Borrower Defense
Advisory Report
NACUBO’s advisory 19-04, published in October 2019, explains new financial responsibility requirements for private nonprofit institutions and discretionary and non-discretionary triggering events, which affect both public and nonprofit institutions. The new rules, published in September 2019, require that all institutions that receive Title IV aid notify ED when certain triggering events occur.
2016 Borrower Defense Overview
The Obama-era borrower defense rules, which went into effect on October 17, 2018, contained guidance on three major topics:
1. Borrower Defense to Repayment
The 2016 rules created borrower defense standards and defined the evidence former and current students must provide to show that a college's misconduct warrants debt relief. The new regulations make debt relief available to students when there is:
- A breach in contractual promises between a school and its students;
- A state or federal court judgement against a school related to the loan or the educational services for which the loan was made; or
- Substantial misrepresentation by the school about the nature of the educational program, the nature of financial charges, or the employability of graduates.
NACUBO supported the Department of Education's (ED) goal to protect students from bad actors. However, we remain concerned that the vastly broadened view of misrepresentation will leave institutions acting in good faith vulnerable to lawsuits and burdened with red tape.
2. Triggering Events
Obama-era guidelines establish a new set of automatic and discretionary triggering conditions that could lead to a recalculation of an institution's composite score, and, if warranted, require the school to provide financial surety to ED and publicly disclose certain information to current and prospective students. Institutions experiencing a triggering event will be required to notify ED, in most cases, within 10 days. They will also have to meet new disclosure requirements.
3. Financial Responsibility Ratios
Obama-era borrower defense guidance includes provisions for re-calibrating ED financial responsibility ratios when certain triggering events occur. The new rules do not address ratio changes needed as a result of the Financial Accounting Standard's Board's (FASB) new nonprofit financial reporting guidance (Accounting Standards Update 2016-14) or its new lease standard (ASU 2016-02).
Background
Initially created in response to the sudden closure of Corinthian Colleges and finalized in the last few months of the Obama administration, the original borrower defense rules were slated to take effect in July 2017. However, the Trump administration put the rules' implementation on hold, stating that the regulations were flawed and needed revision. In response, consumer protection advocates and other stakeholders sued the department, alleging that ED's decision to delay the finalized Obama-era guidance was illegal. After a court battle, ED lost this lawsuit and the finalized Obama-era regulations took effect on October 17, 2018.
In July 2018, the Trump administration unveiled its proposed revisions to the borrower defense rules, which were intended to replace the Obama administration's finalized regulations. Under the master calendar provision of the Higher Education Act, ED had until November 1 to finalize the new rules for them to go into effect July 1, 2019. However, ED missed this deadline. Consequently, the Obama-era regulations will remain in effect until new regulations take their place, in July 2020 at the earliest.
NACUBO has worked extensively on borrower defense rules and their implications for financial responsibility. To find out more, read below or visit our Financial Responsibility Standards page.
2016 Finalized Rules
NACUBO Resources
Note (May 2019): Acknowledging confusion stemming from the sudden and unexpected implementation of the 2016 rules, ED published additional guidance on certain provisions of the rules in March 2019. Notably ED set May 14, 2019, as the deadline to notify it of most financial responsibility actions, events, or conditions between July 1, 2017, and the present that must be reported. All business officers should familiarize themselves with the March 2019 electronic announcement because several provisions affect both public and private institutions. Reporting requirements will continue indefinitely.
- Summary of clarifying guidance from ED (June 10, 2019)
- Update on sub-regulatory guidance for borrower defense rules (April 15, 2019)
- Overview of the long-delayed borrower defense rules' effect on financial reporting (October 26, 2018)
- Summary of the Obama administration's finalized borrower defense rules (November 15, 2016)
- Table outlining automatic triggers included in the 2016 borrower defense rules
- Table outlining discretionary triggers included in the 2016 borrower defense rules
- Business Officer Magazine analysis of Obama-era borrower defense rules' impact on financial accountability ratios (January 2017)
Coverage of the 2016 Rulemaking Process
- Summary of proposed Obama-era borrower defense rules (June 27, 2016)
- NACUBO's 2016 comment letter on borrower defense (August 1, 2016)
Department of Education Resources
- Questions & Answers document with additional guidance (June 19, 2019)
- Final regulations in the Federal Register (November 1, 2016)
- Summary of major provisions in the final regulations (November 2016)
- 2016 borrower defense NPRM (June 16, 2016)
2018 Proposed Rules
NACUBO Resources
- Overview of preliminary final borrower defense rules (September 9, 2019)
- Business Officer Magazine summary of the 2018 borrower defense and financial responsibility rules (October 2018)
- NACUBO's 2018 comment letter on borrower defense & financial responsibility (August 30, 2018)
- ACE's borrower defense comment letter, endorsed by NACUBO (August 30, 2018)
- Overview of ED's decision to revisit borrower defense (August 13, 2018)
- Summary of ED's announcement to revisit accountability rules (June 26, 2017)
External Resources
- 2019 preliminary borrower defense rules (August 30, 2019)
- ED's summary of provisions in the 2019 preliminary borrower defense rules (August 30, 2019)
- ED's press release for the 2019 preliminary borrower defense rules (August 30, 2019)
- 2018 borrower defense NPRM (July 30, 2018)
NACUBO Tools
- Advisory Report on changes to financial responsibilities standards for all institutions under the 2016 rules (updated July 2019)
- Excel worksheet, designed to stress test ratios and composite scores under the 2016 rules
- Financial Responsibility Timeline (updated September 2019)
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