The Department of Education recently proposed a new rule on borrower defense to repayment of federal student loans, spurred by former Corinthian College students refusing to pay their debts after the for-profit chain's demise. While ED has long allowed forgiveness of loans in some cases, the rules were skeletal and seldom used.
During the negotiated rulemaking sessions that preceded the notice of proposed rulemaking (NPRM), ED introduced potentially onerous requirements in order to hold higher education institutions accountable and protect the federal government's financial interests.
The NPRM would establish new standards for determining whether a borrower can establish a defense to repayment on a loan based on an act or omission of a school. The proposed rule is aimed at providing relief for students who have been mistreated.
While the proposed regulations are still under review, NACUBO is concerned that ED would penalize nonprofit colleges and universities for circumstances that are unrelated to student outcomes and not indicative of potential risk to the federal government. Proposed triggers that would require schools to obtain letters of credit or provide other surety are not comprehensive financial indicators and do not suggest that an institution is about to close precipitously. The triggers would also require extensive disclosures to enrolled and prospective students.
Comments are due to ED by August 1. NACUBO welcomes members' feedback, comments, and observations on any provisions in the proposed rules that seem problematic as the association prepares to respond. Anecdotal information on the circumstances surrounding potential triggering events is welcome as no data are available about such occurrences.
NACUBO also encourages members to file comments with ED. No stakeholders with financial expertise were included on the negotiated rulemaking committee selected by ED, so insight from business officers is needed.
A summary of the two main sections of the proposal follows.
Borrower Defense to Repayment
Institutional Accountability and Financial Responsibility
Borrower Defense to Repayment
The proposed rules establish a new federal standard [§685.222] for a borrower defense to repayment for loans disbursed on or after July 1, 2017. ED proposes three circumstances to serve as a basis for a claim to be eligible for loan forgiveness (a discharge):
- A favorable contested judgment against the school from a court or administrative tribunal for relief, provided the claim relates to the making of the borrower's Direct Loan.
- A breach of contract between the borrower and an institution where the school failed to perform its obligations.
- A substantial misrepresentation by the institution that the borrower reasonably relied on when he or she decided to attend, or to continue to attend, the school.
There would be no time limitation for borrowers to assert a defense to repayment for amounts still owed on a given loan for all three circumstances listed above. Additionally, there would be no time limit for claims for recovery of amounts previously collected when the defense is based on a judgment. If a claim to recover amounts previously collected is made based on a breach of contract, a borrower would have six years from the date of the breach to make the claim. Similarly, if a claim to recover amounts previously collected is based on a substantial misrepresentation, a borrower would have six years from the date of the discovery of the misrepresentation to make a claim.
The proposed rule would allow claims to be made by individuals or groups of borrowers. If the department determines that common facts and claims exist that apply to borrowers who have not filed an application, it could include those borrowers in a group, with individuals having the option to opt out.
Once ED receives an application for defense, it would either place the borrower(s) in forbearance, or if the loan was in default, suspend collection activity on the loan. Department officials would use the application and accompanying documentation to begin a fact-finding process to determine if a defense should be granted. ED would then notify the borrower(s) of its decision, and those denied could request reconsideration of the claim if new evidence is submitted.
Under the proposed rules, if a borrower defense claim is approved, ED would determine the appropriate method for calculating relief to the borrower. This may include a discharge of all amounts owed to ED and recovery of amounts previously collected, or some lesser amount. The department is excluding relief based on non-pecuniary damages such as inconvenience, aggravation, emotional distress, or punitive damages.
Institutional Accountability and Financial Responsibility
NACUBO is concerned that the proposals related to institutional accountability and financial responsibility 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. The proposed rules include significant changes to the current financial responsibility regulations but do not attempt to correct ED's flawed practices related to calculation of institutional composite scores. The proposed new criteria would be in addition to those requirements, establishing a number of new ways for schools to be considered not financially responsible.
The department proposes to establish a number of new "triggers" that would require institutions to provide a letter of credit or other financial protection to "help protect students, the Federal government, and taxpayers against potential institutional liabilities." The provisions impact proprietary institutions and private nonprofit colleges and universities. As in the existing regulations, public institutions that are backed by the state are assumed to be financially responsible and would not be impacted by these changes.
Under the proposal, an institution that is subject to one of the listed triggering events would be considered "not able to meet its financial or administrative obligations." It could continue to participate in the Title IV programs only under provisional certification and would be required to provide a form of financial protection to ED (generally a letter of credit). The amount of the surety would vary depending on circumstances, generally with a floor of 10 percent of the amount of Title IV program funds received by the institution during the most recently completed fiscal year. The penalties would be cumulative, in some cases requiring multiple letters of credit-for example, four triggering events could require letters of credit or other surety valued for at least 40 percent of an institution's prior-year Title IV funds.
