Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 37242-37330 [2018-15823]
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37242
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
DEPARTMENT OF EDUCATION
34 CFR Parts 668, 674, 682, and 685
RIN 1840–AD26
[Docket ID ED–2018–OPE–0027]
Student Assistance General
Provisions, Federal Perkins Loan
Program, Federal Family Education
Loan Program, and William D. Ford
Federal Direct Loan Program
Office of Postsecondary
Education, Department of Education.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Secretary proposes to
create Institutional Accountability
regulations that would amend the
regulations governing the William D.
Ford Federal Direct Loan (Direct Loan)
Program to establish a Federal standard
for evaluating and a process for
adjudicating borrower defenses to
repayment for loans first disbursed on
or after July 1, 2019, and provide for
actions the Secretary may take to collect
from schools financial losses due to
successful borrower defense to
repayment discharges. The Secretary
also proposes to withdraw (i.e. rescind)
certain amendments to the regulations
already published but not yet effective.
DATES: We must receive your comments
on or before August 30, 2018.
ADDRESSES: Submit your comments
through the Federal eRulemaking Portal
or via postal mail, commercial delivery,
or hand delivery. We will not accept
comments submitted by fax or by email
or those submitted after the comment
period. To ensure that we do not receive
duplicate copies, please submit your
comments only once. In addition, please
include the Docket ID at the top of your
comments.
If you are submitting comments
electronically, we strongly encourage
you to submit any comments or
attachments in Microsoft Word format.
If you must submit a comment in Adobe
Portable Document Format (PDF), we
strongly encourage you to convert the
PDF to print-to-PDF format or to use
some other commonly used searchable
text format. Please do not submit the
PDF in a scanned format. Using a printto-PDF format allows the Department to
electronically search and copy certain
portions of your submissions.
• Federal eRulemaking Portal: Go to
www.regulations.gov to submit your
comments electronically. Information
on using Regulations.gov, including
instructions for accessing agency
documents, submitting comments, and
viewing the docket, is available on the
site under ‘‘Help.’’
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SUMMARY:
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• Postal Mail, Commercial Delivery,
or Hand Delivery: The Department
strongly encourages commenters to
submit their comments electronically.
However, if you mail or deliver your
comments about the proposed
regulations, address them to Jean-Didier
Gaina, U.S. Department of Education,
400 Maryland Ave. SW, Mail Stop 294–
20, Washington, DC 20202.
Privacy Note: The Department’s
policy is to make comments received
from members of the public available for
public viewing on the Federal
eRulemaking Portal at
www.regulations.gov. Therefore,
commenters should be careful to
include in their comments only
information that they wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT: For
further information related to Borrower
Defenses to Repayment, Pre-dispute
Arbitration Agreements, Internal
Dispute Processes, and Guaranty
Agency Fees, Barbara Hoblitzell at (202)
453–7583 or by email at:
Barbara.Hoblitzell@ed.gov or Annmarie
Weisman at (202) 453–6712 or by email
at: Annmarie.Weisman@ed.gov. For
information related to False
Certification Loan Discharge, and
Closed School Loan Discharge, Brian
Smith at (202) 453–7440 or by email at:
Brian.Smith@ed.gov. For information
regarding Financial Responsibility and
Institutional Accountability, John
Kolotos at (202) 453–7646 or by email
at: John.Kolotos@ed.gov. For
information regarding Recalculation of
Subsidized Usage Periods and Interest
Accrual, Ian Foss at (202) 377–3681 or
by email at: Ian.Foss@ed.gov.
If you use a telecommunications
device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay
Service (FRS), toll free, at (800) 877–
8339.
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of This Regulatory Action:
Section 455(h) of the Higher
Education Act of 1965, as amended
(HEA), authorizes the Secretary to
specify in regulation which acts or
omissions of an institution of higher
education a borrower may assert as a
defense to repayment of a Direct Loan.
Current regulations in 34 CFR
685.206(c) governing defenses to
repayment have been in effect since
1995 but, until recently, were rarely
used. Those regulations specify that a
borrower may assert as a defense to
repayment ‘‘any act or omission of the
school attended by the student that
would give rise to a cause of action
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against the school under applicable
State law.’’
On November 1, 2016, the Department
published final regulations (81 FR
75926) (the 2016 final regulations) on
the topic of borrower defenses to
repayment. The 2016 final regulations
were developed following negotiated
rulemaking and after receiving and
considering public comments on a
notice of proposed rulemaking. Certain
provisions of the 2016 final regulations
have been delayed until July 1, 2019 (83
FR 6458).
These proposed regulations are
designed to:
• Provide students with a balanced,
meaningful process that relies on a
single, Federal standard rather than 50
State standards to ensure that borrower
defense to repayment discharges are
handled swiftly, carefully, and fairly;
• Encourage students to seek
remedies from institutions that have
committed acts or omissions that
constitute misrepresentation and cause
harm to the student;
• Ensure that institutions rather than
taxpayers bear the burden of billions of
dollars 1 in losses from approvals of
borrower defense to repayment
discharges;
• Enable institutions to respond to
borrower defense to repayment claims
and provide evidence to support their
response;
• Discourage institutions from
committing fraud or other acts or
omissions that constitute
misrepresentation or from closing
precipitously;
• Enable the Department to properly
evaluate institutional financial risk in
order to protect students and taxpayers;
• Provide students with additional
time to qualify for a closed school loan
discharge;
• Address the concerns expressed by
negotiators, as well as in a suit filed by
an association against the Department,
that large financial liabilities resulting
from the unclear borrower defense
standard in the 2016 final regulations
could cripple or force the closure of
colleges and universities, even as they
produce positive outcomes for students
and provide students with accurate and
complete information relating to
enrollment;
• Reduce uncertainty about the future
of the Federal financial aid system itself
due to the strain on the government of
large numbers of borrower defense to
repayment discharges; and
1 The Department estimated that borrower
defense activity under the 2016 final regulation
would have an estimated $14.9 billion net budget
impact for the 2017 to 2026 loan cohorts. 71 FR
76055.
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• Most of all, to ensure that millions
of American students and borrowers are
provided with accurate information to
inform their enrollment decisions and to
ensure that students are not subjected to
narrowed educational options as a result
of unwarranted school closures.
The goal of the Department is to
enable students to make informed
decisions on the front end of college
enrollment, rather than to grant them
financial remedies after-the-fact when
lost time cannot be recouped and new
educational opportunities may be
sparse. Postsecondary students are
adults who can be reasonably expected
to make informed decisions and who
must take personal accountability for
the decisions they make. Institutions are
prohibited from misleading students by
providing false or incomplete
information, and remedies should be
provided to a student when
misrepresentation on the part of an
institution causes financial harm to that
student. Regardless, students have a
responsibility when enrolling at an
institution or taking student loans to be
sure they have explored their options
carefully and weighed the available
information to make an informed
choice. The Department has an
obligation to enforce the Master
Promissory Note, which makes clear
that students are not relieved of their
repayment obligations if later they regret
the choices they made.
Through these proposed regulations,
the Department is considering whether
to reaffirm the Department’s original
interpretation of the statute, which
persisted for 20 years and provided
borrowers an opportunity to raise
defenses to the repayment of Direct
Loans only in response to collection
actions by the Department, or to
continue with the Department’s 2015
interpretation, which allowed borrowers
to raise defenses to repayment in
affirmative claims. The Department
adopted that interpretation in response
to advocacy efforts on behalf of student
borrowers who had attended
institutions owned by Corinthian
Colleges, Inc., but without negotiated
rulemaking.
This new interpretation to allow
affirmative claims was codified in the
Department’s 2016 final regulations.
The 2015 reinterpretation was designed
to expand loan forgiveness for
borrowers who had attended Corinthian
institutions, which, following a
sequence of events, closed precipitously
after the Department placed the
institutions on HCM1 status and added
a delay in title IV reimbursement that is
typically not associated with HCM1.
The Department’s closed school loan
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discharge regulations provide that a
student who was attending a school at
the time of its closure, who did not
complete his or her program of study
prior to the school’s closure, and who
meets other criteria may receive a
discharge of Federal student loans
obtained for the student’s enrollment at
the institution. 34 CFR 674.33, 682.402,
and 685.214. But the Department
wished to extend loan forgiveness to
borrowers who may not have qualified
for this closed school loan discharge, so
it created new policies for accepting
affirmative claims.
The Department’s experience with
these affirmative claims has informed
this NPRM. That experience has led the
Department to realize that a clear
Federal standard is required in order to
adjudicate borrower defense claims in a
fair and equitable manner. The
Department has also heard concerns
during the process about the
Department’s statutory authority to
adjudicate these claims in an affirmative
posture and about whether the process
for adjudicating these claims
appropriately balances the competing
interests of borrowers, institutions, and
taxpayers.
Among other issues enumerated
throughout this document, the
Department is concerned that a process
that allows for borrowers to submit
affirmative claims, where there are
minimal consequences for submitting an
unjustified claim, could potentially
create improper incentives for
borrowers with unsubstantiated
allegations against schools to seek loan
discharges. For example, a borrower
may attempt to seek loan forgiveness
simply because he or she is dissatisfied
with the education received or with his
or her ability to get a particular job,
rather than as a result of a
misrepresentation by the institution.
This situation could easily increase the
burden on the Department of identifying
legitimate claims among those that do
not meet the defense to repayment
standard. And with nothing to lose by
submitting a claim, a borrower could be
tempted to submit a claim whether or
not he or she has been harmed. The
Department does not have sufficient
information to determine the extent of
this potential incentive effect. As of
January 2018, it had received 138,989
claims, of which 23 percent had been
processed, and only 2 percent of the
processed claims were associated with
schools other than Corinthian and ITT,
but that targeted rather than random
sample is insufficiently representative
to support conclusions on the issue at
this point.
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In any case, an influx of affirmative
claims could itself cause harm to
borrowers. For example, even if the
Department can accurately distinguish
between genuine and frivolous claims,
the time it takes to do so may prolong
the time it takes to provide relief to
deserving borrowers. And borrowers not
entitled to relief may find themselves
worse off if they receive a forbearance
while the claim was being processed,
because interest would accrue and
increase the amount the borrower would
be required to repay when the loan
reenters repayment.
In addition, the Department is
concerned that several features of the
2016 final regulations might have put
the Department in the untenable
position of forgiving billions of dollars
of Federal student loans based on
potentially unfounded accusations.
Specifically, those regulations would
allow the Department to afford relief to
borrowers without providing an
opportunity for institutions to
adequately tell their side of the story.
And they would allow the Department
to afford relief to entire groups of
borrowers, including those who did not
apply for relief or who were potentially
not harmed by the institution.
However, despite these concerns, the
Department is considering the
continuation of its current practice of
accepting affirmative claims from
borrowers not in a collections status. A
policy that limits borrower defense
eligibility to defensive claims may have
the unintended effect of treating
borrowers harmed by a
misrepresentation who default on their
loans better than other defrauded
borrowers who stay out of default by
responsibly enrolling in income-driven
repayment plans and making payments
on their loan.
In addition, lessons learned from the
recent mortgage crisis raise concerns
that limiting borrower defense eligibility
to defensive claims could lead some
relief-seeking borrowers to strategically
default. Researchers observed similar
strategic behavior by homeowners in
response to a 2008 mortgage
modification program offered by a large
financial institution to borrowers who
were at least sixty days delinquent.2 The
study found that the program’s
structure, which relied on the
borrower’s repayment status, yielded a
thirteen percent increase in the
probability of that financial institution’s
borrowers rolling over from current to
delinquent status—evidence of strategic
behavior by borrowers aiming to take
advantage of mortgage modifications. A
2 https://www.nber.org/papers/w17065.pdf.
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similar behavioral response from reliefseeking borrowers choosing to enter
default could result in a range of
troubling unintended consequences,
including damage to borrower credit
scores, increased default collection costs
for taxpayers, and increases to
institutional cohort default rates.
The Department is trying very
carefully to balance relief for borrowers
who have been harmed by acts of
institutional wrongdoing, with its
obligation to the taxpayer to provide
reliable stewardship of Federal dollars.
With more than a trillion dollars in
outstanding student loans, the
Department must uphold its fiduciary
responsibilities and exercise caution in
forgiving student loans to ensure that it
does not create an existential threat to
a program that lacks typical credit and
underwriting standards.
With so much at stake for all parties,
it seems reasonable that consumer
complaints should continue to be
adjudicated through existing legal
channels that put experienced judges or
arbitrators in the position of weighing
the evidence and rendering an impartial
decision. Significant reputational
damage could be done to an institution
from an affirmative borrower defense
claim long before an institution is given
an opportunity to contest that claim in
a recoupment proceeding. Such damage
could weaken or even force institutions
to close, regardless of the truth, extent,
or other circumstances surrounding the
unverified claims. And if the institution
prevails in a recoupment proceeding, it
is the taxpayer who is left responsible
for the claims the Department approved
in error.
These concerns have led the
Department to reconsider and seek
public comment on whether it should
reaffirm the Department’s original
interpretation of the statute, which
provided borrowers an opportunity to
raise defenses to the repayment of Direct
Loans only in response to collection
actions by the Department. The
Department is interested in comments
about its statutory authority to consider
defenses to the repayment of Direct
Loans in an affirmative posture, and
about the risks and benefits of doing so.
However, the Department is also
considering continuing to accept
affirmative claims from borrowers not in
a collections action. In either case, the
Department would need to implement
provisions that would protect
institutions and taxpayers against
frivolous claims. Our initial review of
pending claims suggests that some
borrowers may believe that the process
allows for a discharge based on a
borrower’s dissatisfaction with the
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education he or she received or the
outcomes he or she realized following
enrollment, even in the absence of a
misrepresentation on the part of the
institution. That is not the case. As
stated in the Master Promissory Note the
borrower signs when initiating their first
loan, the borrower is expected to repay
the loan even if the borrower fails to
complete the program or is dissatisfied
with the institution or his or her
outcomes. The Department seeks
comments from the public regarding
what types of provisions or
requirements could be used to reduce
frivolous claims while still ensuring a
borrower a fair and meaningful
opportunity to seek relief in the event of
fraud.
The Department is also proposing to
change its approach to a possible group
adjudication of borrower defense
claims. The 2016 final regulations
would enable the Department to initiate
affirmative claims on behalf of entire
groups of borrowers, if the Secretary
determines that there are common facts
and claims that apply to the group.
However, in this NPRM, the Department
is proposing a uniform standard based
on a misrepresentation made with
knowledge of its false, misleading, or
deceptive nature or with a reckless
disregard for the truth. As this proposed
standard is dependent upon a factspecific inquiry, the Department does
not believe that the group process is
appropriate to include in these
proposed regulations. Further, a group
discharge process could place an
extraordinary burden on both the
Department and the taxpayer, and the
Department has reconsidered whether
such a process appropriately balances
the need to reduce burden on borrowers
and the Department with the obligation
to protect taxpayer funds. Because an
institution can refuse to provide an
official transcript for a borrower whose
loan has been forgiven, group discharges
could render some borrowers unable to
verify their credentials or work in the
field for which they trained and have
enjoyed employment.
Moreover, the Department believes
that a review of claims on an individual
basis is necessary to ensure that it
affords appropriate relief to borrowers
who suffered harm from an alleged
misrepresentation. Since publication of
the 2016 final regulations, the
Department has conducted further
analyses of the tens of thousands of
defense to repayment applications for
Corinthian students that the Department
has received to date. Those analyses
have demonstrated that students
enrolled at Corinthian who submitted
defense to repayment applications may
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not all have been harmed to the same
extent. An individual process would
offer all borrowers fair and equal access
to defense to repayment relief. And
these proposed regulations would not
eliminate the opportunity for Corinthian
or other students with loans first
disbursed prior to July 1, 2019, to seek
debt relief under the 2015 interpretation
of the regulation.
The Department proposes a new
Federal standard to govern claims on
loans made after July 1, 2019 based on
an alleged misrepresentation. Under
that standard, a borrower may assert as
a defense to repayment an eligible
institution’s misrepresentation—that is,
a statement, act, or omission by the
school to the borrower that is (i) false,
misleading, or deceptive, (ii) made with
knowledge of its false, misleading, or
deceptive nature or with a reckless
disregard for the truth, and (iii) directly
and clearly related to the making of a
Direct Loan for enrollment at the school
or the provision of educational services
for which the loan was made. To relate
to the ‘‘provision of educational
services,’’ a misrepresentation must
relate to the borrower’s program of
study. Such misrepresentations can
relate, for example, to the educational
resources provided by the institution
that are required by an accreditation
agency or a State licensing or
authorizing agency for the completion of
the student’s educational program.
The proposed standard for a borrower
defense discharge differs from the
standard selected in the 2016 final
regulations, which was based on the
Department’s authority during
enforcement actions. The 2016 final
regulations adopted the
misrepresentation standard at 34 CFR
668.71, and provided that defenses to
repayment may additionally be based
upon breaches of contract and certain
types of judgments. The proposed
standard would not provide for a
defense to repayment based on such
breaches of contract or other judgments.
Instead, such breaches or judgments
may be considered as evidence of a
misrepresentation, to the extent they
bear on an act or omission related to the
educational services provided. The
Department believes this approach will
assist it to quickly and fairly review
each and every application and provide
equitable relief to borrowers who were
harmed.
The Department’s proposed standard
also does not distinguish between the
types of institutions that committed the
misrepresentation. Appendix A of the
2016 final regulations, by contrast, took
the position that a student who attended
a selective, non-profit institution would
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not receive debt relief even if the
institution committed an act that would
otherwise entitle the borrower a defense
to repayment because, in the opinion of
the Department, the education received
was valuable despite the
misrepresentation. We cannot
adequately support assumptions about
the inherent quality of any institution,
including a selective non-profit
institution. The Department accordingly
does not propose to maintain this
position.
