the past 20 years, and had been used only a handful of times by individual students, the collapse of Corinthian College, the patchwork of state consumer protection laws, and the harm done to thousands of students, gave the Department of Education reason to establish more explicit borrower defense regulations. Prior regulations permitted a borrower defense to loan repayment based only on an act or omission of the institution that would give rise to a cause of action under applicable state law.  

After holding a series of negotiated rulemaking sessions, the Department of Education under the Obama Administration published an expanded final rule regarding borrower defenses to repayment on November 1, 2016.  The final regulations were scheduled to be implemented on July 1, 2017.
However, the Department of Education under the Trump Administration has announced that it will not implement the expanded borrower defense to repayment regulations. Instead, the Department will renegotiate the borrower defense to repayment final regulations, intending to better align the policy with the Trump Administration’s vision. Initial public hearings were held in July 2017, and negotiated rulemaking panels will be convened from November through February 2018.  Of particular note, the Department of Education heeded NAICU's call to convene a subcommittee of specialists dedicated to reexamining the finanical responsibility standards, as currently constructed.  The Subcommittee on Financial Responsibility will meet concurrent to the broader negotiated rulemaking panels.

While the final borrower defense regulations may be substantially altered in the upcoming negotiated rulemaking sessions, the final rule published by the Obama Administration may be instructive.  Under the expanded regulations, published November 1, 2016, future borrower defense cases would be based on "an act or omission of the school attended by the student that relates to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was provided," under any of three mechanisms: 1) a judgment against the school; 2) a breach of contract with the student; or 3) substantial misrepresentation.  

NAICU is generally supportive of the need for more explicit regulations to protect borrowers, but expressed concern that aspects of the proposed regulations were too broad, especially pertaining to misrepresentation.  The final regulation retains the NPRM definition of misrepresentation that replaces the term "likelihood to deceive" with "mislead under the circumstances" and adds that misrepresentation also includes omitting information.  The final regulation also clarifies that a borrower defense is based on substantial misrepresentation that requires that the borrower reasonably relied on the information provided, or lacking, in deciding to attend a school, or take out a direct loan, to the borrower's detriment. 

The final rule also lays out in detail the process by which individuals, groups, and the Department may bring cases deserving consideration for loan forgiveness.  

The regulation also expands false certification for loan forgiveness, for which institutions are liable. False certification now includes certifying aid eligibility of a student who, because of a variety of reasons, including having a mental health condition or criminal record, would not meet home state requirements for the employment for which the program was intended.

The final rule also added three types of financial responsibility triggers as a way to prevent future actions that might lead to borrower defense claims, and the obligation of the Department to bear the cost of forgiving student loans. The triggers are those that result in automatic failure of financial responsibility, those requiring recalculation of an institution’s composite score, and those identified by the Secretary of Education as posing financial risk. The only automatic trigger that applies to private, nonprofit and public institutions is having a cohort default rate of 30 percent or more for two consecutive years.  The financial responsibility standards will be given special attention during the upcoming negotiated rulemaking sessions. The recommendations promulgated by the Subcommittee on Financial Responsibility will be submitted to the full borrower defenses to repayment committee, which will decide whether to incorporate, modify, or reject the subcommittee’s recommendations.

In the near-term, the Department will provide guidance on institutions' due process rights in borrower defense cases.  Institutions can be required to reimburse the Department for successful borrower defense claims against them.  


Borrower defense is a long-existing, but previously rarely used, provision of law that enables students who have been defrauded by an institution to have their federal student loans forgiven.  Following the collapse of Corinthian College, borrower defense was implemented on a larger scale for the first time, forcing the Department of Education to develop more detailed regulations, including establishing a mechanism for seeking reimbursement from the institutions the borrowers whose loans were forgiven attended.  After a contentious rulemaking process, the Department issued proposed regulations in June 2016. The final regulation was published on November 1, 2016, with a July 1, 2017 implementation date scheduled by the Obama Administration. The Trump Administration has announced that it will not implement the regulations on July 1, and will instead renegotiate the final regulations in late 2017, and early 2018.   


Although a basis for borrower defenses has been in statute since the mid-1990s, until recently, only a handful of cases were brought for this reason and detailed regulations for implementation were never written.  The prior regulation stated only that a borrower may raise a defense to loan repayment because of an act or omission of the institution that would give rise to a cause of action under applicable state law. The need for detailed regulations on borrower defenses to loan repayment, however, became evident after Corinthian College collapsed in 2015, following a protracted dispute with the Department of Education over employment statistics required to be provided by the college. Thousands of students were adversely affected. With the assistance of consumer advocacy groups, applications for loan forgiveness for these students flooded the Department. In the absence of detailed regulations, the Department coped with this onslaught by appointing a “Special Master,” who reviewed applications individually, a slow and cumbersome process.  More recently, the Department established a Federal Student Aid Enforcement Office with duties that include the consideration of borrower defense claims. 

As a prelude to the regulations, negotiated rule-making sessions were held in 2016.  These negotiations did not reach consensus, and thus the Department was able to write its own provisions.  In June 2016, the Department published the notice of proposed rulemaking (NPRM) and, after reviewing 10,000 comments, issued the final rule on November 1, 2016. As announced by Secretary DeVos in June 2017, the Department will begin a renegotiation of the regulations in late 2017, and early 2018. The timeline for final publication and implementation remains unclear at this time. 

The Department’s Federal Student Aid Enforcement Office reported in January 2017 that it had approved more than 28,000 borrower-defense claims from former students of Corinthian Colleges, totaling more than $558 million in relief. The Department has also approved more than 6,300 claims from students who attended ITT Tech, totaling about $97 million. Smaller for-profits colleges and universities have also had former students’ claims approved by the Department, including American Career Institute. 

What You Can Do

  • Review areas of potential liability under the final borrower defense rules, including all campus recruitment and enrollment materials, for accuracy of claims in such areas as employment outcomes.
  •  Be aware of the financial responsibility triggers, especially those that could result in recalculation of an institution's financial responsibility composite score.


Dept. of Education Reports

NAICU Contact

Tim Powers: