Financial Responsibility Regulations at Stake in Current ED Negotiated Rulemaking

Spurred by fallout from the recent demise of the for-profit Corinthian College chain, the Department of Education convened a team of stakeholders to negotiate new rules addressing borrower defenses to repayment of federal student loans. By the committee's second meeting, however, discussions around schools' financial responsibility suggested the addition of potentially onerous requirements.

NACUBO recognizes that the negotiators are largely focused on relief for students who have been mistreated but is concerned that these proposals, if adopted, would penalize nonprofit colleges and universities for circumstances that may be completely unrelated to students and not indicative of potential risk to ED or the federal government.

ED originally charged the group, comprised primarily of consumer advocates and campus student financial aid directors, with considering the following:

1. Whether to establish new standards for the purpose of determining whether a borrower can establish a defense to repayment on a loan based on an act or omission of a school.
2. The time period for availability of Borrower Defense to Repayment claims.
3. Developing a regulatory framework for the process of submitting, reviewing, and determining the veracity of Borrower Defense to Repayment claims.
4. Updating and expanding the existing categories of false certification discharges.
5. Whether to revise the financial responsibility or administrative capability regulations, and whether to add disclosure requirements, to help protect students, the federal government, and taxpayers against potential school liabilities and risks.

Several smaller issues were added to the agenda at the committee's first meeting in January. For the second round of negotiated rulemaking in February, ED provided draft regulatory language for each topic.

In Issue 5 above, ED proposed changes to the financial responsibility standards for nonprofit and for-profit institutions that would greatly expand its demands on colleges and universities. Institutions would have to provide letters of credit to cover potential future liabilities to the department.

ED proposed, for instance, to require an institution that "is required to repay a debt or liability arising from an audit, investigation, or review conducted by a State or Federal entity, or accrediting agency, or the school resolves or settles a suit brought against it by that entity for violations of State or Federal law, regulations, or accreditation standards" to submit a letter of credit equal to the debt to ED. The look-back period would be three years.

Under the proposal, a school also would be required to submit a letter of credit equal to 10 percent of its prior year Title IV funds for each of 14 other potential triggers, again subject to a three-year look back. The penalties would be cumulative, so if the institution hit three triggers, it would need to post a letter of credit for 30 percent of its prior-year Title IV funds. The wide-ranging list of potential triggers includes violating an existing loan agreement, failing to make a payment in accordance with existing debt obligations for more than 120 days, or disclosing as a contingent liability in its audited financial statements a possible or probable loss stemming from a state or federal action or "any event that causes the school, or related entity, to realize any liability that was previously noted as a contingent liability."

In addition to posting letters of credit, the draft rules would also require institutions to disclose to all prospective and current students that  they had been required to do so. If the disclosure was made by email, the school would have to obtain an electronic receipt confirming that the message was received. 

At the February meeting, negotiators were invited to suggest other possible triggers. One suggestion that generated significant support from consumer representatives was the use of mediation clauses in payment contracts with students.

NACUBO staff will continue to monitor the discussions and is working with other higher education associations to respond to this development.

The third and final round of negotiations is scheduled for March 16-18, when ED will present a second draft of regulatory language to the committee. If the group reaches consensus, ED will be bound to formally propose the rules as drafted when it publishes a notice of proposed rulemaking, expected later this spring or summer. The public will have the opportunity to comment at that time.