The Department does propose to
maintain the standard of evidence or
proof required to make a successful
claim that was included in the 2016
final regulations—a preponderance of
the evidence. The Department believes
that this standard will allow claims to
be asserted and handled in a manner
that is genuinely fair to students,
taxpayers, and institutions, especially
since a borrower in collections could
have left the institution many years
prior to making a claim, which would
make it exceedingly difficult to meet a
higher evidentiary standards. However,
if the Department chooses to continue to
accept affirmative claims, where barriers
to submitting such claims are very low
and there are no penalties for a borrower
who submits an unjustified claim, the
Department believes that a higher
evidentiary standard may be
appropriate. The Department seeks
comments from the public about
whether or not a clear and convincing
evidence standard would be appropriate
if the Department chooses to continue to
accept affirmative claims and, if so,
whether that clear and convincing
standard should apply solely to
affirmative claims or to both affirmative
and defensive claims.
Finally, the Department proposes to
limit the period of time during which
the Secretary may recoup funds
discharged under these regulations.
Specifically, for loans disbursed on or
after July 1, 2019, the Secretary would
have five years from the date of the final
determination on a borrower’s defense
to repayment application to initiate a
proceeding to recover from the school
the amount of the losses incurred by the
Secretary on the discharged loans.
In addition to the changes to the
borrower defense regulations discussed
above, we seek in this NPRM to
strengthen the Department’s ability to
protect the Federal taxpayer from the
consequences of a school’s precipitous
closure by amending the Department’s
financial responsibility regulations. The
proposed regulations identify actions or
events that the Secretary may consider
in determining whether a school is
financially responsible, provide that the
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Secretary may accept other types of
surety or financial protection in lieu of
letters of credit, clarify that the
Department may impose a limitation on
a school by changing a school’s
participation status from ‘‘fully
certified’’ to ‘‘provisionally certified’’,
and update the Department’s regulations
as to initial and final decisions that may
be made by a hearing official in a fine,
limitation, suspension, or termination
proceeding to incorporate the proposed
alternate means of financial protection
to the Department. These proposed
regulations balance the need for
consumer protection, regulatory
enforcement, and fairness to schools.
They seek to hold schools accountable,
provide prospective and continuing
students with information necessary to
make informed choices, and mitigate
actions that pose an existential threat to
institutions. A school’s precipitous
closure—as opposed to a well-planned,
accreditor approved teach-out—puts
students, borrowers, and taxpayers at
unnecessary risk.
Further, through these proposed
regulations, the Department seeks to
encourage schools that are closing to go
through an orderly closure, which
includes offering appropriate teach-outs
to their students. Since 2015,
precipitous closures have led to large
numbers of defense to repayment and
closed school discharge applications.
We believe that closing schools should
be encouraged to offer accreditorapproved and, if applicable, State
authorizer-approved teach-out plans.
Such plans allow students the
reasonable opportunity to complete
their academic programs, either at
another location after the school has
closed or through an orderly wind-down
process before the school officially
closes.
We also propose changes to the
Department’s current false certification
regulations. The Department believes
that in cases when the borrower is
unable to obtain an official transcript or
diploma from the high school,
postsecondary institutions should be
able to rely on an attestation from a
borrower that the borrower earned a
high school diploma since the
Department relies on a similar
attestation in processing a student’s Free
Application for Federal Student Aid
(FAFSA). This policy change provides
assurances to students that they will
have a reasonable opportunity to pursue
postsecondary education when they
cannot obtain an official transcript or
diploma, and to institutions that they
will not face significant liabilities years
later if a student’s status cannot be
verified. Therefore, we are proposing
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regulatory language that when a
borrower provides an institution an
attestation of his or her high school
graduation status for purposes of
admission to the institution, the
borrower may not subsequently qualify
for a false certification discharge based
on not having a high school diploma.
We do not propose to adopt the
changes relating to pre-dispute
arbitration agreements and class action
waivers that are in the 2016 final
regulations. In those regulations, the
Department took the position that the
HEA gives the Department broad
authority to impose conditions on
schools that wish to participate in a
Federal benefit program and that
regulation of the use of pre-dispute
arbitration agreements and class action
waivers was necessary to ‘‘protect the
interests of the United States and
promote the purposes’’ of the Direct
Loan Program under Section 454(a)(6) of
the HEA, 20 U.S.C. 1087d(a)(6). We
continue to recognize, as explained in
the preamble to the 2016 final
regulations, that pre-dispute arbitration
agreements and class action waivers, in
some circumstances, may not be well
understood by consumers and may not
facilitate the Department’s awareness of
potential issues faced by students at a
school. However, in re-weighing all
applicable factors, including the current
legal landscape, we have determined
that the Department should take a
position more in line with the benefits
of arbitration and the strong Federal
policy favoring it.
Several potential benefits of
arbitration are relevant here. Arbitration
is often a more efficient and less
adversarial means of dispute resolution
than time-consuming and expensive
litigation that may result in borrowers
waiting years to obtain a fair hearing
and any relief. Arbitration may also
allow borrowers to obtain greater relief
than they would in a consumer class
action case where attorneys often
benefit most. Moreover, arbitration may
reduce the expense of litigation that a
university would otherwise pass on to
students in the form of higher tuition
and fees. Arbitration also eases burdens
on the overtaxed U.S. court system.
For all of these reasons, the
Department has decided that the 2016
final regulations’ provisions on class
action waivers and pre-dispute
arbitration should not be included in
these proposed regulations. As stated
above, we believe that borrower defense
to repayment should be a last resort for
borrowers. Arbitration is one means of
dispute resolution through which
borrowers may be able to obtain relief
without filing a defense to repayment
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with the Department. The Department
does not propose to prevent that means.
But because pre-dispute arbitration
agreements or class-action waivers may
limit the availability of certain
alternative means of dispute resolution,
we propose changes that would provide
borrowers with a better understanding
of the dispute resolution processes
available to them when they enroll at a
school.
The proposed regulations also update
the appendices to subpart L of 34 CFR
part 668 to account for changes in
accounting standards and terminology.
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Incorporation by Reference
In proposed § 668.175(d) with respect
to the zone alternative, we reference the
following accounting standards: FASB
ASC 850, Accounting Standards Update
(ASU) 2015–01, and ASC 225. FASB
ASC 850 addresses disclosures of
transactions between related parties.
These disclosures are considered to be
related party transactions even though
they may not be given accounting
recognition. While not providing
accounting or measurement guidance
for such transactions, FASB ASC 850
requires their disclosure nonetheless.
Accounting Standards Update (ASU)
No. 2015–01 addresses extraordinary
and unusual items, to simplify income
statement classification by removing the
concept of extraordinary items from
United States generally accepted
accounting principles (U.S. GAAP).
ASC 225 provides general income
statement guidance. Specifically, it
addresses the classification and
resulting presentation and disclosure of
extraordinary events and transactions. It
also addresses the presentation and
disclosure of unusual and infrequently
occurring items that do not meet the
extraordinary criteria, and speaks to
business interruption insurance. The
types of costs and losses covered by
business interruption insurance
typically include items such as gross
margin that was lost or not earned due
to the suspension of normal operations.
These items are accessible to the
public on the Financial Accounting
Standards Board (FASB) website,
www.fasb.org.
Summary of the Major Provisions of
This Regulatory Action:
For the Direct Loan Program, we
propose new regulations governing
borrower defenses that would—
• Establish a new Federal standard
for borrower defenses to repayment
submitted by borrowers with loans first
disbursed on or after July 1, 2019;
• Establish a process for the assertion
and resolution of borrower defenses to
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repayment for loans first disbursed on
or after July 1, 2019;
• Provide schools and borrowers with
opportunities to provide evidence and
arguments when a defense to repayment
application has been filed and to
provide an opportunity for each to
respond to the other’s submitted
evidence;
• Require a borrower to sign an
attestation to ensure that financial harm
is not the result of the borrower’s
workplace performance, disqualification
for a job for reasons unrelated to the
education received, a personal decision
to work less than full-time or not at all,
or the borrower’s decision to change
careers.
• Establish a time limit for the
Secretary to initiate an action to collect
from the responsible school the amount
of any loans first disbursed on or after
July 1, 2019, that are subject to a
successful borrower defense to
repayment discharge for which the
school is liable;
• Provide for remedial actions the
Secretary may take to collect from the
responsible school the amount of any
loans subject to a successful borrower
defense to repayment discharge for
which the school is liable; and
• Establish institutional
responsibility and financial liability for
losses incurred by the Secretary for
repayment of loan amounts discharged
by the Secretary on the basis of a
borrower defense to repayment
discharge.
The proposed regulations would also
revise the Student Assistance General
Provisions regulations to—
• Provide for schools that require
Federal student loan borrowers to sign
pre-dispute arbitration agreements or
class action waivers as a condition of
enrollment to make a plain language
disclosure of those requirements to
prospective and enrolled students and
place that disclosure on its website
where information regarding admissions
and tuition and fees is presented; and
• Provide for schools that require
Federal student loan borrowers to sign
pre-dispute arbitration agreements or
class action waivers as a condition of
enrollment to include information in the
borrower’s entrance counseling
regarding the school’s internal dispute
and arbitration processes.
• Amend the financial responsibility
provisions to establish the conditions or
events that have or may have an adverse
material effect on an institution’s
financial condition and which warrant
financial protection for the Department,
update the definitions of terms used to
calculate an institution’s composite
score to conform with changes in
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accounting standards but provide a six
year phase-in to enable the Department
adequate time to update the Composite
Score regulations accordingly through
future negotiated rulemaking, and
expand the types of financial protection
acceptable to the Secretary.
The proposed regulations would
also—
• Revise the Perkins Loan, FFEL, and
Direct Loan programs’ closed school
discharge regulations to extend the
window for a borrower to qualify for a
closed school discharge to 180 days;
• Revise the Perkins Loan, FFEL, and
Direct Loan programs’ closed school
discharge regulations to specify that if a
closing school provides an opportunity
to complete the program of study
approved by the school’s accrediting
agency and, if applicable, the school’s
State authorizing agency, the borrower
would not qualify for a closed school
discharge;
• Modify the conditions under which
a Direct Loan borrower may qualify for
a false certification discharge by
specifying that, in cases when the
borrower could not reasonably provide
the school an official transcript or
diploma from the borrower’s high
school, but provided an attestation to
the school that the borrower was a high
school graduate, the borrower would not
qualify for a false certification discharge
based on not having a high school
diploma;
• Prohibit guaranty agencies from
charging collection costs to a defaulted
borrower who enters into a repayment
agreement with the guaranty agency
within 60 days of receiving notice of
default from the agency;
• Prohibit guaranty agencies from
capitalizing interest on a loan that is
sold following the completion of loan
rehabilitation;
• Reflect the Department’s policy
regarding the impact that a discharge of
a Direct Subsidized Loan has on the 150
Percent Direct Subsidized Loan Limit;
and
• Update composite score
calculations to reflect recent changes in
FASB accounting standards and provide
for a six year phase-in process to
provide the Department sufficient time
to update the Composite Score
regulations accordingly through
negotiated rulemaking.
In addition, for the reasons set forth
below, we propose to withdraw (i.e.,
rescind) specified provisions of the final
regulations we published on November
1, 2016 (81 FR 75926) (the 2016 final
regulations) that were delayed until July
1, 2019, pertaining to borrower defenses
to repayment and related issues.
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Please refer to the Summary of
Proposed Changes section of this notice
of proposed rulemaking (NPRM) for
more details on the major provisions
contained in this NPRM.
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 defense to repayment
applications; (2) improved financial
protections for the Federal government
and taxpayers by requiring institutions
to incur the losses associated with a
successful defense to repayment
application and reducing the likelihood
of taxpayers incurring costs related to
paying claims submitted by students
who were not harmed; (3) additional
information to help students,
prospective students, and their families
make educated decisions based on
information about a school’s mandatory
arbitration or class action waiver
requirements and to effectively use
arbitration when necessary; (4) an
extended window for a borrower to
qualify for a closed school discharge
and revisions incentivizing completion
of educational programs; (5) revised
conditions under which a Direct Loan
borrower may qualify for a false
certification discharge to ensure that
students who are unable to obtain a high
school transcript have an opportunity to
participate in postsecondary education
and that a student’s intentional
misrepresentation of his or her high
school graduation status cannot then be
used to justify a false certification
discharge; (6) restrictions on guaranty
agencies from charging collection costs
to a defaulted borrower who enters into
a repayment agreement with the
guaranty agency within 60 days of
receiving notice of default from the
agency, and from capitalizing interest
on a loan that is sold following the
completion of loan rehabilitation; (7)
recalculating subsidized usage periods,
as appropriate, when a borrower has
received a loan discharge; and (8)
updating the calculation of composite
scores to reflect changes in FASB
standards, but also providing a six-year
phase in to provide time for the
Department to update its composite
score regulations through future
negotiated rulemaking.
Costs include the paperwork burden
associated with the required reporting
and disclosures to ensure compliance
with the proposed regulations, the cost
to affected schools of providing
financial protection, and the cost to
taxpayers of borrower defense claims
that are not reimbursed by schools.
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There may also be costs to borrowers
who may be reluctant to go into default,
even if they have a claim that would
result in loan relief or partial loan relief,
and therefore do not benefit from that
loan relief. There may also be costs to
borrowers who use the legal system to
seek damages from an institution rather
than relying on the government to
adjudicate consumer complaints.
Invitation to Comment: We invite you
to submit comments regarding these
proposed regulations.
To ensure that your comments have
maximum effect in developing the final
regulations, we urge you to identify
clearly the specific section or sections of
the proposed regulations that each of
your comments addresses, and provide
relevant information and data whenever
possible, even when there is no specific
solicitation of data and other supporting
materials in the request for comment.
We also urge you to arrange your
comments in the same order as the
proposed regulations. Please do not
submit comments that are outside the
scope of the specific proposals in this
NPRM, as we are not required to
respond to such comments.
We invite you to assist us in
complying with the specific
requirements of Executive Orders 12866
and 13563 and their overall requirement
of reducing regulatory burden that
might result from these proposed
regulations. Please let us know of any
further ways we could reduce potential
costs or increase potential benefits
while preserving the effective and
efficient administration of the
Department’s programs and activities.
During and after the comment period,
you may inspect all public comments
about the proposed regulations by
accessing Regulations.gov. You may also
inspect the comments in person at 400
Maryland Ave. SW, Washington, DC,
between 8:30 a.m. and 4:00 p.m.,
Eastern Time, Monday through Friday
of each week except Federal holidays.
To schedule a time to inspect
comments, please contact one of the
persons listed under FOR FURTHER
INFORMATION CONTACT.
Assistance to Individuals with
Disabilities in Reviewing the
Rulemaking Record: On request, we will
provide an appropriate accommodation
or auxiliary aid to an individual with a
disability who needs assistance to
review the comments or other
documents in the public rulemaking
record for the proposed regulations. To
schedule an appointment for this type of
accommodation or auxiliary aid, please
contact one of the persons listed under
FOR FURTHER INFORMATION CONTACT.
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37247
Background
The Secretary proposes to amend
parts 668, 674, 682, and 685 of title 34
of the Code of Federal Regulations
(CFR). The regulations in 34 CFR part
668 pertain to Student Assistance
General Provisions. The regulations in
34 CFR part 674 pertain to the Perkins
Loan Program. The regulations in 34
CFR part 682 pertain to the FFEL
Program. The regulations in 34 CFR part
685 pertain to the Direct Loan Program.
We are proposing these amendments
to: (1) Specify that the standard used to
identify an act or omission of a school
that provides the basis for a borrower
defense to repayment discharge will
depend on when the Direct Loan was
first disbursed; (2) establish a new
Federal standard that the Department
will use to determine whether a school’s
act or omission constitutes a basis for a
borrower defense to repayment
discharge for loans disbursed on or after
July 1, 2019; (3) provide an opportunity
for an institution to know that a defense
to repayment application has been
lodged against it and to respond to
claims made in that application; (4)
establish the procedures to be used by
a borrower to initiate a borrower defense
to repayment application for loans first
disbursed on or after July 1, 2019; (5)
establish a time limit for the Secretary
to initiate action to collect from the
responsible school the amount of any
loans first disbursed on or after July 1,
2019 that are subject to an approved
borrower defense to repayment
discharge; (6) establish the procedures
that the Department would use to
determine the liability of a school for
the amount of any loan discharges and
reimbursement of loan payments
resulting from successful borrower
defenses to repayment; (7) establish the
conditions or events upon which an
institution is or may be required to
provide to the Department financial
protection, such as a letter of credit, to
help protect the Federal government
and taxpayers, against potential
institutional liabilities; (8) institute
requirements to ensure borrowers are
informed and educated about predispute arbitration agreements and class
action waivers that students are
required to sign by the school as a
condition of enrollment; (9) revise the
closed school discharge regulations to
extend the window for a borrower to
qualify for a closed school discharge
and specify that if a closing school
provides a borrower an opportunity to
complete his or her academic program
through a teach-out plan approved by
the school’s accrediting agency and, if
applicable, the school’s State
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authorizing agency, the borrower would
not qualify for a closed school
discharge; (10) amend the eligibility
criteria for the false certification loan
discharge by specifying that, in cases
when a borrower could not provide the
school an official high school transcript
or diploma but provided an attestation
that the borrower was a high school
graduate, the borrower would not
qualify for a false certification discharge
based on not having a high school
diploma; (11) clarify the conditions
under which FFEL Program loan
holders may capitalize the interest due
on a loan to be consistent with the
Department’s practice for loans it holds;
(12) reflect the conditions under which
the discharge of a Direct Subsidized
Loan will lead to the elimination or
recalculation of a Subsidized Usage
Period under the 150 Percent Direct
Subsidized Loan Limit or the restoration
of interest subsidy; and (13) prohibit
guaranty agencies from charging
collection costs if a borrower enters into
a repayment agreement within 60 days
of the default notice.