In addition to the new "automatic triggers," ED is also proposing additional discretionary triggers that the "Secretary could consider in determining whether an institution is financially responsible."
Automatic triggers are events tied to mandatory sanctions, and include:
- State or Federal Agency Actions: If currently or in the three most recently completed award years, an institution had to repay a debt or liability arising from an investigation by a state, federal, or other oversight entity; or settles or resolves a suit brought by one of those entities related to the making of a federal loan or the provision of educational services [§668.171(c)(1)(i)(A)]; or is being sued by a government agency or other oversight entity for such claims [§668.171(c)(1)(i)(B)] . Repayments to ED to cover losses for successful borrower defense claims or an active suit brought by one of these entities based on any other type of claim constitute additional triggers if the repayment amount or potential damages are material [§668.171(c)(1)(ii)].
Under some circumstances, suits brought under the False Claims Act or by private parties, if related to the making of federal loans or provision of educational services, could also be considered a triggering event [§668.171(c)(1)(iii)].
These triggers, and others that are pegged to certain liabilities, would be subject to a materiality test that was added during negotiated rulemaking. Generally, the amount of the liability for one or more of the years must exceed the lessor of the threshold amount to be subject to Single Audit requirements (currently $750,000) or 10 percent of the institution's current assets [§668.171(c)(2)].
- Accrediting Agency Actions [§668.171(c)(3)]: If currently or at any time in the three most recently completed award years, the institution's primary accrediting agency required the institution to submit a teach-out plan for itself or any additional branches or locations or placed the institution on probation, issued a show-cause order, or placed the institution in a similar accreditation status for failing to meet one or more of the agency's standards, and the accrediting agency does not notify the secretary within six months that the institution has come into compliance.
- Loan Agreements and Obligations [§668.171(c)(4)]: If, as disclosed in a note in its financial statements or reported to ED, an institution in relation to its largest secured creditor:
- Violated a provision or requirement in a loan agreement;
- Failed to make a payment for more than 120 days; or
- A monetary or nonmonetary default or delinquency or other event, as defined under the terms of the loan agreement, triggers or provides a recourse by the creditor for an increase in collateral, changes in contractual obligations, an increase in interest rates or payments, or imposes some sanction, penalty, or fee upon the institution.
This trigger does not have a materiality provision, but only applies to the institution's largest creditor.
- Gainful Employment (GE) [§668.171(c)(7)]: For institutions where more than 50 percent of students who receive Title IV aid are enrolled in GE programs, if more than 50 percent of those enrolled in GE programs are in programs that failed or are in the zone under the debt-to-earnings rates measure.
- Cohort Default Rates (CDR) [§668.171(c)(9)]: Institution's two most recent cohort default rates are 30 percent or greater. Does not apply if the institution files a challenge, request for adjustment, or appeal with respect to its CDR, and that action results in reducing the CDR below 30 percent or the institution not losing eligibility or not being placed on provisional certification.
- Fluctuation in Direct Loan or Pell Grant Volumes [§668.171(c)(10)(i)]: Significant fluctuations in Direct Loan and/or Pell Grant funds received by the institution in consecutive award years that cannot be explained by changes in the institution's programs. No specific threshold is established.
- High Annual Dropout Rates [§668.171(c)(10)(v)]: High dropout rates as calculated by the secretary; no specific threshold is currently established.
- State Licensing Agency [§668.171(c)(10)(ii)]: The institution has been cited by a state licensing or authorizing agency for failing state or agency requirements.
- Credit Rating [§668.171(c)(10)(iv)]: The institution or corporate parent has a noninvestment grade bond or credit rating.
Reporting and Disclosure
Institutions would be given 10 days to notify ED of any action or event that constitutes an automatic or discretionary trigger. Currently, only institutions that have run into trouble with the financial responsibility standards and are participating under the zone alternative or provisional certification are subject to this type of prompt reporting requirement [§668.171(d)].
The proposed regulations would also require widespread disclosure, in writing, to enrolled and prospective students that an institution was required to provide a letter of credit or other financial protection to the department. Schools are given the option of hand-delivering or emailing a "student warning." Additionally, institutions would be required to post a disclosure on the home page of the institution's website that identifies and explains the circumstances behind the required letter of credit [§668.41(i)].