Borrower Defense Rules Have Significant Implications for Financial Reporting
10/26/2018
After a lengthy court battle, Obama-era borrower defense rules took effect on October 17, 2018, nearly two years after the Department of Education initially finalized them. They have significant implications for nonprofit and for-profit institutions that participate in federal student aid programs.
In addition to governing debt relief for defrauded students, Obama-era borrower defense guidance includes provisions for recalibrating ED's financial responsibility ratios when certain triggering events occur. The new rules also do not address ratio changes needed as a result of the Financial Accounting Standards Board’s (FASB) new nonprofit financial reporting guidance (Accounting Standards Update 2016-14) or its new lease standard (ASU 2016-02).
The new set of automatic and discretionary triggering conditions could lead to a recalculation of an institution’s composite score, and, if warranted, require it 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.
ED has yet to announce how it will implement these rules. NACUBO has published an advisory report with more detail about the changes to ED's financial responsibility standards for non-profit students, and we will continue actively exploring the implication of the rules' sudden implementation, particularly as it relates to financial responsibility ratios and triggering events. At this time, it is unclear how schools should report a triggering event or check compliance with disclosure requirements.
Trump Administration Revisions Delayed
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. Like the Obama-era guidance, these rules were imperfect. NACUBO submitted comments to the department outlining our concerns with the rewritten rules in August.
Under the master calendar provision of the Higher Education Act, ED has until November 1 to finalize the new rules for them to go into effect July 1, 2019. However, ED is expected to miss this deadline. This means that the Obama-era regulations will remain in effect until new regulations take their place (in July 2020 at the earliest).
Advocacy Efforts to Improve Financial Responsibility Regulations
Concerning financial responsibility, NACUBO has asked ED to convene accounting experts to improve the now-effective borrower defense guidance, with the objective to:
- Address a flawed EZ Audit crosswalk of current to new financial statement attributes-released by ED in August 2018—that private colleges will be required to use when FASB ASU 2016-14 (NFP financial reporting) is implemented.
- Finalize updated financial responsibility recommendations made earlier in 2018 that conform to ASUs 2016-14 and 2016-02, not-for-profit financial reporting and leases, respectively. These recommendations were made by an appointed subcommittee during the Trump administration's negotiated rulemaking process for borrower defense.
If the work of the financial responsibility subcommittee from the 2017 negotiated rulemaking is not used by ED, both nonprofit and for-profit institutions will be in danger of false financial responsibility failures, which will only be made worse if borrower defense trigger adjustments need to be used.
How Did We Get Here?
Finalized in the last few months of the Obama administration, the original borrower defense rules were slated to take effect in July 2017. The rules originally were created in response to the sudden closure of Corinthian Colleges (and resulting demand from former students for loan forgiveness) and laid out how borrowers could discharge their federal student loans if their schools had closed or defrauded them.
However, the Trump administration put their implementation on hold, stating that the rules were flawed and needed revision. In response, consumer protection advocates and other stakeholders sued ED, alleging that its decision to delay the finalized Obama-era guidance was illegal.
Last month, Judge Randolph Moss agreed, ruling that the department’s decision to indefinitely postpone implementation was “arbitrary and capricious.” However, the court suspended its judgment, giving the department a month to provide an adequate rationale for its decision. ED missed this deadline and, after an unsuccessful preliminary injunction filed on behalf of for-profit schools, the finalized Obama-era rules took effect on October 17.