Public Participation
On June 16, 2017, we published a
notification in the Federal Register (82
FR 27640) announcing our intent to
establish a negotiated rulemaking
committee under section 492 of the HEA
to revise the regulations on borrower
defenses to repayment of Federal
student loans and other matters, and on
the authority of guaranty agencies in the
FFEL Program to charge collection costs
to defaulted borrowers under 34 CFR
682.410(b)(6). We also announced two
public hearings at which interested
parties could comment on the topics
suggested by the Department and
suggest additional topics for
consideration for action by the
negotiated rulemaking committee. The
hearings were held on—
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July 10, 2017, in Washington, DC; and
July 12, 2017, in Dallas, TX.
Transcripts from the public hearings
are available at www2.ed.gov/policy/
highered/reg/hearulemaking/2017/
index.html.
We also invited parties unable to
attend a public hearing to submit
written comments on the proposed
topics and to submit other topics for
consideration. Written comments
submitted in response to the June 16,
2017, Federal Register notification may
be viewed through the Federal
eRulemaking Portal at
www.regulations.gov, within docket ID
ED–2017–OPE–0076. Instructions for
finding comments are also available on
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the site under ‘‘How to Use
Regulations.gov’’ in the Help section.
On August 30, 2017, we published a
notification in the Federal Register (82
FR 41194) requesting nominations for
negotiators to serve on the negotiated
rulemaking committee and setting a
schedule for committee meetings.
Negotiated Rulemaking
Section 492 of the HEA, 20 U.S.C.
1098a, requires the Secretary to obtain
public involvement in the development
of proposed regulations affecting
programs authorized by title IV of the
HEA. After obtaining extensive input
and recommendations from the public,
including individuals and
representatives of groups involved in
the title IV, HEA programs, the
Secretary in most cases must subject the
proposed regulations to a negotiated
rulemaking process. If negotiators reach
consensus on the proposed regulations,
the Department agrees to publish
without alteration a defined group of
regulations on which the negotiators
reached consensus unless the Secretary
reopens the process or provides a
written explanation to the participants
stating why the Secretary has decided to
depart from the agreement reached
during negotiations. Further information
on the negotiated rulemaking process
can be found at: www2.ed.gov/policy/
highered/reg/hearulemaking/hea08/negreg-faq.html.
On August 30, 2017, the Department
published a notification in the Federal
Register (82 FR 41194) announcing its
intention to establish two negotiated
rulemaking committees and a
subcommittee to prepare proposed
regulations governing the Federal
Student Aid programs authorized under
title IV of the HEA. One negotiated
rulemaking committee was established
to propose regulations relating to gainful
employment and the other to propose
regulations pertaining to borrower
defenses to repayment of Federal
student loans, the definition of
misrepresentation as it pertains to
borrower defense, the program
participation agreement for schools
participating in the title IV programs,
closed school and false certification
loan discharges, financial responsibility
and administrative capability,
arbitration and class action lawsuits,
revisions to regulations that will address
whether and to what extent guaranty
agencies may charge collection costs
under 34 CFR 682.410(b)(6) to a
defaulted borrower who enters into a
loan rehabilitation or other repayment
agreement within 60 days of being
informed that the guaranty agency has
paid a claim on the loan.
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A subcommittee, which was
composed of individuals with expertise
in the applicable financial accounting
and reporting standards set by the
Financial Accounting Standards Board
(FASB), was established to discuss
whether and how the (FASB’s) recent
changes to the accounting standards for
financial reporting affected financial
reporting requirements for schools and
to recommend appropriate regulatory
changes to the negotiated rulemaking
committee.
The notification set forth a schedule
for the committee meetings and
requested nominations for individual
negotiators to serve on the negotiating
committee and the subcommittee. The
Department sought negotiators to
represent the following groups: Students
and former students; consumer
advocacy organizations; legal assistance
organizations that represent students
and former students; groups
representing U.S. military service
members or veteran Federal student
loan borrowers; financial aid
administrators at postsecondary schools;
general counsels/attorneys and
compliance officers at postsecondary
schools; chief financial officers (CFOs)
and experienced business officers at
postsecondary schools; State attorneys
general and other appropriate State
officials; State higher education
executive officers; institutions of higher
education eligible to receive Federal
assistance under title III, parts A, B, and
F, and title V of the HEA, which include
Historically Black Colleges and
Universities, Hispanic-Serving
Institutions, American Indian Tribally
Controlled Colleges and Universities,
Alaska Native and Native HawaiianServing Institutions, Predominantly
Black Institutions, and other institutions
with a substantial enrollment of needy
students as defined in title III of the
HEA; two-year public institutions of
higher education; four-year public
institutions of higher education; private,
nonprofit institutions of higher
education; private, proprietary
institutions of higher education; FFEL
Program lenders and loan servicers;
FFEL Program guaranty agencies and
guaranty agency servicers (including
collection agencies); and accrediting
agencies. The Department sought
subcommittee members to represent the
following constituencies who also have
expertise in the applicable financial
accounting and reporting standards set
by the Financial Accounting Standards
Board (FASB): Private, nonprofit
institutions of higher education, with
knowledge of the accounting standards
and title IV financial responsibility
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requirements for the private, nonprofit
sector; private, proprietary institutions
of higher education, with knowledge of
the accounting standards and title IV
financial responsibility requirements for
the proprietary sector; accrediting
agencies; chief financial officers (to
include experienced business officers
and bursars) at postsecondary
institutions; associations or
organizations that provide accounting
guidance to auditors and institutions;
certified public accountants or firms
who conduct financial statement audits
of title IV participating institutions; and
FASB. The Department considered the
nominations submitted by the public
and chose negotiators who would
represent the various constituencies.
The negotiating committee included
the following members: Joseline Garcia,
United States Students Association, and
Stevaughn Bush, (alternate) Student,
Howard University School of Law,
representing students and former
students.
Ashley Harrington, Center for
Responsible Lending, and Suzanne
Martindale (alternate), Consumers
Union, representing consumer advocacy
organizations.
Abby Shafroth, National Consumer
Law Center, and Juliana Fredman,
(alternate) Bay Area Legal Aid,
representing legal assistance
organizations that represent students.
Will Hubbard, Student Veterans of
America, and Walter Ochinko
(alternate), Veterans Education Success,
representing U.S. military service
members or veterans.
Valerie Sharp, Evangel University,
and Kimberly Brown (alternate), Des
Moines University, representing
financial aid administrators.
Aaron Lacey, Partner, Thomas Coburn
LLP, and Bryan Black, (alternate),
Attorney, representing General
Counsels/attorneys and compliance
officers.
Kelli Hudson Perry, Rensselaer
Polytechnic Institute, and Dawnelle
Robinson (alternate), Roanoke Chowan
Community College, representing CFOs
and business officers.
John Ellis, State of Texas Office of the
Attorney General, and Evan Daniels
(alternate), Office of the Arizona
Attorney General, representing State
attorneys general and other appropriate
State officials.
Robert Flanigan, Jr., Spelman College,
and Lodriguez Murray (alternate),
United Negro College Fund,
representing minority serving
institutions.
Dan Madzelan, American Council on
Education, and Barmak Nassirian
(alternate), American Association of
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State Colleges and Universities,
representing two-year public
institutions.
Alyssa Dobson, Slippery Rock
University, and Kay Lewis (alternate),
University of Washington, representing
four-year public institutions.
Ashley Ann Reich, Liberty University,
and Gregory Jones (alternate), Compass
Rose Foundation, representing private,
non-profit institutions.
Mike Busada, Ayers Career College,
and Chris DeLuca (alternate), DeLuca
Law LLC, representing private,
proprietary institutions with enrollment
of 450 students or fewer.
Michael Bottrill, SAE Institute North
America, and Linda Rawles, (alternate)
Rawles Law, representing private,
proprietary institutions with enrollment
of 451 students or more.
Wanda Hall, Edfinancial Services, and
Colleen Slattery (alternate), MOHELA,
representing FFEL Program lenders and
loan servicers.
Jaye O’Connell, Vermont Student
Assistance Corporation, and Sheldon
Repp (alternate), National Council of
Higher Education Resources,
representing FFEL Program guaranty
agencies and guaranty agency servicers.
Dr. Michale McComis, Accrediting
Commission of Career Schools and
Colleges, and Karen Peterson Solinski,
(alternate), Higher Learning
Commission, representing accreditors.
Annmarie Weisman, U.S. Department
of Education, representing the
Department.
The subcommittee included the
following members:
John Palmucci, Maryland University
of Integrative Health, representing
private, non-profit institutions.
Jonathan Tarnow, Drinker Biddle &
Reath LLP, representing private,
proprietary institutions.
Dr. Julianne Marie Malveaux,
Economic Education, and formerly of
Bennett College, representing minority
serving institutions.
Dale Larson, Dallas Theological
Seminary, representing Accrediting
agencies.
Dawnelle Robinson, Shaw University,
representing CFOs, business officers,
and bursars.
Susan M. Menditto, National
Association of College and University
Business Officers, representing
organizations that provide accounting
guidance to auditors and institutions.
Ronald E. Salluzzo, Attain,
representing Certified public
accountants or firms who conduct
compliance audits and/or prepare
financial statements of participating
Title IV institutions.
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37249
Jeffrey Mechanick, the Financial
Accounting Standards Board (FASB),
representing FASB.
The negotiated rulemaking committee
met to develop proposed regulations on
November 13–15, 2017, January 8–11,
2018, and February 12–15, 2018. The
subcommittee met in person on
November 16–17, 2017, January 4–5,
2018, and by telephone on January 30,
2018.
At its first meeting, the negotiating
committee reached agreement on its
protocols and proposed agenda. The
protocols provided, among other things,
that the committee would operate by
consensus. Consensus means that there
must be no dissent by any member in
order for the committee to have reached
agreement. Under the protocols, if the
committee reached a final consensus on
all issues, the Department would use the
consensus-based language in its
proposed regulations. Furthermore, the
Department would not alter the
consensus-based language of its
proposed regulations unless the
Department reopened the negotiated
rulemaking process or provided a
written explanation to the committee
members regarding why it decided to
depart from that language.
During the first meeting, the
negotiating committee agreed to
negotiate an agenda of eight issues
related to student financial aid. These
eight issues were: Borrower defense to
repayment standard; the process for
applying for and considering borrower
defense claims; financial responsibility
and administrative capability; predispute arbitration agreements, class
action waivers, and internal dispute
processes; closed school discharges;
false certification discharges; guaranty
agency collection fees; and subsidized
usage period recalculations.
During committee meetings, the
negotiators reviewed and discussed the
Department’s drafts of regulatory
language and the committee members’
alternative language and suggestions. At
the final meeting on February 15, 2018,
the committee did not reach consensus
on the Department’s proposed
regulations. For that reason, and
according to the committee’s protocols,
all parties who participated in or who
were represented in the negotiated
rulemaking, in addition to all members
of the public, may comment freely on
the proposed regulations. For more
information on the negotiated
rulemaking sessions, please visit:
www2.ed.gov/policy/highered/reg/
hearulemaking/2017/
borrowerdefense.html. Transcripts and
audio recordings of the negotiated
rulemaking session are also available at:
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www2.ed.gov/policy/highered/reg/
hearulemaking/2017/
borrowerdefense.html.
While transcripts have been made
available by the Department to aid
public understanding of the negotiated
rulemaking proceedings, the transcripts
have not been vetted or reviewed for
accuracy or completeness and should
not be considered as the Department’s
official transcription of the negotiated
rulemaking proceedings.
Summary of Proposed Changes
The proposed regulations would—
• Rescind specified provisions of the
2016 final regulations, which have not
yet become effective.
• Amend § 668.41 to require schools
that require students to accept predispute arbitration agreements or class
action waivers as a condition of
enrollment to disclose that information
to students, prospective students, and
the public in an easily accessible format;
• Amend § 668.91 to provide that the
Secretary may accept other types of
surety or financial protection in
addition to letters of credit and that a
hearing official must uphold the amount
of financial protection required by the
Secretary unless certain conditions are
met;
• Amend § 668.94 to provide that a
limitation on an institution’s
participation in the Title IV programs
may include changing the institution’s
status from fully certified to
provisionally certified;
• Amend § 668.171 to establish the
actions or events that have or may have
an adverse material effect on an
institution’s financial condition and
revise appendices A and B of the
financial responsibility regulations to
conform with changes in accounting
standards;
• Amend § 668.172 to address
changes to the accounting standards
regarding leases;
• Amend § 668.175 to expand the
types of financial protection acceptable
to the Secretary;
• Amend §§ 674.33, 682.402 and
685.214 to extend the window for a
borrower to qualify for a closed school
discharge and to specify that if a closing
school provided a borrower the
reasonable opportunity to complete his
or her academic program through an
orderly school closure or a teach-out
plan and that is approved by the
school’s accrediting agency and, if
applicable, the school’s State
authorizing agency, the borrower will
not qualify for a closed school
discharge;
• Amend §§ 682.202, 682.405, and
682.410 to prohibit guaranty agencies
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and FFEL Program lenders from
capitalizing the outstanding interest on
a FFEL loan when the borrower
rehabilitates a defaulted FFEL loan;
• Amend § 682.405 to prohibit
guaranty agencies and FFEL Program
lenders from charging collections costs
when a borrower enters into a
repayment agreement within 60 days of
the notice of default;
• Amend § 685.200 to specify that a
loan discharge based on school closure,
false certification, an unpaid refund, or
a defense to repayment will lead to the
elimination of or recalculation of the
subsidized usage period that is
associated with the loan or loans
discharged;
• Amend § 685.206 to clarify that
existing regulations with regard to
borrower defenses to repayment apply
to loans first disbursed prior to July 1,
2019; to establish a Federal standard for
deciding borrower defenses to
repayment pertaining to a loan first
disbursed on or after July 1, 2019; to
establish the procedures that the
Department would use to determine the
liability of a school for the amount of
any loan discharges resulting from
borrower defense claims pertaining to
loans first disbursed on or after July 1,
2019; and to provide that the Secretary
may initiate a proceeding to recover
from an institution the amount of any
loan discharged by the Secretary based
on a defense to repayment within five
years of the date of the final decision to
discharge the loan.
• Amend § 685.212 to add borrower
defense to repayment discharges to the
discharge provisions listed in this
section.
• Amend § 685.215 to provide that in
cases when a Direct Loan borrower
could not obtain an official transcript or
diploma from high school and instead
provided an attestation to the institution
that the borrower was a high school
graduate, the borrower will not qualify
for a false certification discharge based
on not having a high school diploma.
• Amend § 685.300 to require
institutions to accept responsibility for
the repayment of amounts discharged by
the Secretary pursuant to the borrower
defense to repayment, closed school
discharge, false certification discharge,
and unpaid refund discharge
regulations.
• Amend § 685.304 to require
institutions that use pre-dispute
arbitration agreements or class action
waivers to provide written, plain
language descriptions of those
agreements and to provide the student
borrower with written information on
how to use the school’s internal dispute
resolution process.
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• Amend § 685.308 to require the
repayment of funds and the purchase of
loans by the school if the Secretary
determines that the school is liable as a
result of a successful claim for which
the Secretary discharged a loan, in
whole or in part, pursuant to §§ 685.206,
685.214, and 685.216.
Significant Proposed Regulations
We discuss substantive issues under
the sections of the proposed regulations
to which they pertain. Generally, we do
not address proposed regulatory
provisions that are technical or
otherwise minor in effect.
In 2016, the Department conducted
negotiated rulemaking and published
the 2016 final regulations on the topic
of borrower defenses to repayment and
related issues, but those regulations
have not yet gone into effect. On June
16, 2017, the Department published in
the Federal Register a notification of the
partial delay of effective dates under
section 705 of the Administrative
Procedure Act (5 U.S.C. 705) (82 FR
27621) (705 Notification), for certain
provisions of the final regulations until
a legal challenge by the California
Association of Private Postsecondary
Schools is resolved. See Complaint and
Prayer for Declaratory and Injunctive
Relief, California Association of Private
Postsecondary Schools v. DeVos, Civil
Action No. 1:17-cv-00999 (D.D.C. May
24, 2017). Subsequently, we published
an interim final rule (82 FR 49114),
which gave notice that after the 705
notification delayed implementation
past July 1, 2017, pursuant to the
Department’s interpretation of the
master calendar requirement, the
earliest the regulation could go into
effect was July 1, 2018. Then, on
February 14, 2018, following a notice of
proposed rulemaking, the Department
published a final rule establishing July
1, 2019, as the effective date of the 2016
final regulations (83 FR 6458).
We now propose rescission of the
2016 final regulations that we delayed
through previous notification. In this
preamble, we describe the proposed
changes to the regulations based on the
currently effective regulations and not
the delayed provisions of the 2016 final
regulations. In light of the withdrawal
(i.e. rescission) of the delayed
provisions of the 2016 final regulations,
this approach is required under 1 CFR
part 21, which provides that each
agency that drafts regulations must do
so as an amendment to the Code of
Federal Regulations. The currently
effective regulations, not the delayed
provisions of the 2016 final regulations,
are the provisions codified in the Code
of Federal Regulations. Thus, we are
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amending the currently effective
regulations, not the delayed provisions
of the 2016 final regulations, in this
NPRM. Throughout the ‘‘Significant
Proposed Regulations’’ section of this
NPRM, we describe our reasoning for
the proposed rescissions in the context
of the topics to which they pertain. For
purposes of determining the budget
impact of the regulation, we utilize the
2019 President’s Budget Request, which
assumed the implementation of the
2016 regulation.
Please note that the following two
issues in the 2016 final regulations are
being addressed through a separate
rulemaking process focused on the
Gainful Employment regulations
process: The requirement that
proprietary schools at which the median
borrower has not repaid in full, or paid
down by at least one dollar the
outstanding balance of, the borrower’s
loans to provide a Department-issued
plain language warning in promotional
materials and advertisements; and the
requirement for a school to disclose on
its website and to prospective and
enrolled students if it is required to
provide financial protection, such as a
letter of credit, to the Department. The
Department felt that the Gainful
Employment rulemaking was the
appropriate place to propose and
discuss eliminating these disclosures
because the Gainful Employment
negotiated rulemaking committee
addressed other regulations on
disclosures.
