Timothy Higus

Associate Editor

Loyola University Chicago School of Law, JD 2022

After two years of deliberation, public comment, and litigation, the Department of Education has released its final regulations for an overhaul of borrower defense to repayment claims. On August 30, 2019, the Department of Education released a press brief outlining new regulations set to take place on July 1, 2020. The new rules maintain that they are in place to create “streamlined and fair procedures that ensure basic due process for both borrowers and institutions.” Touting an anticipated savings of $11.1 billion dollars in savings to taxpayers over a ten-year span, the new regulations will likely make it more difficult for students to have their student loans forgiven. However, because of a missed deadline by the Department of Education, an Obama-era rule that favors borrowers by offering a transparent process for handling their claims, as well as automatic forgiveness of loans for some borrowers, is effective until that time.

Defense to repayment background

defense to repayment was a rule originally promulgated in 1995, however, it was rarely used until 2015. At that point, the closure of the for-profit system known as Corinthian Colleges created nearly 100,000 claims. The company closed after the Department of Education stopped granting federal loan dollars and issued a 30 million dollar fine because of an investigation that found the company misled students by using deceptive or false job placement and graduation rates. However, the claims are not arising only from Corinthian Colleges, but from other for-profit colleges as well. Secretary Betsy DeVos says that there are “bad actors on both sides of the equation (non-profit versus for-profit colleges), but a 2017 report by the Century Foundation found that of the claims filed by non-Corinthian students, 94% were generated by other for-profit colleges.

A backlog of claims

Since the Trump administration took office, Secretary DeVos has delayed and suspended the updated Obama regulation set to take effect in 2017 that would give students a “clear, fair, and transparent” process for their student loan discharge. Secretary DeVos has said that this rule was like raising your hands for “free money.” She attempted to suspend the Obama rule and announced plans to rewrite it, but a Federal District Court judge ruled the delay “arbitrary and capricious.” The result of the inaction has been a severe backlog reflected in the first quarterly report in 2019 listing 179,377 pending applications of the 239,937 received.

The Department set out to change the rule as updated by the Obama Administration. This took place after over two years of deliberation and public comment. The final rule will take effect on loans disbursed after June 30, 2020, while loans disbursed before July 2020 will be subject to the Obama regulations.

The DeVos regulations

The new regulations develop a new federal standard for claims including that the college made a “misrepresentation of material fact upon which the borrower reasonably relied in deciding to obtain a [loan]” and that misrepresentation resulted in the student’s enrollment or continuation at that institution. It also requires that the student was financially harmed by that misrepresentation. This misrepresentation is defined as a “statement, act, or omission” that the institution knew was false, misleading or deceptive. This sets the standard for a very high level of evidence that a borrower must prove. The good news for borrowers is that the standard of proof for their claim was maintained as a preponderance of the evidence whereas the original proposed rule was set to require the more difficult clear and convincing standard (substantially more likely to be true than false). Additionally, the Department can consider any other relevant evidence as long as both parties have an opportunity to respond. This is possible because there is no opportunity for automatic discharge of a group of affected people, but instead, each case is reviewed independently. There is no appeal to this review and a written decision by the agency is final.

The new regulations create a three-year window for all defense to repayment claims, regardless of withdrawal or graduation. The initial proposal did not create a consistent claim limitation period, allowing for only 30 days in some cases. This is a change from the previous administration that did not put any time limitations on when a borrower could file a claim. In the initial proposal, the Department was also only going to permit defensive claims after a student had defaulted. This would have incentivized students to go into default on their loans to be able to make a defense to repayment claim. The final regulations permit affirmative loans before default as long as they are within the limitations period.

Students will have a more difficult time claiming relief from school closures. Under the old regulations, students were automatically enrolled in a school discharge process. Now, the student must submit an application within the three-year limitations period. However, students enrolled in an institution that is closing now have an extra sixty days to determine if they want to withdraw or participated in a teach-out opportunity before the institution closes.

The previous rules prohibited institutions from using a pre-dispute arbitration agreement and class action waivers when students enrolled. The new rules allow for this as long as it is in plain language. This institution-friendly permission will allow colleges to avoid litigation and resolve disputes outside of a courtroom.

Overall, these new regulations seem to prioritize saving tax-payer dollars by denying students loan discharge. Because students seeking loan forgiveness must do so on a case-by-case basis within the new three-year window and must show that the institution knowingly misrepresented facts or claims that impacted the student’s enrollment, there will likely be fewer claims filed and granted. The inability to file as a class of affected borrowers makes the Department’s job more difficult when determining a borrower’s eligibility and working through the claims already filed. However, some students are hopeful that their claims will finally be responded to, regardless of the outcome.