Update on Claims Under Defense to Repayment Statute Released
The U.S. Department of Education announced final regulations to protect student borrowers against misleading and predatory practices by post-secondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct. These final regulations further cement the Obama Administration’s strong record and steadfast commitment to protecting student loan borrowers, deterring harmful practices by institutions, safeguarding taxpayer dollars and holding institutions accountable for their actions.
“Since taking office, the Obama Administration has worked tirelessly to protect students and taxpayers and crack down on dodgy schools,” said U.S. Secretary of Education John B. King, Jr. “Today’s regulations build on that progress by ensuring that students who are lied to and mistreated by their school get the relief they are owed, and that schools that harm students are held responsible for their behavior.”
The Department began the negotiated rule making process after it received an unprecedented influx of borrower defense claims following the closure of Corinthian Colleges. The then-current regulation, promulgated in 1995, provided little detail on how borrowers could submit, and how the Department would adjudicate claims. The final regulations include key provisions from the proposed regulations that will protect the rights of borrowers and hold institutions accountable by:
- Giving borrowers access to consistent, clear, fair, and transparent processes to file claims;
- Empowering the Secretary to provide debt relief to borrowers without requiring individual applications in instances of widespread misrepresentations;
- Protecting taxpayers by ensuring that financially troubled institutions provide the government with protection against the risks they create and that institutions whose actions lead to discharges of Federal student loans are held responsible;
- Helping students make more informed decisions by requiring proprietary schools with poor loan repayment outcomes to include a plain-language warning in their advertising and promotional materials;
- Ensuring affected borrowers have information about loan discharge when schools close and access to an automated process; and
- Banning schools from inducing students to sign pre-dispute arbitration agreements that waive their rights to go to court and bring class action lawsuits based on borrower defense claims.
The final regulations strengthen several provisions in response to public comment on the proposed regulations, including:
- Early Implementation of Automatic Closed School Discharge: The final regulations provide for the automatic discharge of the loans of borrowers whose school closed on or after Nov. 1, 2013 and have not re-enrolled in another Title IV participating institution within three years. The Department intends to designate this provision for early implementation as soon as operationally possible before July 1, 2017, which will allow eligible Corinthian borrowers to benefit from this streamlined process sooner.
- Banning All Pre-dispute Arbitration Agreements: The final regulations strengthen the limitations on pre-dispute arbitration agreements that prevent students from taking institutions to court by permanently banning any pre-dispute arbitration agreements for all Direct Loan borrowers for disputes related to the educational services provided or the making of Direct Loans, regardless of whether such clauses are a condition of enrollment. These provisions not only allow students to choose where to pursue claims against an institution after claims arise, but also prohibit institutions from banning class action lawsuits by students.
- Determining Borrower Defense Loan Relief: The final regulations make clear that the Department will determine in a reasonable and practicable way the appropriate relief for a borrower defense claim, taking into account any educational benefit received.
“To protect students from the start, the regulations seek to deter institutions from engaging in predatory behavior or otherwise exposing the government to risk,” said U.S. Under Secretary of Education Ted Mitchell. “And the rule will protect taxpayers by requiring institutions to put up collateral when they’re at risk of closure. For students who are injured by an institution’s conduct, these regulations provide a clear path to relief with all of their rights intact, and restore their right to sue. While these efforts represent a huge step forward, the Department cannot do this work on its own. That’s why the rule will recognize the actions taken by States and accreditors to protect students and the integrity of the federal aid programs.”
The Department received over 10,000 comments on the proposed regulations published in the Federal Register on June 16. All provisions of the regulations, with the exception of those the Department intends to designate for early implementation, will take effect on July 1, 2017.
A summary of the key provisions of the final regulations is available here.
Restoring Semesters of Pell Eligibility for Students Affected by Closed Schools
The Department is also announcing plans to restore semesters of Pell Grant eligibility for eligible students who were unable to complete their programs because their institution closed. Following requests from bipartisan members of Congress, the Department has determined it has the authority to restore semesters of Pell Grant eligibility for Pell recipients at closed institutions. While the Department is still exploring the operational changes required to implement this policy, we will work to ensure that all eligible students see this change made automatically.
This policy initiative is critically important because students have a limited number of semesters in which they can receive Pell Grants to continue and complete their education. In 2008, Congress established a maximum Pell Grant lifetime eligibility of 18 semesters, but in 2012, Congress reduced the lifetime eligibility further to 12 semesters and applied it to all students, including a group of students “grandfathered” from the original 18-month limitation. This policy is expected to benefit several thousand students immediately, who were at or near their lifetime limit, as well as more students whose institutions might close moving forward, and those who hadn’t reached their limits but who will be able to go back to school if they choose.
Next Borrower Defense Claim Report
In the wake of the Corinthian Colleges closure, the Department appointed a special master to establish the groundwork for a robust system for reviewing and evaluating incoming defense to repayment claims from student borrowers. The report released provides updated numbers on borrower defense claims received, and announces the approval of more than 11,000 new claims based on the Department’s findings concerning Corinthian’s misleading job placement rates. To date, more than 15,000 claims have been approved, with a combined outstanding loan balance of $247 million.
The report also announces the approval of the first borrower defense claims based on allegations that Corinthian mispresented the transferability of credits in certain instances. As described in the report, the Department is now denying claims that fail to qualify for relief under the Department’s findings and failed to assert any other claim for borrower defense relief. The Department will inform these borrowers of the reason for the denial and that they may re-apply if they have new information bearing on their claim or if they would like to allege another basis for relief not included in their original application. The report details the Department’s continued outreach efforts and provides an update on closed school discharges for former Corinthian students.
Moving forward, the Enforcement Unit will publish periodic reports detailing the Department’s progress with processing borrower defense claims. The Enforcement Unit, announced in February, collaborates with partner state and federal agencies, in building cases against institutions of higher education that engage in wrongdoing. The Unit includes four groups—Investigations, Borrower Defense, Administrative Actions and Appeals, and Clery—and utilizes a broad set of interventions and tools, including subpoena authority, document demands, interrogatories and interviews to enforce against violations of federal law.
Continued Steps to Protect Students
The final borrower defense regulations build on years of work by the Obama Administration to protect students and taxpayers from fraudulent or failing institutions of higher education. Those efforts include publishing the landmark Gainful Employment regulations ending Federal student aid eligibility for career colleges that are not paying off for their students; establishing tougher regulations targeting incentives that drove sales-people to enroll students through dubious promises; requiring States to step up their oversight through the state authorization regulation, including for distance education programs; and calling for more rigorous accreditation standards and practices that focus on student outcomes. Additionally, the Department has taken a number of enforcement actions to protect students and taxpayers from institutions that have engaged in risky behavior using Federal student aid dollars.