Thus, in this NPRM, we propose
rescinding the revisions to or additions
to the following regulations:
Section 668.14(b)(30), (31), and (32)
Program participation agreement.
Section 668.41(h) and (i) Reporting
and disclosure of information.
Section 668.71(c) Scope and special
definitions.
Section 668.90(a)(3) Initial and final
decisions.
Section 668.93(h), (i) and (j)
Limitation.
Section 668.171 General.
Section 668.175(c), (d), (f), and (h)
Alternative standards and requirements.
Part 668, subpart L, appendix C.
Section 674.33(g)(3) and (8)
Repayment.
Section 682.202(b)(1) Permissible
charges by lenders to borrowers.
Section 682.211(i)(7) Forbearance.
Section 682.402(d)(3), (d)(6)(ii)(B)(1)
and (2), (d)(6)(ii)(F) introductory text,
(d)(6)(ii)(F)(5), (d)(6)(ii)(G), (d)(6)(ii)(H)
through (K), (d)(7)(ii) and (iii), (d)(8),
and (e)(6)(iii) Death, disability, closed
school, false certification, unpaid
refunds, and bankruptcy payments.
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Section 682.405(b)(4)(ii) Loan
rehabilitation agreement.
Section 682.410(b)(4) and (b)(6)(viii)
Fiscal, administrative, and enforcement
requirements.
Section 685.200(f)(3)(v) and (f)(4)(iii)
Borrower eligibility.
Section 685.205(b)(6) Forbearance.
Section 685.206(c) Borrower
responsibilities and defenses.
Section 685.212(k) Discharge of a loan
obligation.
Section 685.214(c)(2), (f)(4) through
(7) Closed school discharge.
Section 685.215(a)(1), (c) introductory
text, (c)(1) through (8), and (d) Discharge
for false certification of student
eligibility or unauthorized payment.
Section 685.222 Borrower defenses.
Part 685 subpart B, appendix A
Examples of borrower relief.
Section 685.300(b)(11) and (12) and
(d) through (i) Agreements between an
eligible school and the Secretary for
participation in the Direct Loan
Program.
Section 685.308(a) Remedial actions.
Note: Section 668.90 has been
redesignated as § 668.91 and § 668.93
has been redesignated as § 668.94
pursuant to the borrower defense
procedural rule, published January 19,
2017 at 82 FR 6253 (the borrower
defense procedural rule).
Borrower Defenses—General
(§ 685.206)
Background: Section 455(h) of the
HEA authorizes the Secretary to specify
which acts or omissions of an
institution of higher education a
borrower may assert as a defense to the
repayment of a Direct Loan. 20 U.S.C.
1087e(h). Under the Department’s
current regulations at § 685.206(c), a
borrower may assert as a defense against
repayment of a loan in response to a
proceeding by the Department to collect
on a Direct Loan, any act or omission of
the school attended by the student
directly and clearly related to the
making of a Direct Loan for enrollment
at the institution or the provision of
educational services for which the loan
was made that would give rise to a
cause of action against the school under
applicable State law (referred to in this
document as the ‘‘State law standard’’).
The Department first promulgated the
Direct Loan Program’s borrower defense
to repayment regulation December 1,
1994 (59 FR 61664, 61696), which
became effective on July 1, 1995. The
Department’s intent was for this rule to
be effective for the 1995–1996 academic
year and then to develop a more
extensive rule for both the Direct Loan
and FFEL Loan programs through a
negotiated rulemaking process.
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However, based on the recommendation
of the non-Federal negotiators on a
negotiated rulemaking committee
convened in the spring of 1995 (60 FR
37768), the Secretary decided not to
develop further regulations or to revise
§ 685.206(c).
Though the regulation has been in
effect since 1995, it was rarely used
prior to 2015, when the Department
received applications from borrowers
for loan relief in response to the
Department’s announcement (see
www.ed.gov/news/press-releases/factsheet-protecting-students-abusivecareer-colleges and https://
studentaid.ed.gov/sa/about/
announcements/corinthian) that it
would consider affirmative borrower
defense claims.
The current regulation does not set
forth the process a borrower may use to
assert an affirmative borrower defense
claim. Therefore, the Department
appointed a Special Master in June 2015
to create and oversee a process to
provide debt relief for borrowers who
sought Federal student loan discharges
based on claims against the borrower’s
institution. Later, the Department’s
Federal Student Aid (FSA) office
assumed responsibility for resolving
these claims, and it continues to do so.
This FSA process has proven to be
burdensome to borrowers, given the
time it takes to adjudicate each claim,
and costly to taxpayers.
The Department is considering
whether to allow only defensive claims
or to continue the approach taken in its
2015 interpretation that allowed it to
accept both defensive and affirmative
claims. One regulatory alternative,
specified in the proposed amendatory
language, continues to provide a remedy
to borrowers in a collections
proceeding, as has been the case since
the borrower defense to repayment
regulation was promulgated in 1994, by
permitting borrowers to assert defense
to repayment during a proceeding by the
Department to collect on a Direct Loan
including, but not limited to, tax refund
offset proceedings under 34 CFR 30.33,
wage garnishment proceedings under
section 488A of the HEA, salary offset
proceedings for Federal employees
under 34 CFR part 31, and consumer
reporting proceedings under 31 U.S.C.
3711(f).
The other regulatory alternative,
specified in the proposed amendatory
language, would allow for both
affirmative claims from borrowers not in
a collections action and defensive
claims. If we do accept affirmative
claims, we would need to develop
appropriate deterrents to frivolous
claims. At a minimum, the Department
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would revise the affirmative claim
review process to provide institutions
with a reasonable opportunity to see
and respond to borrower claims and
would require the borrower to sign a
waiver that allows the institutions to
provide the Department with any
information from the borrower’s
education record that is relevant to the
claim. The Department could also limit
the period of time after a borrower
leaves an institution during which a
borrower could make an affirmative
claim. Given the Department’s longstanding requirement that institutions
retain certain documents for only three
years, the Department could limit
claims to the three-year period
following the borrower’s departure from
the institution to ensure that the
institution would have access to records
that could be relevant to their defense.
The Department seeks public comment
on ways to balance the need to serve
borrowers with the need to limit
unsubstantiated claims and provide an
opportunity for the institution to
provide evidence in its own defense.
Borrower Defense to Repayment—
Assertion of Defenses to Repayment in
Collection Proceedings and Federal
Standard for Asserting a Borrower
Defense to Repayment
Statute: Section 455(h) of the HEA
authorizes the Secretary to specify in
regulation which acts or omissions of an
institution of higher education a
borrower may assert as a defense to
repayment of a Direct Loan.
Current Regulations: Section
685.206(c) establishes the conditions
under which a Direct Loan borrower
may assert a defense to repayment, the
relief afforded by the Secretary in the
event the defense is successful, and the
Secretary’s authority to recover from the
school any loss that results from a
defense to repayment discharge granted
by the Department. Specifically,
§ 685.206(c)(1) provides that a borrower
may assert a defense to repayment based
upon any act or omission of the school
that would give rise to a cause of action
against the school under applicable
State law. The borrower may raise such
defense to repayment during a
proceeding by the Department to collect
on a Direct Loan, including, but not
limited to, tax refund offset proceedings
under 34 CFR 30.33, wage garnishment
proceedings under section 488A of the
HEA, salary offset proceedings for
Federal employees under 34 CFR part
31, and consumer reporting proceedings
under 31 U.S.C. 3711(f). Under the
current regulations, since 2015, the
Department has accepted affirmative
claims, i.e., those not in collection
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proceedings. Under 34 CFR
685.206(c)(2), if a borrower defense to
repayment discharge is approved, the
borrower is relieved of the obligation to
pay all or part of the loan and associated
costs and fees, and may be afforded
such further relief as the Secretary
determines is appropriate, including,
among other things, reimbursement of
amounts previously paid toward the
loan.
Proposed Regulations: Proposed
§ 685.206(c) would specify that, with
respect to Direct Loans disbursed prior
to July 1, 2019, the State law standard
would continue to apply. Proposed
paragraph (c) maintains that a borrower
defense to repayment of these loans may
be asserted in proceedings including,
but not limited to, tax refund offset
proceedings, wage garnishment
proceedings, salary offset proceedings
for Federal employees, and consumer
reporting agency reporting proceedings,
but includes clarifications as to
statutory and regulatory authorities for
those specified proceedings.
Proposed § 685.206(d) would
establish a new uniform standard not
based upon applicable State law, also
referred to here as the ‘‘Federal
standard’’ for a borrower’s defense to
repayment discharge on a Direct Loan
first disbursed on or after July 1, 2019.
First, § 685.206(d)(1) would define
terms applicable to the Federal
standard, including the term ‘‘borrower
defense to repayment.’’ Consistent with
the Department’s current interpretation
that it is not appropriate for the taxpayer
to face potential loss based on action by
schools in matters unrelated to the
Department’s loan programs, this
definition would provide that a
borrower defense to repayment
discharge must directly and clearly
relate to the making of the Direct Loan,
or the making of a loan that was repaid
by a Direct Consolidation Loan, for
enrollment at a school or the provision
of educational services for which the
loan was obtained. In addition, we
clarify that for the purposes of this
paragraph, ‘‘borrower’’ includes the
student who attended the institution for
whom Direct Loans (Parent PLUS) were
obtained by a parent. Further, under this
proposed definition, a ‘‘borrower
defense to repayment’’ would be
considered to include both a defense to
repayment of amounts owed to the
Secretary on a Direct Loan and
reimbursement of payments previously
made to the Secretary on the Direct
Loan. Proposed § 685.206(d)(1) also
would define the terms ‘‘provision of
educational services’’ and ‘‘school’’ and
‘‘institution.’’
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Parallel to the current regulation, the
proposed regulations provide that for
loans first disbursed on or after July 1,
2019, a borrower may assert a defense
to repayment ‘‘defensive’’ claim as part
of a proceeding related to certain actions
by the Department to collect on a Direct
Loan, including tax refund offset
proceedings under 26 U.S.C. 6402(d), 31
U.S.C. 3716 and 3720A; wage
garnishment proceedings under section
488A of the Act or under 31 U.S.C.
3720D and 34 CFR part 34; salary offset
proceedings for Federal employees
under 34 CFR part 31, 5 U.S.C. 5514,
and 31 U.S.C. 3716; and consumer
reporting agency reporting proceedings
under 31 U.S.C. 3711(e). This language
is reflected in proposed
§ 685.206(d)(2)—Alternative A.
The Department is also considering
accepting ‘‘affirmative’’ claims from
borrowers not in a collections action.
Proposed regulatory language for this
approach is set forth in
§ 685.206(d)(2)—Alternative B. Like
Alternative A, Alternative B proposes to
consider both affirmative and defensive
claims under a preponderance of the
evidence standard. But the Department
seeks comment on whether claims
under this regulatory alternative should
have to be supported by clear and
convincing evidence, rather than a
preponderance of the evidence. Such a
standard might be appropriate, as it is
the standard used in most States for
adjudicating fraud litigation and could
deter some frivolous affirmative claims.
See Restatement (Third) of Torts: Liab.
for Econ. Harm section 9 TD No 2 (2014)
(‘‘The elements of a tort claim ordinarily
must be proven by a preponderance of
the evidence, but most courts have
required clear and convincing evidence
to establish some or all of the elements
of fraud.’’)
The Department is interested in
comments regarding the benefits or risks
of these proposals. The Department also
seeks public comments regarding other
mechanisms that could be utilized to
discourage the submission of frivolous
claims, which are costly for the
Department and institutions to
adjudicate. Such mechanisms could
include limiting the period of time after
a borrower leaves an institution during
which a defense to repayment claim can
be submitted (such as imposing a 3 year
limit on borrower defense to repayment
claims to align with the Department’s 3
year record retention requirement).
Under this proposed regulation, the
Department would develop a claim
review process for either (or both)
defensive or affirmative claims that
would provide institutions with a
reasonable opportunity to see and
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respond to borrower claims. The
Department proposes, for example, to
require the borrower to sign a waiver
that allows the institution to provide the
Department with any information from
the borrower’s education records that is
relevant to the claim. The Department
also proposes to require borrowers to
submit information about whether, for
reasons other than the education
received, the borrower has been
removed from a job due to on-the-jobperformance, disqualified from work in
the field for which the borrower trained,
or worked less than full-time in the
chosen field. Such circumstances would
not disqualify a borrower from a
successful defense to repayment, but
might be relevant to determining
whether the asserted financial harm was
in fact caused by an alleged
misrepresentation.
The proposed regulations also would
remind borrowers submitting
affirmative or defensive claims that if
the borrower receives a 100 percent
discharge for the loan, the institution
has the right to withhold an official
transcript for the borrower, as has
always been the case in instances in
which the borrower has been awarded
student loan discharge through false
certification, closed school or defense to
repayment discharge.
The Department also welcomes
comments regarding the process the
Department might use to collect
evidence from borrowers and schools, to
evaluate the merits of a borrower’s
defense to repayment claim, and to
render decisions on claims that are
submitted affirmatively.
Under proposed § 685.206(d)(4), a
borrower defense to repayment related
to a loan that was repaid by a Direct
Consolidation Loan disbursed on or
after July 1, 2019, would be evaluated
under the proposed Federal standard.
Although this approach may result in
different treatment of some borrowers
who took out loans before this NPRM,
such differences in treatment would
arise only if the borrower chose to take
out a new Direct Consolidation Loan
after July 1, 2019. This is consistent
with the longstanding treatment of
consolidation loans as new loans. The
Department is interested in comments
as to whether this structure would likely
lead borrowers to engage in, or borrower
advocates to encourage, strategic default
for the sole purpose of asserting a
defense to repayment. Proposed
§ 685.206(d)(5) includes two alternatives
relating to affirmative and defensive
claims.
Section 685.206(d)(5)(i) and (ii)—
Alternative A provides that the
Secretary will approve the borrower’s
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defense to repayment claim if a
preponderance of the evidence
establishes that the school at which the
borrower was enrolled made a
misrepresentation, upon which the
borrower reasonably relied under the
circumstances in deciding to obtain a
Direct Loan (or a loan repaid by a Direct
Consolidation Loan) for the student to
enroll in a program at the school which
resulted in financial harm to the
borrower. The proposed regulations in
§ 685.206(d)(5) would define
misrepresentation as a statement, act, or
omission by the eligible institution to
the borrower that is (i) false, misleading,
or deceptive, (ii) made with knowledge
of its false, misleading, or deceptive
nature or with a reckless disregard for
the truth, and (iii) directly and clearly
related to the making of a Direct Loan
for enrollment at the school or to the
provision of educational services for
which the loan was made. Proposed
section 685.206(d)(5)(i) and (ii)—
Alternative B contains the same
language with respect to defensive
claims and extends the proposed
standard to affirmative claims.
Proposed § 685.206(d)(5)(iii) sets forth
that the Secretary may consider
additional information when evaluating
a claim. Proposed § 685.206(d)(5)(iv)
would provide additional information
about what may constitute a
preponderance of the evidence of a
misrepresentation and evidence of
financial harm. The Department is
interested in comments as to whether it
should require clear and convincing
evidence of misrepresentation and
financial harm (as opposed to a
preponderance of the evidence of
misrepresentation and financial harm)
in the event it continues to consider
affirmative claims.
Proposed § 685.206(d)(6) would
clarify that a school’s violation of an
eligibility or compliance requirement in
the HEA or the Department’s
implementing regulations is not a basis
for a borrower defense to repayment
unless that conduct would, by itself,
establish a basis for a defense to
repayment. Proposed § 685.206(d)(6)
also lists other circumstances that
would not suffice to establish a defense
to repayment under the proposed
Federal standard.
Reasons: During the public hearings
and negotiated rulemaking sessions, the
Department heard from representatives
from a broad range of constituencies on
what they thought was an appropriate
basis for a borrower defense to
repayment. At the negotiated
rulemaking sessions, negotiators
expressed a shared desire to develop a
regulation that would provide for fair
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treatment of borrowers who had been
harmed by an act or omission of a
school, but differed widely in their
views of how this might be achieved.
The Department began negotiations by
asking whether we should establish a
Federal standard for evaluating future
borrower defense to repayment
applications.
Defense to Repayment––Assertion of
Borrower Defenses
As part of the discussions of a Federal
standard, negotiators debated whether
borrowers should be allowed to assert
defenses to repayment affirmatively—in
other words, at any point of time
regardless of whether the borrower’s
loan is in default and the subject of
Department collection proceedings—or
only defensively, during such collection
proceedings. Many negotiators were in
favor of permitting borrowers to pursue
affirmative claims to allow borrowers an
opportunity to rectify the harm
stemming from an act or omission of a
school. One negotiator noted that the
current regulation implies that a
borrower raises a defense to repayment
in response to collection activities and
asked what, if any, discretion the
Department might have to interpret the
regulation more broadly. Another
negotiator asserted that she understood
that the Department did not interpret
the current regulation to limit claims to
borrowers who are in default and that it
had allowed affirmative applications to
be submitted by borrowers.
From 1994 to 2015, the Department’s
regulation—as per earlier negotiated
rulemaking—provided defense to
repayment loan discharge opportunities
only to borrowers who were in a
collection proceedings. As a matter of
practice, starting in 2015 and later
codified in the 2016 regulations, the
Department has (primarily in response
to the closure of Corinthian Colleges,
Inc.) accepted borrower defenses to
repayment requests asserted
affirmatively outside of the collection
proceedings specifically listed in the
existing regulation.
We are now considering that for loans
first disbursed on or after July 1, 2019,
the Department return to the pre-2015
interpretation such that borrowers may
only submit applications in connection
with one of the specific collection
proceedings listed in current
§ 685.206(c). The language of both the
statute and existing regulations on
borrower defenses is consistent with
this approach, and the Department
believes it may better balance the
competing interests of borrowers and
taxpayers. Under this approach, the
Department would view the assertion of
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defenses to repayment as a last resort for
borrowers, with disputes between
borrowers and schools primarily
resolved by those parties in the first
instance. The proposal to allow
borrowers to assert defenses to
repayment during the enumerated
Department collection proceedings, and
not as affirmative claims at any point in
time, aligns with the Department’s 20
year prior practice and protects
taxpayers from liabilities that should be
leveraged first against the institutions
that committed acts or omissions
covered by the defense to repayment
provision.
