NACUBO

My NacuboWhy Join: Benefits of Membership

E-mail:   Password:   

 Remember Me? | Forgot password? | Need an online account?

Business and Policy Areas
Business and Policy Areas
Loading

Negotiators Fail to Find Agreement on Borrower Defense, Financial Responsibility Rules

March 21, 2016

The third and final round of negotiations on the Department of Education’s proposed changes to its policies and procedures on granting loan forgiveness to borrowers who were misled or mistreated by schools ended last week without reaching agreement. A key issue included in these discussions was how to hold higher education institutions accountable and protect the federal government’s financial interests. At the February meeting of the stakeholders, ED had proposed changes to the financial responsibility standards that would add new reasons for schools to be required to post letters of credit.

During the March meeting, ED scaled back its earlier list of potential triggering events. In the draft under discussion, in addition to current standards, a for-profit or nonprofit institution would be considered not financially responsible if, over the past three years, the institution:

  • Was required to repay ED for losses related to borrower defense claims that exceeded $750,000 or 10 percent of its current assets. ED had originally suggested a threshold of $100,000.
  • Was required to repay a debt or liability arising from an audit or investigation by a state, federal, or oversight agency related to making a federal loan or the provision of educational services. An earlier version would have applied to a repayment required for any reason.
  • Was sued by a state, federal, or oversight agency based on any kind of claim if potential damages exceeded 10 percent of its current assets.
  • Was required by its accrediting agency to submit a teach-out plan covering the institution or any of its branches or locations, or was placed on probation or issued a show cause order.
  • Violated a provision in a loan agreement with, or failed to make a payment to (for more than 120 days), its largest secured creditor. The earlier version would have applied this provision to all creditors.

Several other provisions only apply to for-profit schools or those with more than 50 percent of students enrolled in gainful employment programs. At the discretion of the secretary of education, additional triggers might come into play, including significant fluctuation in aid funds, citations from state licensing agencies, failure of a financial stress test adopted by ED, and a non-investment grade bond rating. Institutions would be required to notify ED within 10 days of the occurrence of any of the triggering events.

Institutions would be required to provide ED with letters of credit or cash, or have portions of their Title IV funds withheld, if they met any of these triggers. They would also be required to disclose to students and prospective students, using language developed by ED, that the institution had been required to do so.

New Loan Repayment Rate

ED also proposed to require all types of institutions to provide a warning to current and prospective students if its five-year loan repayment rate was less than zero. This loan repayment rate is similar to that used to measure gainful employment programs but is calculated differently. It looks at whether borrowers who entered repayment in a given year had repaid at least $1 of loan principal five years later.

ED provided data at the negotiations indicating that about 13 percent of public and nonprofit colleges and universities would fail this standard. Two-year independent institutions had a slightly higher failure rate at 23 percent. The failure rate at for-profit institutions was nearly 50 percent.

Rulemaking Schedule

Under the protocols for negotiated rulemaking, if all parties come to consensus on the issues being discussed, ED is bound to formally propose the rules as drafted. Absent consensus, ED is free to propose whatever version of the rules it chooses. ED often, however, stays close to the version the committee had been discussing at the end.

ED representatives indicated the department plans to adhere to a schedule that would allow final rules to be published by November 1—the statutory deadline for rules to take effect on July 1, 2017. A notice of proposed rulemaking seeking public comment likely will be published by early summer.

ED maintains a Web page on the borrower defenses rulemaking, but has not yet posted documents from the final round of meetings.

Contact

Anne Gross
Vice President, Regulatory Affairs
202.861.2544
E-mail