The purpose of the borrower defense regulation is to protect student loan borrowers from misleading, deceitful, and predatory practices of, and failures to fulfill contractual promises by, institutions participating in the Department’s student aid programs.

Most post-secondary institutions provide a high-quality education that equips students with new knowledge and skills and prepares them for their careers. However, when post-secondary institutions make false and misleading statements to students or prospective students about school or career outcomes or financing needed to pay for those programs, or fail to fulfill specific contractual promises regarding program offerings or educational services, student loan borrowers may be eligible for discharge of their Federal loans.

The proposed regulations would give students access to consistent, clear, fair, and transparent processes to seek debt relief; protect taxpayers by requiring that financially risky institutions are prepared to take responsibility for losses to the government for discharges of and repayments for Federal student loans; provide due process for students and institutions; and warn students, using plain language issued by the Department, about proprietary schools at which the typical student experiences poor loan repayment outcomes—defined in these proposed regulations as a proprietary school with a loan repayment rate that is less than or equal to zero percent, which means that the typical borrower has not paid down at least a dollar on his or her loans—so that students can make more informed enrollment and financing decisions.

The Department also proposes a regulation that would prohibit a school participating in the Direct Loan Program from requiring, through the use of contractual provisions or other agreements, arbitration to resolve claims brought by a borrower against the school that could also form the basis of a borrower defense under the Department’s regulations. The proposed regulations also would prohibit a school participating in the Direct Loan Program from obtaining agreement, either in an arbitration agreement or in another form, that a borrower waive his or her right to initiate or participate in a class action lawsuit regarding such claims and from requiring students to engage in internal institutional complaint or grievance procedures before contacting accrediting or government agencies with authority over the school regarding such claims. The proposed regulations also would prohibit a school participating in the Direct Loan Program from requiring, through the use of contractual provisions or other agreements, arbitration to resolve claims brought by a borrower against the school that could also form the basis of a borrower defense under the Department’s regulations. The proposed regulations would also impose certain notification and disclosure requirements on a school regarding claims that are voluntarily submitted to arbitration after a dispute has arisen.

Summary of the Major Provisions of This Regulatory Action: For the Direct Loan Program, we propose new regulations governing borrower defenses that would—

• Clarify that borrowers with loans first disbursed prior to July 1, 2017, may assert a defense to repayment under the current borrower defense State law standard;
• Establish a new Federal standard for borrower defenses, and limitation periods applicable to the claims asserted under that standard, for borrowers with loans first disbursed on or after July 1, 2017;
• Establish a process for the assertion and resolution of borrower defense claims made by individuals;
• Establish a process for group borrower defense claims with respect to both open and closed schools, including the conditions under which the Secretary may allow a claim to proceed without receiving an application;
• Provide for remedial actions the Secretary may take to collect losses arising out of successful borrower defense claims for which an institution is liable; and
• Add provisions to schools’ Direct Loan program participation agreements that, for claims that may form the basis for borrower defenses—
• Prevent schools from requiring that students first engage in a school’s internal complaint process before contacting accrediting and government agencies about the complaint;
• Prohibit the use of mandatory pre-dispute arbitration agreements by schools;
• Prohibit the use of class action lawsuit waivers; and
• To the extent schools and borrowers engage in arbitration in a manner consistent with applicable law and regulation, require schools to disclose to and notify the Secretary of arbitration filings and awards.

The proposed regulations would also revise the Student Assistance General Provisions regulations to—

• Amend the definition of a misrepresentation to include omissions of information and statements with a likelihood or tendency to mislead under the circumstances. The definition would be amended for misrepresentations for which the Secretary may impose a fine, or limit, suspend, or terminate an institution’s participation in title IV, HEA programs. This definition is also adopted as a basis for alleging borrower defense claims for Direct Loans first disbursed after July 1, 2017;
• Clarify that a limitation may include a change in an institution’s participation status in title IV, HEA programs from fully certified to provisionally certified;
• Amend the financial responsibility standards to include actions and events that would trigger a requirement that a school provide financial protection, such as a letter of credit, to insure against future borrower defense claims and other liabilities to the Department;
• Require proprietary schools with a student loan repayment rate that is less than or equal to zero percent to provide a Department-issued plain language warning to prospective and enrolled students and place the warning on its Web site and in all promotional materials and advertisements; and
• Require a school to disclose on its Web site and to prospective and enrolled students if it is required to provide financial protection, such as a letter of credit, to the Department.

The proposed regulations would also—

• Expand the types of documentation that may be used for the granting of a discharge based on the death of the borrower (“death discharge”) in the Perkins, FFEL, Direct Loan, and TEACH Grant programs;
• Revise the Perkins, FFEL, and Direct Loan closed school discharge regulations to ensure borrowers are aware of and able to benefit from their ability to receive the discharge;
• Expand the conditions under which a FFEL or Direct Loan borrower may qualify for a false certification discharge;
• Codify the Department’s current policy regarding the impact that a discharge of a Direct Subsidized Loan has on the 150 Percent Direct Subsidized Loan Limit; and
• Make technical corrections to other provisions in the FFEL and Direct Loan Program regulations and to the regulations governing the Secretary’s debt compromise authority.

Costs and Benefits: As further detailed in the Regulatory Impact Analysis, the benefits of the proposed regulations include:

(1) An updated and clarified process and the creation of a Federal standard to streamline the administration of the borrower defense rule and to increase protections for students as well as taxpayers and the Federal government;

(2) increased financial protections for the Federal government and thus for taxpayers;

(3) additional information to help students, prospective students, and their families make educated decisions based on information about an institution’s financial soundness and its borrowers’ loan repayment outcomes;

(4) improved conduct of schools by holding individual institutions accountable and thereby deterring misconduct by other schools;

(5) improved awareness and usage, where appropriate, of closed school and false certification discharges; and

(6) technical changes to improve the administration of the title IV, HEA programs.

Costs include paperwork burden associated with the required reporting and disclosures to ensure compliance with the proposed regulations, the cost to affected institutions of providing financial protection, and the cost to taxpayers of borrower defense claims that are not reimbursed by institutions.