Section 455(h) of the HEA provides
that ‘‘a borrower may assert . . . a
defense to repayment of a loan made
under [the Direct Loan Program],’’ on
the basis of an act or omission of a
school, as specified by the Secretary. 20
U.S.C. 1087e(h) (emphasis added). The
current regulations implementing the
statutory provision reflect the
Department’s understanding at the time
of the rule’s promulgation in 1994 that
the statute directs the Department to
provide borrowers with a defense to
repayment, as part of certain
Department collection actions. See 34
CFR 685.206(c)(1) (‘‘In any proceeding
to collect on a Direct Loan, the borrower
may assert [ ] a defense to repayment
. . . These proceedings include, but are
not limited to, the following . . .’’
(emphasis added)). The proceedings
referenced in the regulation only occur
after a borrower defaults on a loan.
The Department processed a small
number of defense to repayment claims
from borrowers in a collections
proceeding under the existing regulation
from 1994 through 2015. In response to
the closure of Corinthian Colleges, Inc.
(CCI) in 2015, however, the Department
changed its position and began to accept
borrowers’ requests for the type of relief
(loan discharges and certain further
relief) provided under 34 CFR
685.206(c), even before the borrower
defaulted on a loan—or, in other words,
the Department allowed borrowers to
affirmatively assert borrower defense
claims. As a result, the Department was
flooded with tens of thousands of
borrower defense claims before it had
promulgated new regulations that
officially notified the public of this new
interpretation or established a
mechanism or structure under which to
adjudicate the large volume of claims.
After further consideration of the
history and regulatory provisions
governing borrower defenses, the
Department believes that it may be
appropriate to provide in the proposed
regulations that, for loans first disbursed
after the proposed rules’ anticipated
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effective date of July 1, 2019, borrowers
may request a loan discharge and
related relief under the proposed
Federal misrepresentation standard for
such requests only by asserting such
defense in a proceeding to collect on the
loan by the Department (i.e., a tax
refund offset proceeding, a wage
garnishment proceeding, a salary offset
proceeding for a Federal employee, or a
consumer reporting agency reporting
proceeding).
As noted above, this proposal is
squarely within the Department’s
authority under section 455(h) of the
HEA to ‘‘specify in regulations which
acts or omissions of an institution of
higher education a borrower may assert
as a defense to repayment’’ of a Direct
Loan. 20 U.S.C. 1087e(h) (emphasis
added). It is also consistent with the
Department’s direction that students
should use processes already in place at
schools, as well as at accrediting
agencies and State authorizing agencies,
to resolve issues relating to the services
provided by the institution as quickly as
possible following any incident, rather
than delaying corrective action and
shifting the financial burden to the
taxpayer.
This differs from the approach taken
in the 2016 final regulations. In those
regulations, the Department took the
approach it had adopted in 2015 to
allow affirmative defense to repayment
claims and accordingly would have
removed language referencing the
Department’s collection proceedings as
the forum for a borrower’s assertion of
a defense to repayment. The Department
continues to consider whether to accept
affirmative claims from borrowers, as
opposed to only accepting defensive
claims from borrowers during a
specified collection proceeding.
However, the Department believes that
if it were to allow affirmative claims, it
would need to also consider appropriate
deterrents to frivolous claims.
The Department is concerned that in
the event of affirmative claims, it is
relatively easy for a borrower to submit
an application for loan relief, even if the
borrower has suffered no harm, on the
chance that perhaps some amount of
loan forgiveness will be awarded.
Although the barriers to submitting a
claim are low for borrowers, the
collective burden of numerous
unjustified claims could be significant
for both the Department and
institutions. This could delay our efforts
to review and provide loan relief to
borrowers who have been genuinely
harmed. The Department seeks
comment on how it could continue to
accept and review affirmative claims,
but at the same time discourage
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borrowers from submitting unjustified
claims. One idea is to increase the
evidentiary standard to ‘‘clear and
convincing’’ for affirmative claims. The
Department seeks comment on whether
or not this evidentiary standard would
be appropriate to balance the need to
serve borrowers who have been harmed
and the need to reduce the number of
unjustified claims students might
otherwise submit. If such a standard is
warranted, the Department also seeks
comment about whether it should
continue to evaluate defensive claims
under the preponderance of the
evidence standard and on the rationale
for having two different evidentiary
standards.
The Department believes that, even if
it continues to accept affirmative claims,
it must also accept defensive claims so
both students in repayment and
students in collections have access to
remedies for instances of fraud.
Defense to Repayment—Federal
Standard (Provision of Educational
Services and Relationship With the
Loan)
The language we propose in this
NPRM clarifies that the
misrepresentation of a school forming
the basis of a borrower defense to
repayment discharge must directly and
clearly relate to the making of a Direct
Loan for enrollment at the school or the
provision of educational services for
which the loan was made. This language
reflects the Department’s consistent
position, as explained in a Notice of
Interpretation issued in 1995 (60 FR
37769) and adopted in the 2016 final
regulations (81 FR 76080 (revised 34
CFR 685.206(c)(1)), 76083 (new 34 CFR
685.222(a)(5))), that the Department will
acknowledge a borrower defense to
repayment only if it directly relates to
the loan or to the school’s provision of
educational services for which the loan
was provided.
Some non-Federal negotiators
requested that the regulation define the
term ‘‘provision of educational services’’
and include a reference to educational
resources. Another non-Federal
negotiator noted that the Department
has made its understanding of this term
‘‘provision of educational services’’
clear in the regulatory history for the
borrower defense regulation and that
there are well-developed bodies of State
law that explain this term.
The Department agrees that the term
‘‘provision of educational services’’ is
open to interpretation and, in proposed
§ 685.206(d), we define that term as ‘‘the
educational resources provided by the
institution that are required by an
accreditation agency or a state licensing
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or authorizing agency for the
completion of the student’s educational
program.’’ We thus intend for a
misrepresentation relating to the
‘‘provision of educational services’’ to
be clearly and directly related to the
borrower’s program of study. We also
intend misrepresentation to include
items such as the nature of the school’s
educational program or related
resources required by an accreditor or
licensing authority, the nature of the
school’s financial charges, the
advertised outcomes (including job
placement rates, licensure pass rates,
and graduation rates) of prior graduates
of the school’s educational program, an
institution’s published rankings or
selectivity statistics, the eligibility of
graduates of the educational program for
licensure or certification, the State
agency authorization or approval of the
school or educational program, or an
accreditor approval of the school or
educational program.
Defense to Repayment—Consolidation
Loans
The Department proposes that for a
Direct Consolidation Loan first issued
on or after the anticipated effective date
of these regulations, a borrower may
assert a defense to repayment under the
proposed Federal standard (discussed
below). Under the Department’s existing
regulation at 34 CFR 685.220, a
borrower may consolidate certain
specified loans into a Direct
Consolidation Loan. Generally, the
Department views a consolidation loan
as a new loan, distinct from the
underlying loans that were paid in full
by the proceeds of the Direct
Consolidation Loan. The Department’s
borrower defense authority is part of the
Direct Loan Program, see 20 U.S.C.
1087e(h) (‘‘[A] borrower may assert . . .
a defense to repayment of a loan made
under this part [as to the Direct Loan
Program]’’) and Direct Consolidation
Loans are made under the Direct Loan
Program. As a result, the Department’s
existing practice is to provide relief
under the Direct Loan authority if the
underlying loans have been
consolidated under the Direct Loan
Program into a Direct Consolidation
Loan. Or, if consolidation is being
considered depending on the outcome
of any preliminary analysis of whether
relief might be available under 34 CFR
685.206(c), relief is not actually
provided until the borrower’s loans
have been consolidated into a Direct
Consolidation Loan.
The Department’s proposal clarifies
the Department’s position and the
standard that it proposes to use to
evaluate a Direct Consolidation Loan
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borrower’s defense to repayment claim.
The Department will consider a
misrepresentation that the borrower
reasonably relied upon under the
circumstances in deciding to obtain the
underlying loan repaid by the Direct
Consolidation Loan, for the student to
enroll or continue enrollment in a
program at an institution.
The Department’s standard is
designed to provide borrowers with
relief for the misrepresentations made
with either knowledge of their false,
misleading, or deceptive nature, or with
a reckless disregard for the truth. Where
misconduct of such nature has been
demonstrated, the Department believes
it is appropriate to provide borrowers
with relief, regardless of whether the
underlying loan is a Direct Loan.
However, given that the Department’s
borrower defense authority is part of the
Direct Loan Program, see 20 U.S.C.
1087e(h) (‘‘[A] borrower may assert . . .
a defense to repayment of a loan made
under this part [as to the Direct Loan
Program]’’), the Department will only
consider providing such relief if the
underlying loans were themselves
Direct Loans or have been consolidated
under the Direct Loan Program, into a
Direct Consolidation Loan. If a defense
to repayment was approved on a Direct
Consolidation Loan, borrowers would
receive a discharge of the remaining
balance on their Direct Consolidation
Loan in an amount proportionate to the
amount of the underlying loan at issue
and would receive proportionate
reimbursements of any payments made
to the Secretary on the underlying loan
or the Direct Consolidation Loan. See
Hiatt v. Indiana State Student
Assistance Comm. (In re Hiatt), 36 F.3d.
21, 24 (7th Cir., 1994) and In re
McBurney, 357 B.R. 536, 538 (9th Cir
BAP, 2006), supporting the
consideration of consolidation loans as
new loans.
Under the Department’s proposal, the
standard that would be applied to
determine if a defense to repayment has
been established is the Federal standard
for Direct Consolidation Loans first
disbursed after July 1, 2019. The 2016
final regulations would have similarly
applied a Federal standard to some
underlying loans that were not Direct
Loans, but it would have done so based
upon the underlying loans’ date of first
disbursement. Thus, under the 2016
final regulations, the same claim might
have required the application of
different standards to different
underlying loans, if the borrower had
both underlying Direct Loans and loans
that are not Direct Loans. The
Department believes that the language it
proposes in this NPRM is more
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consistent with the Department’s
longstanding policy regarding the
treatment of consolidated loans, would
be more easily understood, would create
less confusion for schools and
borrowers, and would be easier to
administer for the Department. Further,
as a consolidation loan is a new loan,
the Department believes it is
appropriate to apply the date of first
disbursement of that loan to determine
what standard would apply. The
Department understands that this
approach may deter some borrowers
who might otherwise wish to
consolidate their loans but do not wish
to be subject to the proposed standard
and associated time limits. But the
Department believes that this concern is
outweighed by the benefits of this
standard. In all events, as under the
existing regulations, a borrower would
be able to choose consolidation if he or
she determines it is the right option for
the borrower. The Department invites
comment on this approach.
Defense to Repayment—Federal
Standard (Misrepresentation)
In this rulemaking, the Department is
proposing an exclusively Federal
standard not based in State law for loans
disbursed after July 1, 2019, for ease of
administration and to provide fair,
equitable treatment for all borrowers
regardless of the State in which the
school is located or the student was in
residence while enrolled or while in
repayment. That Federal standard
differs somewhat from the ‘‘substantial
misrepresentation’’ standard adopted in
the 2016 final regulations and drawn
from more general enforcement
contexts. 81 FR 75939–75940. It also
differs somewhat from the proposal that
the Department offered during
negotiations, in that it relies solely on
misrepresentation as the basis for
discharge, rather than also allowing
final judgments to serve as a basis for
discharge. As discussed in more detail
below, the Department believes that the
standard it proposes will provide more
equitable treatment for borrowers and
ease of administration for the
Department.
During discussions relating to the
Federal standard for borrower defense to
repayment applications, negotiators
disagreed about whether to establish a
Federal standard at all. Some
negotiators expressed opposition,
arguing that protecting consumers and
ensuring the educational quality of
schools licensed to operate by the State
are the responsibilities of the States.
Other negotiators noted that a Federal
standard not based in State law could
disadvantage borrowers. Many States’
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consumer protection laws might be
more favorable to borrowers than the
Federal standard proposed by the
Department (discussed immediately
below). These negotiators also noted
that the proposed Departmental process
to adjudicate claims under a Federal
standard would not provide borrowers
with the benefit of a discovery process
like the one that exists in judicial
proceedings. Still, many negotiators
supported establishing a Federal
standard, arguing that doing so would
provide clarity, uniformity of borrower
treatment, and ease of administration.
Some negotiators stated that the
Department should adopt a structure
under which a Federal standard would
serve as a minimum standard, but with
the Department also evaluating whether
a borrower defense claim would receive
more favorable treatment under
applicable State law and then applying
the more favorable standard to the
borrower defense claim.
The Department is persuaded that an
exclusively Federal standard for
borrower defense to repayment
applications is appropriate. The
Department’s primary reason for
proposing a Federal standard for
borrower defenses to repayment is that
Direct Loans are Federal assets and the
benefits of such loans should be
established by Federal law. In addition,
the Department believes that using a
Federal standard will reduce the burden
on borrowers and the Department.
Applying a State law-based standard
means that borrowers have to determine
which State law applies to their claim
and the Department has to review that
determination. Moreover, borrowers in
some States may have access to more
favorable law than borrowers in other
States for the same Federal defense to
repayment. In contrast, applying a
Federal standard will eliminate the
issue of what law applies and ensure
that all borrowers’ claims are evaluated
under the same rules.
The Department’s proposed Federal
standard is a modified version of the
proposal it offered at the negotiated
rulemaking sessions. The Department’s
proposal during negotiations would
have included two different bases for a
borrower to assert a defense to
repayment for loans first disbursed on
or after July 1, 2019: (1) A final,
definitive judgment by a State or
Federal court of competent jurisdiction,
rendered in a contested proceeding,
where the borrower was awarded
monetary damages against the
institution relating to the student’s
enrollment at the subject institution or
the provision of educational services for
which the loan was obtained, and (2)
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generally, a misrepresentation by the
school made with intent to deceive,
knowledge of the falsity of the
misrepresentation, or a reckless
disregard for the truth, and that resulted
in financial harm to the borrower. In
this NPRM, the Department now
proposes a modified version of the
second basis for relief—a
misrepresentation standard, as
discussed in depth below.
With regard to the misrepresentation
standard, negotiators disagreed on the
appropriate definition of
‘‘misrepresentation’’ and whether the
borrower should be required to prove
the school’s intent, knowledge of falsity,
or reckless disregard for the truth. Some
negotiators argued that it would be
difficult for a borrower to prove that a
school had acted with the requisite
intent or had knowledge of the falsity of
the misrepresentation, and that it would
also be difficult for a borrower to
demonstrate that the school had
engaged in a level of misconduct that
would amount to a ‘‘reckless disregard
for the truth.’’ These negotiators argued
in favor of a standard that would enable
borrowers to avail themselves of the full
range of States’ consumer protection
laws that prohibit certain unfair and
deceptive conduct (commonly known as
‘‘unfair and deceptive trade acts and
practices’’ or ‘‘UDAP’’ laws). Some
negotiators argued the Department
should not approve borrower defenses
and also hold a school liable for losses
from approvals of misrepresentationbased defenses to repayment, if the
school had committed an inadvertent
mistake or if the misrepresentation had
been made by an employee acting
without the school’s knowledge or
against the school’s direction.
The 2016 final regulations provided
that a borrower may assert a borrower
defense for a ‘‘substantial
misrepresentation’’ as defined in the
Department’s regulation at 34 CFR
668.71, if the school, any of its
representatives, or any institution,
organization, or person with whom the
school has an agreement for specified
services made such a substantial
misrepresentation that the borrower
reasonably relied on to the borrower’s
detriment in deciding to attend, or
continue attending, the school or in
deciding to take out a Direct Loan. See
81 FR 76083 (text for 34 CFR
685.222(d)). The 2016 final regulations
also included a non-exclusive list of
circumstances for a Department official
to consider in determining whether the
borrower’s reliance was reasonable.
Under those regulations, a borrower
would be able to assert such a borrower
defense to recover funds previously
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collected by the Secretary not later than
six years after the borrower discovered,
or reasonably could have discovered,
the substantial misrepresentation. The
borrower would also be able to assert a
defense to any outstanding amounts
owed on the loan at any time.
The ‘‘substantial misrepresentation’’
definition was drawn from § 668.71,
which permits the Department to bring
an enforcement action for a substantial
misrepresentation in the form of a
suspension, limitation, termination, or
fine action. The section generally
defines a misrepresentation as any false,
erroneous, or misleading statement
made by a school, and it defines a
misleading statement to include any
orally or visually made statement, or
one that is made in writing or by other
means, that has the likelihood or
tendency to deceive. It then defines a
‘‘substantial misrepresentation’’ as any
misrepresentation on which the person
to whom it was made could reasonably
be expected to rely, or has relied, to that
person’s detriment. The 2016 final
regulations amended the language of
§ 668.71 to explicitly note that an
omission of information can amount to
a misrepresentation. 81 FR 76072 (text
of language added to 34 CFR 668.71). As
stated above, while a substantial
misrepresentation under current
§ 668.71 includes misrepresentations
that a person had relied upon or could
reasonably have been expected to rely
upon, for the purposes of borrower
defense to repayment under the 2016
final regulations, a substantial
misrepresentation would have been
found only if the person had, indeed,
reasonably relied upon the
misrepresentation to his or her
detriment.
In this NPRM, the Department
proposes a different Federal standard for
defenses to repayment based upon
misrepresentations by an institution to
the borrower. Under the proposed
standard, a misrepresentation is a
statement, act, or omission by an
eligible institution to a borrower upon
which the borrower reasonably relies
that is false, misleading, deceptive, and
made with knowledge of its false,
misleading, or deceptive nature or with
reckless disregard for the truth and
directly and clearly related to the
making of a Direct Loan, or a loan
repaid by a Direct Consolidation Loan,
for enrollment at the school or to the
provision of educational services for
which the loan was made. The vast
majority of the borrower defense claims
filed since 2015 have alleged that the
school at issue made statements to the
borrower that amount to
misrepresentations under State law. As
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a result, we believe it is appropriate to
base the Federal standard upon a
school’s misrepresentations. We have
removed breach of contract or State law
judgment as a standard for borrower
defense relief since breach of contract or
a State law judgment may be for actions
or events not directly related to the
educational services provided by the
institution, and therefore do not qualify
for relief under borrower defense to
repayment. That said, a State law
judgment could serve as evidence
provided by a borrower in filing a
borrower defense to repayment
application.
Nothing in this proposed regulation
attempts to prevent a borrower from
taking action against an institution of
higher education based on State law.
However, for the purpose of evaluating
a borrower’s defense to repayment
claim, only the new Federal standard
will be considered.
The proposed standard takes the same
position as in the 2016 final regulations
that certain persons and institutions
affiliated with a school may make
misrepresentations leading to a
borrower defense to repayment under
circumstances generally understood to
render those misrepresentations
attributable to the school.
In the 2016 final regulations, the
Department declined to include a
requirement that the borrower prove
that the school had acted with intent in
making the misrepresentation. In the
preamble to those regulations, the
Department also specifically declined to
include any requirement that the
Department find that the school had
knowledge of the misrepresentation. 81
FR 75947. The Department reasoned, in
2016, that it is more reasonable and fair
to have an institution be responsible for
the harm caused to borrowers as a result
of a misrepresentation, even if such a
misrepresentation is the result of
innocent or inadvertent mistakes. Id. at
75947–75948.
As was the case in the 2016 final
regulations, the Department does not
propose that a defense to repayment be
approved only when a school can be
shown to have made a
misrepresentation with the intent to
induce the reliance of the borrower on
the misrepresentation. The Department
agrees with negotiators that it is
unlikely that a borrower would have
evidence to demonstrate that an
institution had acted with intent to
deceive. But given its responsibility to
the Federal taxpayer, the Department
believes that defense to repayment
should be granted only where a
preponderance of the evidence shows
that a school has made a
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misrepresentation with either
knowledge of its falsity or with a
reckless disregard of the truth. The
Department’s proposal includes a nonexhaustive list of evidence that may
indicate that such a misrepresentation
took place. The Department believes
that this standard strikes a balance
between protecting borrowers by
establishing a standard of evidence that
is reasonable for a borrower to meet and
protecting the Federal taxpayer by
requiring a level of evidence that
ensures misrepresentation actually took
place and the student relied upon that
misrepresentation and suffered harm.
Like the 2016 final regulations, the
Department’s proposed
misrepresentation standard also covers
omissions. The Department believes that
an omission of information that makes
a statement false, misleading, or
deceptive can cause injury to borrowers
and can serve as the basis for a defense
to repayment. As it did in the 2016 final
regulations, the Department recognizes
that the reasonableness of a borrower’s
reliance on the misrepresentation may
depend upon the circumstances, and its
proposed rule thus states that the
Department will look at whether a
borrower reasonably relied upon the
misrepresentation ‘‘under the
circumstances.’’
Under the proposed alternative
regulations, which would return to the
practice of allowing borrower defense to
repayment applications only in
response to Department collection
proceedings, the proposed standard
differs from the time limitations
imposed under the 2016 final
regulations. Those regulations imposed
a six-year limitation period on a
borrower’s ability to raise a defense to
repayment claim for amounts previously
collected. Under the proposed standard,
a borrower may be able to assert a
defense to repayment at any time during
the repayment period, once the loan is
in collections, regardless of whether the
collection proceeding is one year or
many years after a borrower’s discovery
of the misrepresentation. The proposal
does not impose a limit on the
borrower’s ability to recover amounts
previously collected by the Department.
The Department considered an
alternative approach in which the
borrower would have only three years
following the end of enrollment at the
institution to assert a defense to
repayment claim. This three-year limit
corresponds to the three-year record
retention policy imposed by the
Department. It is unlikely that it would
take a borrower more than three years to
realize that he or she was harmed by
misrepresentations upon which the
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borrower relied to make an enrollment
decision. However, since collection
proceedings can be initiated at any time
during the repayment period, the
current proposal similarly provides
borrowers with the opportunity to assert
a defense to repayment during a
collection proceeding, regardless of how
many years after enrollment that
proceeding is commenced. In the event
that the Department is persuaded by
public comments provided in response
to this NPRM to continue accepting
affirmative claims, the Department
proposes to implement a three-year
limit on filing claims after the end of the
borrower’s enrollment at the institution
accused of misrepresentation.
The proposed standard also differs
from the 2016 final regulations in that
it does not include breach of contract or
a State law judgment as a standard for
defense to repayment. Although those
standards are utilized by the
Department in enforcement actions, and
breach of contract or a State law
judgment could be used as evidence to
substantiate a borrower defense claim,
breach of contract or a State law
judgment, alone, does not automatically
qualify a borrower for borrower defense
to repayment relief since these may
pertain to actions or activities other than
the institution’s provision of
educational services.
Some negotiators noted that consumer
protection laws governing
misrepresentations are generally the
province of the States, but the
Department’s proposed Federal standard
would not invade that province. The
proposed Federal standard would not
prevent a borrower from pursuing a
claim against a school based on a
violation of State law. It simply would
not provide for that claim to be the basis
of a borrower defense to repayment
claim. Thus, it would leave such State
law claims to be pursued through
arbitration, State courts, or other
administrative bodies responsible for
adjudicating them.
Other negotiators expressed concern
that changes to a financial aid award
letter not be construed as
misrepresentations, and the Department
agrees that such changes ordinarily
would not qualify as
misrepresentations. For example, if a
financial aid award letter changes as a
result of a change in the borrower’s
financial circumstances, the Department
would not consider the change to form
the basis of a borrower defense to
repayment claim under our proposed
regulations.
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Borrower Defense—Judgments and
Breach of Contract
During the negotiations, the
Department discussed using a nondefault, contested Federal or State court
judgment issued by a court of competent
jurisdiction, as a possible basis for
borrower defense claims. Negotiators
expressed support generally for a
judgment-based standard as one basis
for a claim, but some negotiators
expressed concern that lawsuits based
on the acts or omissions of a school
have often been concluded by default
judgments that did not result from a
contested proceeding or by settlement.
Some negotiators also expressed the
concern that borrowers may not have
the resources to bring such lawsuits or
that the schools may require borrowers
to execute agreements that would
prevent such lawsuits. They urged that
the Department accept judgments
obtained by government entities, such
as State Attorneys General. However,
since Direct Loans are Federal assets,
only the Federal government has the
authority to relieve a borrower of his or
her repayment obligation. Therefore,
although a State law judgment could
serve as evidence to support a borrower
defense to repayment claim, the
judgment alone would not be sufficient
to grant automatic relief.
The Department had included nondefault, favorable contested judgments
as a basis for a borrower defense claim
for loans first disbursed after the
anticipated effective date of the 2016
final regulations. In the preamble to
those regulations, the Department stated
that while it does not anticipate such
judgments to be common, such a
standard would allow the Department to
continue to recognize State law causes
of action, without putting the burden on
the Department to interpret and apply
States’ laws. 81 FR 75941–75942.
However, this does not alleviate the
inequities that can result if, as a result
of differences in State laws, two
borrowers who have suffered equal
harm as the result of the same
misrepresentation receive different
treatment. Therefore, in this regulation
we propose a single Federal standard
that would ensure equal treatment of
borrowers regardless of where they live
or their school is located.
The Department acknowledges
negotiators’ concerns that some court
cases do not result in contested, nondefault judgments, such as where the
institution chooses to settle pending
litigation or an arbitration proceeding
and satisfies the claim pursuant to a
settlement agreement or consent
judgment, or where an insurer for the
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institution satisfies the claim. But the
Department believes this concern is less
pressing for these regulations, which do
not propose a judgment-based standard
for a defense to repayment claims. The
Department also acknowledges that
private parties often settle disputes
among themselves without court action.
The Department believes that it is
preferable for a school (or its insurer, if
such coverage exists) to satisfy a student
borrower’s meritorious claims of
misrepresentation against it and to
provide appropriate relief directly to the
student borrower for the school’s own
actions where it is merited. A borrower
who receives a favorable decision in
such a dispute but believes he or she
still has not received the relief to which
he or she is entitled may submit the
record of that dispute process and
decision as evidence in support of the
defense to repayment claim with the
Department. As part of its adjudication
of a defense to repayment, and if the
evidence is directly and clearly related
to the loan or to the school’s provision
of education services for which the loan
was provided, the Department may also
consider as evidence findings of fact by
a court of competent jurisdiction or
arbitrator, admissions of fact by the
school made in a court of competent
jurisdiction or arbitration, and court
orders.
During the negotiated rulemaking
sessions, one negotiator proposed
including breaches of contract as a basis
for borrower defense claims. In 2016,
the Department included breach of
contract as a basis for borrower defense
in recognition of lawsuits borrowers
have brought alleging breaches of
contract. 81 FR 39341. But the majority
of the defense to repayment applications
before the Secretary do not allege
breaches of contract, and the
Department believes it is appropriate in
these proposed regulations to tailor the
standard to the types of claims being
alleged by borrowers. Moreover, breach
of contract, as described in the 2016
regulations, would cover conduct
beyond the scope of defense to
repayment since breach of contract is
not limited to the provision of education
services. If the conduct underlying a
breach of contract would satisfy the
proposed requirements for a
misrepresentation, a borrower may
assert a defense to repayment for that
misrepresentation during a collection
proceeding. Or, prior to those
proceedings, a borrower may pursue
more expedient relief through a school’s
internal dispute process, arbitration, or
other legal proceeding.
While the Department is proposing a
new Federal standard based in
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misrepresentation for loans first
disbursed on or after the anticipated
effective date of the proposed
regulations, July 1, 2019, we are not
proposing any changes to the existing
State law standard (or, as noted above,
the context in which a defense to
repayment may be requested) for loans
first disbursed before the anticipated
effective date of these regulations.
Rather, for loans made on or before July
1, 2019, the Department proposes to
keep the State law-based standard in the
currently effective regulations. In the
event that a borrower enters into a
consolidation loan, the date on which
the loan was consolidated (prior to or
after July 1, 2019) determines whether
the Department will review a defense to
repayment claim based on a State law
standard or the proposed Federal
standard.
Borrower Defense—Evidentiary
Standard for Asserting a Borrower
Defense
During the negotiated rulemaking
sessions, negotiators were divided on
the evidentiary standard that should be
applied to borrower defense to
repayment claims adjudicated by the
Department under a Federal standard.
There were extensive discussions
regarding the meaning of, and
differences between, the terms ‘‘clear
and convincing evidence’’ and
‘‘preponderance of the evidence.’’ Some
negotiators argued that the evidentiary
standard should use terms that are
consistent with legal terminology and
precedent. Other negotiators advocated
using an evidentiary standard that is not
based on legal terminology and might be
clearer to individual borrowers. In
addition, several negotiators argued in
favor of an evidentiary standard based
on ‘‘clear and convincing evidence;’’
others argued that a ‘‘preponderance of
the evidence’’ standard would be fairer
to borrowers, since it would not require
a high level of evidence that borrowers
would be unlikely to be able to provide.
One negotiator noted that
preponderance of the evidence is the
typical standard that applies in civil
cases. Negotiators representing
consumer advocates asserted that the
Department’s proposal to apply a
preponderance of the evidence standard
that requires corroboration of the
borrower’s attestation would be harder
to satisfy than a simpler preponderance
of the evidence standard.
We preliminarily agree with
negotiators that, given the types of
evidence borrowers are likely to have in
their possession, a preponderance of the
evidence standard is appropriate. The
Department is accordingly proposing an
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evidentiary standard that requires the
borrower to establish by a
preponderance of the evidence that the
school at which the borrower enrolled
made a statement, act, or omission
directly and clearly related to
enrollment at the school or the
provision of educational services upon
which the borrower reasonably relied
under the circumstances in deciding to
obtain a Direct Loan to enroll or
continue enrollment in a program at the
school that resulted in financial harm to
the borrower.
As we noted in the 2016 final
regulations, the Department uses a
preponderance of the evidence standard
in other proceedings regarding borrower
debt issues. See 34 CFR 34.14(b), (c)
(administrative wage garnishment); 34
CFR 31.7(e) (Federal salary offset). We
believe that this evidentiary standard
strikes a balance between ensuring that
borrowers who have been harmed are
not subject to an overly burdensome
evidentiary standard and protecting the
Federal government, taxpayers, and
institutions from unsubstantiated
claims.
Proposed § 685.206(d)(5)(ii)—
Alternative A would provide that the
Secretary will find that the
preponderance of the evidence supports
the approval of a borrower defense to
repayment discharge when the
borrower’s attestation is supported by
sufficient evidence provided by the
borrower or otherwise in the possession
of the Secretary. The Secretary will
permit the institution to review and
respond to this evidence and will
consider the school’s response.
Alternative B for this section would
extend this standard to affirmative
claims as well.
Borrower Defense—Financial Harm
Consistent with its proposal during
the negotiated rulemaking sessions, the
Department proposes that a
misrepresentation may serve as a basis
for a borrower defense to repayment
only if the misrepresentation resulted in
financial harm to the borrower. During
discussions of this issue, some
negotiators argued that the act of taking
a Federal student loan should be
sufficient evidence of financial harm to
the borrower. These negotiators
suggested that, absent the
misrepresentation, the borrower may
have opted to not take a Federal student
loan.
The Department does not agree that
taking a Federal student loan, by itself,
is sufficient evidence of financial harm
to the borrower in the context of a
borrower defense to repayment.
Borrowers consider a variety of factors
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in choosing a school or program,
including not just cost, but also other
attributes of the school, such as its
facilities, convenience, and the
opportunity for the student to enroll in
his or her program of choice (which may
be unavailable to the student at other
institutions). The borrower has the
opportunity to compare schools’ and
programs’ relative costs and other
factors before committing to borrow and
repay a Federal student loan, and the
borrower has the opportunity to leave
an institution should it not provide
educational opportunities or
experiences commensurate with the
borrower’s expectations. Therefore, even
in the event of misrepresentation, the
borrower may not be successful in
receiving loan relief under the defense
to repayment regulation if that
misrepresentation was not the basis for
the borrower’s enrollment decision or it
did not cause subsequent financial
harm.
Moreover, the Master Promissory Note
signed by the borrower describes the
borrower’s obligation to repay the full
amount of the loan even if the student
borrower (or the student for whom a
PLUS loan was obtained) does not
complete the program, does not
complete the program within the regular
time for program completion, is unable
to obtain employment upon completion,
or is otherwise dissatisfied with or does
not receive the educational or other
services that the student borrower
purchased from the school. The
foregoing information is provided to
borrowers again during entrance
counseling.
As discussed earlier, some negotiators
were concerned that a borrower might
allege misrepresentation on the part of
the school based solely on a change in
the borrower’s financial aid award due
to changes in financial circumstances or
the availability of outside aid, such as
vocational rehabilitation funding. The
Department does not view such changes
to necessarily be evidence of a
misrepresentation on the part of the
school. Instead, the proposed
regulations specify that financial harm
may be established if, for example, there
were a significant difference between
the actual amount or nature of the
tuition and fees charged by the school
for which the Direct Loan was obtained
and the amount or nature of the tuition
and fees that the school represented to
the borrower the school would charge or
was charging. Similarly, financial harm
might be established if an institution
awarded sizeable grants or scholarships
to attract a student to an institution, but
then failed to continue such support
throughout the program (except in cases
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37259
in which the student failed to meet the
requirements of the scholarship or
grant), because the student could have
made the decision to enroll based on the
reasonable belief that scholarship or
grant support would continue. Such
misrepresentation could potentially
form the basis of a defense to repayment
claim.
Some negotiators advocated including
opportunity costs or the quality of
education as evidence of financial harm.
However, the Department believes these
assertions of financial harm are too
difficult to quantify to be used for that
purpose.
Under the 2016 final regulations, a
borrower was required to show that he
or she had reasonably relied upon the
misrepresentation to his or her
detriment. 81 FR 76083 (text of 34 CFR
685.222(d)(1)). The use of the word
‘‘detriment’’ echoed the definition for
substantial misrepresentation under the
Department’s regulation for its
enforcement activities for a school’s
misrepresentation under 34 CFR 668.71,
which was expressly cross-referenced
by the 2016 final regulations’ borrower
defense to repayment standard. While
the 2016 final regulations did not
include a definition for ‘‘detriment,’’ in
the preamble, the Department noted that
generally the term refers to any loss,
harm, or injury suffered by a person or
property. 81 FR 75951. Further, the
Department stated that there was no
quantum or minimum amount of
detriment required for borrower defense
under the substantial misrepresentation
standard and a school’s failure to
provide some element or quality of a
program that had been promised may be
such a detriment. Id.
Under the proposed Federal standard,
a borrower would be required to
demonstrate that the borrower had
suffered financial harm as a result of the
misrepresentation by the school, and
does not use the word ‘‘detriment.’’ As
the Department is not proposing to align
the Department’s enforcement
regulation at 34 CFR 668.71 for
misrepresentation to the borrower
defense to repayment standard, we do
not believe it is necessary to use the
same term in the proposed regulation.
Further, in light of the Department’s
interest in balancing the need to protect
both borrowers and Federal taxpayers,
the Department believes it is
appropriate to require that financial
harm, in the form of a monetary loss as
a result of the misrepresentation, be
present for a borrower defense to
repayment to be approved. As with the
2016 final regulations, however, the
Department does not believe it is
necessary for a borrower to demonstrate
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a specific level of financial harm, other
than the presence of such harm, to be
eligible for relief under the proposed
standard.
Borrower Defense—Filing Deadline for
Asserting a Borrower Defense Claim
During the negotiated rulemaking
sessions, negotiators discussed whether
to impose time limits on a borrower’s
ability to assert a borrower defense to
repayment and possible time periods for
such limits. Some negotiators expressed
concern that the imposition of a
limitation period would bar otherwise
valid borrower defenses to repayment,
even when the loan(s) in question
remained collectible under Federal law.
The proposed regulations do not
impose a statute of limitations on the
filing of a borrower defense to
repayment claim. However, a borrower
must comply with the filing deadlines
established for the different proceedings
in which a borrower defense claim may
be raised. For example, when the
Department intends to garnish a
borrower’s wages, the borrower is sent
a notice of the Department’s intention to
initiate wage garnishment and is
provided 30 days to request a hearing to
dispute that action. A borrower could
raise a defense to repayment claim
during that 30-day timeframe, but
would not be able to raise a claim after
that period has elapsed.
With our regulatory proposal to
accept defense to repayment claims
during the enumerated collection
proceedings, as opposed to the
regulatory proposal to accept both
defensive and affirmative claims, we do
not propose to incorporate the
timeframes for submission of borrower
defense to repayment claims that were
included in the 2016 final regulations.
As discussed previously, the 2016 final
regulations established time limits for
borrowers’ claims regarding recovery of
amounts previously collected, but
allowed defenses of repayment for
amounts owed to be brought at any
time. This NPRM instead enables
borrowers to assert claims during
collection proceedings, which can occur
at any time during the repayment
period. Borrowers can accordingly raise
their defenses whenever such
proceedings are instituted, but must
comply with the existing filing
deadlines for raising defenses in those
collections proceedings. The
Department proposes adopting the
existing filing deadlines for defensive
claims both because amending those
deadlines was beyond the scope of the
negotiated rulemaking and because
harmony of deadlines will reduce
confusion for borrowers.
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The filing deadlines for the various
proceedings in which a defensive
borrower defense claim may be raised
are reflected in the chart below:
Number of
days 3 for
borrower
response
Collection action
Tax Refund Offset proceedings ............................
under 34 CFR 30.33 .............
Salary Offset proceedings for
Federal employees under
34 CFR part 31 .................
Wage Garnishment proceedings ............................
under section 488A of the
HEA ...................................
Consumer Reporting proceedings ............................
under 31 U.S.C. 3711(f) .......
65
65
30
30
Similar to our approach to timeframes
in this NPRM, for suspension of
collections, we follow the existing
processes in the applicable collection
proceeding. For example, with regard to
wage garnishment proceedings under
section 488A of the HEA, the
accompanying regulations at 34 CFR
32.10 state that the wage deductions do
not begin until a written decision has
been issued, if the borrower has
requested a pre-offset hearing to review
the existence of amount of the debt.
Thus, if a borrower defense claim has
been raised in the context of a wage
garnishment proceeding, collections
would be suspended until a written
decision on the wage garnishment has
been issued. The 2016 final regulations
also included suspension of collection
for defaulted loans during a pending
borrower defense claim.
If the Department were to accept
affirmative claims as well as defensive
claims, the Department proposes to
impose a three-year time limit on
borrowers to file such claims based on
regulations that require institutions to
retain administrative records for three
years, while allowing defensive claims
to be asserted at any time in response to
collection proceedings. The Department
welcomes comments on other
approaches to set up a window for
submitting affirmative claims. Since
institutions would likely need access to
records to defend themselves against
inaccurate claims, it would make sense
to require that affirmative borrower
defense claims must be made within the
first three years after a student leaves an
institution. We recognize that in the
case of defensive claims, it is likely that
3 The days listed may vary depending on the
particular circumstances of each borrower’s
situation.
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the institution would no longer have
access to certain records, but the
Department must balance that concern
with the need to provide borrowers an
opportunity to make a defense to
repayment claim during already
established opportunities for the
borrower to challenge collection of the
loan.
Borrower Defense—Exclusions
As discussed above, the Department’s
consistent position since 1995 has been
that the Department will acknowledge a
borrower defense to repayment only if it
directly relates to the loan or to the
school’s provision of educational
services for which the loan was
provided. 60 FR 37769. As a result, the
Department has not considered personal
injury tort claims or allegations of
sexual or racial harassment to be
grounds for alleging a defense to
repayment. In these regulations, the
Department proposes making this limit
explicit and provides a non-exhaustive
list of circumstances that would not
constitute, in and of themselves,
borrower defenses to repayment that are
directly related to the borrower’s loan or
the provision of educational services.
This list also includes slander or
defamation, property damage, and
allegations about the general quality of
the student’s education or the
reasonableness of an educator’s conduct
in providing educational services. The
Department believes such a list will
provide clarity and guidance for
borrowers and schools in applying the
proposed defense to repayment
regulation.
The proposed regulations further state
that a violation of the HEA does not by
itself establish a defense to repayment,
unless the underlying conduct also
meets the Federal standard under the
regulations. This has been the
Department’s consistent position since
1995. See 60 FR 37769; 81 FR 76053
(text of 34 CFR 685.222(a)(3) (defense to
repayment regulation does not provide
a private right of action for a borrower
nor create any new Federal right)).
For all of these reasons, we are
proposing to adopt the regulations
described above and to rescind the
Federal standard provisions of the 2016
final regulations.
Borrower Defense Adjudication Process
(§§ 685.206, 685.212)
Statute: Section 455(h) of the HEA
authorizes the Secretary to specify in
regulation which acts or omissions of a
school a borrower may assert as a
defense to repayment of a Direct Loan.
Current Regulations: Section
685.206(c) provides that borrowers may
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assert a borrower defense to repayment
during proceedings which are available
to the borrower when the Department
initiates certain collection actions on a
Direct Loan.
Section 685.212 establishes the
conditions under which the Department
discharges a borrower’s obligation to
repay a loan, or a portion of a loan,
under various discharge or forgiveness
provisions of the HEA, including closed
school discharges, false certification
discharges, and public service loan
forgiveness.
Proposed Regulations: Proposed
§ 685.206(d)(2) and (3) describes the
process by which a borrower would file
a borrower defense to repayment
application for a loan disbursed on or
after July 1, 2019. Proposed
§ 685.206(d)(2) would specify that a
borrower may assert a borrower defense
to repayment in any of the enumerated
proceedings to collect on a Direct Loan.
Proposed § 685.206(d)(3) would specify
that the borrower must raise a defense
to repayment within the specified
timeframe included in the notification
to the borrower of the Department’s
action to collect on a defaulted student
loan. The borrower would submit a
completed borrower defense to
repayment application to the
Department on a form approved by the
Secretary and signed under penalty of
perjury. The borrower must also submit
any evidence supporting the defense to
repayment within the specified
timeframe included in the Department’s
directions to the borrower.
Proposed § 685.206(d)(7) provides
that the school against which the
borrower alleges misrepresentation in a
defense to repayment will be notified of
the pending application and allowed to
submit a response and evidence within
the specified timeframe included in the
notice.
Proposed § 685.206(d)(8) provides the
items the Secretary may consider in
resolving a borrower defense to
repayment claim and that, following
such consideration, the Secretary will
issue a written decision informing both
the borrower and the school of the
relief, if any, that the borrower will
receive.
Proposed § 685.206(d)(9) would
provide that the Secretary would decide
the amount of financial relief provided
to the borrower upon the determination
of successful borrower defense to
repayment. This section also would
provide that the amount of relief
awarded to a borrower during the
borrower defense process would be
reduced by any amounts that the
borrower obtained from the school or
other sources for claims related to the
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justification of the defense to
repayment, as reported pursuant to
proposed § 685.206(d)(3).
Proposed § 685.206(d)(10) provides
that the determination of a borrower
defense by the Department is final and
not subject to appeal.
Proposed § 685.212(k)(1) would add
borrower defense discharges to the
discharge provisions listed in § 685.212.
Reasons: During negotiated
rulemaking, some negotiators were in
favor of the Department providing
borrowers with a non-adversarial
process through which to seek
resolution, with others asserting that in
such a process, the Department should
rely primarily on the borrower’s
attestation, submitted under penalty of
perjury, and that corroborating evidence
could come from the Department’s own
records. Other negotiators advocated for
a more extensive process for resolving
borrower defenses to repayment, and
asserted that an unsubstantiated
assertion of wrongdoing by a borrower
should not be sufficient to justify the
discharge of a borrower’s Federal
student loans or to impose a financial
liability upon the school for the relief
provided to the borrower.
The 2016 final regulations established
separate adjudication processes for
borrower defense to repayment
applications submitted by individuals
and those to be considered as a group.
Generally, for the individual application
process, the 2016 final regulations
established that a borrower would
submit an application on a form
approved by the Secretary and provide
any supporting evidence or other
information or documentation
reasonably requested by the Secretary. A
Department official would then take
appropriate action to put the borrower
in loan forbearance, if not declined by
the borrower, or, in the case of a
defaulted loan, in stopped collection
status. Next, the Department official
would conduct a fact-finding process,
during which the Department would
notify the school of the defense to
repayment application and consider the
application and any supporting
evidence provided by the borrower.
According to the 2016 regulations, the
Department official would consider any
additional information found in the
Department’s records, or obtained by the
Department. If requested by the
borrower, the Department would
identify relevant records to the borrower
and provide such records upon
reasonable request. At the end of the
process, the Department official would
issue a written decision. Although the
written decision would be the final
decision of the Department, the
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borrower could request reconsideration,
upon the identification of ‘‘new
evidence,’’ or relevant evidence not
previously provided by the borrower or
identified in the written decision. 81 FR
76083–76084 (text of 34 CFR
685.222(e)).
The process proposed by the
Secretary in this NPRM would require
that the borrower submit an application
to the Department along with any
supporting evidence. Whereas the 2016
final regulations did not explicitly
provide an opportunity for schools to
submit evidence and information in
response to the borrower defense claim,
this NPRM proposes to provide schools
with an opportunity to provide a
response and supporting evidence.
Given the fact-specific nature of
misrepresentation claims, the
Department believes that it is
appropriate to obtain as much evidence
as possible from all sources, including
from the school alleged to have made
the misrepresentation. The Department
would not, however, rely upon
Department records or other information
obtained by the Secretary, unless the
school had an opportunity to review
and respond to such evidence. The
Department believes that the proposed
process will assist it in making fair and
accurate decisions, while providing
borrowers and schools with due process
protections.
As discussed in the section titled
‘‘Defense to Repayment—Federal
Standard for Asserting a Defense to
Repayment,’’ the Department is
proposing that borrowers who have
defaulted on a Direct Loan may raise a
defense to repayment of loans first
disbursed on or after July 1, 2019, on the
basis of the proposed Federal
misrepresentation standard, in response
to a notice of the Department’s intent to
engage in certain collection actions. The
Department’s existing regulations as to
those collection actions provide certain
processes and protections for borrowers,
which the Department is not proposing
to change and would apply to borrower
defense to repayment applications made
during the course of those proceedings.
As is the case for defense to
repayment claims under the existing
regulation and the 2016 final
regulations, the Department proposes
that a decision made in the adjudication
process be final as to the merits of the
defense to repayment and any relief to
be provided as a result. In this way,
borrowers will not be subject to the
additional wait that an appeal period
may cause and will receive more
expedient relief. We address the issue of
reconsideration later in this section.
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In the 2016 final regulations, the
Department established a process for
evaluating defense to repayment
applications, regardless of the
substantive standard that would be
applied to the defense to repayment.
Because the Department is now
proposing that, for loans first disbursed
on or after the anticipated effective date
of these regulations (July 1, 2019),
defenses to repayment applications be
made only during the specified
collection proceedings. The Department
will continue to apply the State law
standard for loans made prior to July 1,
2019. The Department proposes only
clarifying updates to the statutory and
regulatory cross-references for the
collection proceedings listed for
defenses to repayment for pre-effective
date loans, and otherwise retains the
existing language of current 34 CFR
685.206(c) as to such defenses to
repayment applications. We also
propose to rescind the process for
adjudication of borrower defense to
repayment portions of the 2016 final
regulations.
The Department seeks public
comment regarding potential processes
that could be used to adjudicate
affirmative claims, should the
Department accept affirmative claims
for some period after a borrower ends
enrollment at an institution. The
Department preliminarily believes that
such a process must include an
opportunity for the institution to receive
a copy of the borrower’s claim and a
signed waiver allowing the institution to
share relevant portions of the borrower’s
education record with the Department,
and provide sufficient time for the
institution to provide a response and
any supporting evidence of its own to
the Secretary. In order to assist the
Department’s assessment of the harm a
potential misrepresentation caused a
borrower, the borrower, in submitting a
defense to repayment claim, might also
be required to submit information about
whether, for reasons other than the
education received, the borrower has
been removed from a job due to on-thejob-performance, disqualified from work
in the field for which the borrower
trained, or working less than full-time in
the chosen field. In addition, the
Secretary proposes to include a
provision emphasizing to borrowers
submitting affirmative or defensive
claims that if the borrower receives a
100 percent discharge for the loan, the
institution has the right to withhold an
official transcript for the borrower, to
avoid any confusion or surprise that
would result from such withholding.
Finally, the regulations make clear that
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the Secretary will also review both the
borrower’s claim and the institution’s
response in making a defense to
repayment decision.
Additional Borrower Defense to
Repayment Application Process
Proposals
At the negotiated rulemaking
sessions, the Department proposed that
the regulations could allow borrowers to
ask the Secretary to reconsider a denial
of a defense to repayment, if the
reconsideration claim was supported by
newly discovered evidence. The
negotiating committee discussed
variations on this reconsideration
process idea, in which either the school
or the borrower could submit additional
evidence to the Department. Negotiators
also proposed that the regulations
include an early dispute resolution
process, whereby the Department or
another party would mediate borrower
defense disputes between a borrower
and the school, to attempt to resolve the
dispute without the need for the parties
to go through the Department’s full
borrower defense adjudication process.
Under our proposed process for
adjudicating defenses to repayment, a
defense to repayment would be
submitted in response to the
Department’s collection actions on a
defaulted loan on a form approved by
Secretary, and the Department’s Federal
Student Aid office will make a decision
on the defense to repayment based on
the submissions from the borrower and
the school, if any. The borrower and the
school will each be afforded the
opportunity to see and respond to
evidence provided by the other.
The reconsideration process proposed
by some members of the negotiated
rulemaking committee would involve
either the borrower or the school
submitting additional, newly
discovered, evidence to the Department.
Under the process and standard
included in these proposed regulations,
the Department expects to receive and
consider all relevant evidence from the
borrower and the institution during its
consideration of the borrower’s defense.
Therefore, we do not believe that an
appeal process or a process for
reconsideration will be needed, nor is
one included in these proposed
regulations.
With regard to the proposed early
dispute resolution process, the
Department does not believe such a
process is appropriate within the
proposed regulations governing
borrower defense. A borrower and a
school may pursue voluntary resolution
of a claim by the borrower at any time,
without the involvement of the
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Department. A borrower may also
pursue relief through his or her state
consumer protection agency.
Group Process
A group of negotiators proposed that
the Department establish a process for
considering groups of borrower defenses
to repayment claims. They argued that
groups of borrowers who were all
subject to the same act or omission by
a school should have their defenses
considered together as a group. These
negotiators also asserted that a group
process in these cases would be more
efficient and would result in more
equitable treatment of similarly situated
borrowers.
The 2016 final regulations provided
for a group process. Specifically, the
Secretary could initiate, upon
consideration of factors including, but
not limited to, common facts and
claims, fiscal impact, and the promotion
of compliance by the school or other
title IV, HEA program participant, a
process to determine whether a group of
borrowers has a legitimate borrower
defense claim. Those regulations
provided for the Secretary to identify
groups comprised of borrowers who
individually filed applications, as well
as borrowers who did not file
applications, should those borrowers
have common facts and claims. 81 FR
76084. The Department further
differentiated the processes based upon
whether the subject school was open or
closed. 81 FR 76085.
The Department does not include a
group process, whether the school in
question is open or closed, in these
proposed regulations. Because relief
through a borrower’s defense to
repayment claim is based not just on
evidence of misrepresentation, but also
evidence that the borrower reasonably
relied on the misrepresentation in
deciding to enroll or continue
enrollment in the institution, and was
harmed by the misrepresentation, the
Department must consider each
borrower’s claim independently. The
Department recognizes that a group of
borrowers with defaulted loans who are
each subject to a proceeding to collect
on a Direct loan may assert
misrepresentation on the part of the
same school based on the same facts and
circumstances, such as when the
student borrowers were enrolled in a
program that the school advertised to
the public as being fully accredited by
a specific programmatic accrediting
agency when, in fact, it was not so
accredited. The Department may, at its
discretion, determine it is more efficient
to establish facts regarding claims of
misrepresentation put forth by a group
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of borrowers. However, in approving an
individual defense, the Secretary would
still need to determine that the borrower
made a decision based on the
misrepresentation, that the borrower
was harmed by the misrepresentation,
and to what, if any, amount of or type
of relief the borrower is entitled. To
make that determination, it will be
necessary to have a completed
application from each individual
borrower, and to examine the facts and
circumstances of each borrower’s
individual situation. In addition, it
would be inappropriate to subject
borrowers who did not individually
submit defense to repayment claims to
the possible collateral consequences of
debt relief, including potentially having
their transcript withheld.
Relief
Proposed § 685.206(d)(9) would
provide that the Secretary would decide
the amount of financial relief provided
to the borrower upon the determination
of an approved defense to repayment
discharge. As part of this determination,
the amount of relief awarded to a
borrower during the defense to
repayment process would be reduced by
any amounts that the borrower received
from other sources based on a claim by
the borrower that relates to the same
loan and the same misrepresentation by
the school as the defense to repayment.
The rule would prevent a double
recovery for the same injury at the
expense of the Federal taxpayer.
As noted in the preamble to the 2016
final regulations, the Department has a
responsibility to protect the interests of
Federal taxpayers as well as borrowers.
As a result, we continue to believe that
establishing a legal presumption of full
relief would not be appropriate. See,
e.g., 81 FR 75973–75974. While the
Department’s other loan discharge
processes for closed school discharges,
34 CFR 685.214; false certification, 34
CFR 685.215; and unpaid refunds, 34
CFR 685.216, do provide for full loan
discharges and recovery of funds paid
on subject loans, the factual premises
for such discharges are clearly
established in statute and are relatively
straightforward. In contrast, we
anticipate that determinations for
borrower defense claims will involve
more complicated issues of law and fact
since students may have been told
different things by different
representatives of an institution or may
have heard the same statements
differently. In many instances, borrower
defense claims assert that an admissions
representative made certain claims or
promises, and yet without a recording of
the actual conversation, it is hard to
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know precisely what was said, the
degree to which the borrower relied on
that information to make an enrollment
decision, and the harm that came from
the decision.
In the NPRM for the 2016 final
regulations, the Department proposed
certain methodologies for calculating
relief, 81 FR 39420, but ultimately did
not include those in light of their
confusing nature, 81 FR 75976. Instead,
the Department stated that it would
consider factors such as the value of the
education provided by the school and
the student’s cost of attendance, as well
as conceptual, non-binding examples for
substantial misrepresentation claims.
See 81 FR 76086–76087. The
Department proposes to allow for partial
relief, based on the degree of harm
suffered by the borrower. Given the
complexity of such determinations,
however, the Department invites
comments on this proposal and on
methods for calculating partial relief in
connection with defenses to repayment.
We also propose to rescind the
application provisions of the 2016 final
regulations.
Recovery From The School (§§ 685.206
and 685.308)
Statute: Section 455(h) of the HEA
authorizes the Secretary to specify in
regulation which acts or omissions of an
institution of higher education a
borrower may assert as a defense to
repayment of a Direct Loan.
Current Regulations: Section
685.206(c)(3) states that the Department
may initiate an appropriate proceeding
to require a school whose act or
omission resulted in a successful
borrower defense to repayment to
require the school to pay the
Department the amount of the loan to
which the defense applies. It specifies
that this proceeding may not be initiated
after the period of record retention
required in § 685.309(c), unless the
school received notice of the borrower’s
defense during that period.
Proposed Regulations: Proposed
§ 685.206(d)(13) would clarify that, for
borrower defense to repayment
discharges granted under the new
Federal standard, the Secretary may
initiate, within five years of the date of
the final determination of the borrower’s
defense to repayment application, an
appropriate proceeding to require a
school whose misrepresentation
resulted in an approved borrower
defense to repayment discharge to pay
the Department the amount of the
discharged loan. The recovery
proceeding would be conducted in
accordance with 34 CFR part 668
subpart G.
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Proposed § 685.206(d)(11) would
require that a borrower who has
received a defense to repayment loan
discharge reasonably to cooperate with
the Secretary in any proceeding to
recover funds from the school. The
Secretary may revoke relief granted to a
borrower who does not fulfill this
obligation. Proposed § 685.206(d)(12)
would require a borrower whose
defense to repayment is successful to
transfer to the Secretary any right to
recovery against third parties of any
amounts discharged by the Department,
based on the borrower’s defense to
repayment.
Conforming changes would be made
by proposed §§ 685.300 and 685.308
related to the agreements signed by
schools to participate in the Direct Loan
Program and to remedial actions that the
Department may take to require
repayment of funds from schools in
various circumstances, respectively.
Reasons: Proposed § 685.206(d)(13)
would establish that the Secretary may
initiate a recovery proceeding to require
the school whose act or omission
resulted in the borrower’s successful
defense to repayment discharge of a
Direct Loan to pay to the Secretary the
amount discharged. The Department
proposes the subpart G hearing as a
mechanism for recovery of funds from
schools resulting from a borrower
defense to repayment discharge. These
proceedings are well established in
regulation and familiar to schools. The
subpart G hearing offers due process to
schools, with an opportunity for a
preconference hearing via telephone, an
informal meeting, or a paper process;
submission of evidence; and a hearing.
The burden of proof rests with the
Department, and the school has an
opportunity to appeal the decision of
the hearing official to the Secretary.
Proposed § 685.206(d)(11) would help
to ensure that the Department receives
the borrower’s cooperation, if needed, in
any proceeding against the school. It is
similar to the requirements applicable to
other loan cancellation provisions.
Cooperation includes providing
testimony regarding any representation
made by the borrower to support a
successful borrower defense to
repayment, and producing, within
timeframes established by the Secretary,
any documentation reasonably available
to the borrower with respect to those
representations and any sworn
statement required by the Secretary with
respect to those representations and
documents.
In the preamble to the 2016 final
regulations, 81 FR 75929–75932, the
Department explained that it has the
legal authority to recover liabilities from
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schools related to approved borrower
defenses to repayment. The Department
continues to maintain that it has this
authority under its statutory and
existing regulatory framework as part of
its responsibility to administer the
Direct Loan Program for the reasons
stated in the preamble to those
regulations. We note that this has been
the Department’s consistent position on
borrower defenses to repayment, as is
reflected in the existing borrower
defense to repayment regulation at 34
CFR 685.206(c)(3).
Consistent with the Department’s
longstanding view, we propose in these
regulations to add language to 34 CFR
685.300 regarding Program Participation
Agreements schools must sign to
participate in the Direct Loan Program.
This language would clarify that schools
are responsible to the Department for
the amounts of the loans underlying
approved borrower defense claims, as
well as those for other Direct Loan
discharges (closed school discharges,
false certification discharges, and
unpaid refund discharges) approved
under the Department’s other
regulations. The Department also
proposes to amend 34 CFR 685.308 to
make corresponding changes clarifying
that the Department may take remedial
actions to recover such losses. The
Department also proposes to rescind the
recovery from schools provisions of the
2016 final regulations.
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Statute of Limitations for Recovering
Funds From Schools (§§ 685.206 and
685.308)
The negotiators discussed whether to
impose a time limit on the Department’s
ability to recover losses for the amount
of an approved borrower defense to
repayment from a school. Negotiators
noted that current § 685.206(c)(3)
imposes a three-year limit on the
Secretary’s ability to initiate an action
based on the period for the retention of
records described in § 685.309(c). This
three-year limit is derived from
§§ 668.24 and 685.309(c), which
describe the requirement to retain
‘‘program records’’—records of the
determination of eligibility for Federal
student financial assistance and the
management of Federal funds provided
to the school. Section 668.24(e)(2)
provides that the school must keep
records of borrower eligibility and other
records of its ‘‘participation’’ in the
Direct Loan Program for three years after
the last award year in which the student
attended the school. In these proposed
regulations, we maintain this time limit
for recovery actions on approved
borrower defense to repayment claims
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for loans first disbursed before July 1,
2019.
We propose to extend that time limit
to five years from the date of the
Department’s final determination on the
borrower’s defense to repayment for
loans first disbursed after July 1, 2019.
Although, as explained above, the
Department does not view liabilities
from borrower defense to repayment as
fines, penalties, or forfeitures, a fiveyear limitation period is used in other
contexts by the Federal government,
such as in enforcement actions. See 28
U.S.C. 2462. Further, given that the
Department does not have a basis for
recovery against a school until a
borrower defense to repayment has been
approved, we believe that the five years
should run from the final determination
of a borrower’s defense to repayment
claim, instead of from the last award
year the borrower attended school.
Therefore, we propose in these
regulations that for loans first disbursed
on or after July 1, 2019, the Secretary
will provide notice to the school of the
defense to repayment application and
will not initiate such a proceeding more
than five years after the date of the final
determination of the borrower’s defense
to repayment. We also propose to
rescind the statute of limitations
provisions of the 2016 final regulations.
Pre-Dispute Arbitration Agreements
and Internal Dispute Processes
(§§ 668.41 and 685.304)
Statute: Section 485(a) of the HEA
identifies information that participating
schools must provide to prospective and
enrolled students. Sections 485(b) and
(l) of the HEA establish counseling
requirements for borrowers of Federal
student loans. Section 454(a) of the HEA
authorizes the Secretary to specify in
regulation the requirements for school
participation in the Direct Loan
program.
Current Regulations: Section 668.41
describes the information a school must
report and disclose to prospective and
enrolled students. Section 668.41(a)
defines terms used in the regulation.
Section 685.304 describes the required
entrance counseling that schools must
provide to Federal Direct Loan
borrowers prior to making the first
disbursement of a Federal Direct student
loan.
Proposed Regulations: We propose a
new § 668.41(h), which would require
schools that use pre-dispute arbitration
agreements or class action waivers as a
condition of enrollment to disclose that
information in writing in an easily
accessible format to students,
prospective students, and the public.
We propose to add definitions to
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paragraph (h)(2) for the terms ‘‘class
action,’’ ‘‘class action waiver,’’ and
‘‘pre-dispute arbitration agreement.’’ We
propose to define ‘‘class action’’ to mean
a lawsuit or an arbitration proceeding in
which one or more parties seeks class
treatment pursuant to Federal Rule of
Civil Procedure 23 or any State process
analogous to Federal Rule of Civil
Procedure 23. We propose to define
‘‘class action waiver’’ as any agreement
or part of an agreement between a
school and a student that relates to the
provision of educational services for
which the student received title IV
funding and prevents an individual
from filing or participating in a class
action that pertains to those services.
We propose to define ‘‘pre-dispute
arbitration agreement’’ as any agreement
or part of an agreement between a
school and a student requiring
arbitration of any future dispute
between the parties relating to the
making of a Direct Loan or provision of
educational services for which the
student received title IV funding.
We also propose to make other
revisions to § 668.41: revising paragraph
(a) to amend the definition of
‘‘undergraduate students’’ to specify
that such students are those enrolled in
a program ‘‘at or’’ below the
baccalaureate ‘‘level,’’ and revising
paragraph (c) to add cross-references to
new § 668.41(h).
Proposed revisions to § 685.304
would require schools that require
borrowers to accept pre-dispute
arbitration agreements or class action
waivers as a condition of enrollment to
(1) clearly, and in plain language,
provide written explanation to the
borrower of the nature and application
of the pre-dispute arbitration agreement
and/or class action waiver, and (2)
provide to the borrower written
information on the availability of the
school’s internal dispute resolution
process.
Reasons: Current regulations do not
address the use of pre-dispute
arbitration agreements or class action
waivers in enrollment agreements
between schools and students or in
other documents that must be signed by
the student as a condition of enrollment.
In 2016, the Department issued
regulations that prohibited a school
participating in the Direct Loan Program
from enforcing class action waivers or
pre-dispute arbitration agreements
against borrowers with Direct Loans for
claims that may form the basis of a
borrower defense to repayment claim.
The 2016 final regulations required
participating schools to ‘‘forgo reliance
on any pre-dispute agreement with a
student that waives the student’s right
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to participate in a class action against
the school related to a borrower defense
claim.’’ 81 FR at 75927, 76088.
However, the 2016 regulations did
permit a borrower to enter into a
voluntary post-dispute arbitration
agreement with a school to arbitrate a
borrower defense claim. For these
voluntary post-dispute arbitrations, the
Department required institutions to
submit copies of the arbitral filings,
responses, awards, and certain other
documents to the Secretary within 60
days of the filing or receipt by the
school, as applicable. The Department
also required schools to submit certain
judicial records of lawsuits filed as to
claims related to borrower defense to
repayment.
Since issuance of the 2016 final
regulations and subsequent delay of
their effective date, schools have been
allowed to continue enforcing predispute arbitration agreements, and the
Department has heard from students,
advocates representing students, and the
public about this practice. Many of
these groups told the Department that
the implications of class-action waivers
or pre-dispute arbitration agreements
can be unclear to students when they
enroll at a school. These groups urged
the Department to take steps to provide
increased protection for student loan
borrowers. Other negotiators argued that
students are and can be well-served by
the arbitration process, which they
contend can be a more efficient, timely,
and cost-effective option for dispute
resolution.
The Department is aware of court
decisions holding that prohibitions on
pre-dispute arbitration agreements and
class action waivers violate the Federal
Arbitration Act (FAA). The FAA
‘‘establishes a liberal federal policy
favoring arbitration agreements’’ that
applies ‘‘unless the FAA’s mandate has
been overridden by a contrary
congressional command.’’ CompuCredit
Corp. v. Greenwood, 565 U.S. 95, 98
(2012). This policy protects the right of
parties to set dispute resolution
procedures by contract.
In the 2016 regulations, the
Department took the position that the
HEA gives the Department broad
authority to impose conditions on
schools that wish to participate in a
Federal benefit program and that
regulation of the use of pre-dispute
arbitration agreements and class action
waivers was necessary to ‘‘protect the
interests of the United States and
promote the purposes’’ of the Direct
Loan Program under section 454(a)(6) of
the HEA, 20 U.S.C. 1087d(a)(6). We
recognize, as explained in the preamble
to the 2016 final regulations, that pre-
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dispute arbitration agreements and class
action waivers may, in some
circumstances, not be well understood
by consumers or facilitate the
Department’s awareness of potential
issues faced by students at a school.
However, our reweighing of the issue
and subsequent legal developments
have led us to believe that the
Department should take a position more
in line with the strong Federal policy
favoring arbitration.
We believe that arbitration offers a
number of potential advantages in this
context. Arbitration may, for example,
be more accessible to borrowers since it
does not require legal counsel and can
be carried out more quickly than a legal
process that may drag on for years. It
may also allow an institution to more
quickly identify and stop bad practices
to ensure that other students are not
harmed. It may also allow borrowers to
obtain greater relief than they would in
a consumer class action case where
attorneys often benefit most. And it may
reduce the expense of litigation that a
university would otherwise pass on to
students in the form of higher tuition
and fees. Arbitration also eases burdens
on the overtaxed U.S. court system.
Our reexamination of the legal
landscape also weighs in favor of the
Department’s proposal not to disrupt
pre-dispute arbitration agreements or
class-action waivers. In particular, the
U.S. Supreme Court recently held that
the FAA governs, unless Congress
‘‘manifests a clear intention’’ to displace
it, and that arbitration agreements ‘‘must
be enforced as written.’’ Epic Systems
Corp. v. Lewis, 584 U.S.—, 2018 WL
2292444 at 17 (May 21, 2018). Thus, in
Epic Systems Corp v. Lewis, the Court
declined to afford deference to the
National Labor Relations Board’s
reading of the National Labor Relations
Act (NRLA) to trump FAA policy—even
though an agency’s interpretation of its
own statute normally receives
deference. Id. Nothing in the NLRA
manifested Congress’s clear intention to
displace the FAA, and the FAA
accordingly controlled.
Epic Systems is consistent with the
Supreme Court’s earlier decision
holding that a prohibition on class
arbitration waivers in consumer
contracts violates the FAA, AT&T
Mobility LLC v. Concepcion, 563 U.S.
333, 347–51 (2011). We believe that the
Supreme Court’s recent reaffirmation of
the Federal policy in favor of arbitration
may warrant a different approach to
these regulations.
That belief is further supported by
recent congressional action.
Specifically, Congress passed, and the
President signed, a joint resolution
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disapproving a final rule published by
the Bureau of Consumer Financial
Protection (BCFP) that would have
regulated pre-dispute arbitration
agreements in contracts for specified
consumer financial products and
services. That proposed rule was
informed by the same extensive study
conducted by the BCFP on the impact
of such agreements that the Department
relied on in its rationale for the predispute arbitration and class action
waiver provisions in the 2016 final
regulations. In light of Congress’ clear
action, the Department believes a
change in its position to align with the
strong Federal policy in favor of
arbitration is appropriate.
The Department thus proposes to
revise its treatment of pre-dispute
arbitration agreements and class action
waivers. It is not currently proposing to
ban such agreements or waivers. And
given the burden to the Department of
reviewing such records, the Department
is also not proposing that institutions be
required to report information about
arbitration awards or judicial
proceedings to the Secretary. However,
the Department acknowledges
negotiators’ concerns that borrowers and
students may not understand the
implications of arbitration agreements
and class action waivers that may be
included in their agreements with the
school.
The Department agrees that it is
important that students understand
what a pre-dispute arbitration
agreement or class action waiver means,
so that students can elect to enroll at an
institution that does not include such
provisions if the student so desires.
Also, it is important for a student who
attends an institution that requires
arbitration to know how to access and
utilize arbitration, thus the requirement
that schools relying upon mandatory
arbitration provide plain language
instruction on both the meaning of this
restriction and the ways a student can
access it. Thus, the Department is
proposing regulatory changes to
promote greater transparency by schools
that require students to enter into such
agreements as a condition of enrollment,
to allow borrowers the opportunity to
make an informed choice as to whether
to enroll in such schools.
During the negotiated rulemaking
sessions, the Department proposed
including in the regulations a
requirement that schools including predispute arbitration agreements or class
action waivers in their enrollment
agreements clearly disclose that
information to prospective and
continuing students, and educate
borrowers during loan entrance
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counseling about pre-dispute arbitration
agreements, class action waivers, and
the schools’ internal dispute processes.
Negotiators expressed two distinct
points of view about the value of
arbitration: Some believed that an
internal dispute resolution process or
arbitration proceeding serves the best
interests of students, schools, and
taxpayers. They noted that the
Department, as well as accreditors,
direct students with complaints to first
attempt to resolve those complaints
with the school. And some of those
negotiators also asserted that arbitration
can be quicker and less expensive than
a court proceeding, provide meaningful
relief to the student at the school’s
(rather than the Federal taxpayers’)
expense, and allow schools to resolve
issues with students outside of the
courts. In contrast, other negotiators
expressed concerns that requiring
students to use an internal dispute
resolution process or arbitration, or
prohibiting students from joining class
action lawsuits, was more likely to
suppress students’ meritorious claims
against their schools.
Negotiators also differed as to the
benefits of increased transparency about
such agreements. Some negotiators
supported the Department’s proposal,
asserting that it would enable
prospective and continuing students to
make an informed choice before taking
out a Federal student loan to enroll or
continue enrollment at a school that
required these agreements. They also
noted that, if these processes are
beneficial to students, as asserted by
some schools, this would be an
additional reason for highlighting them
in the enrollment and student loan
application processes. One negotiator
expressed concern that the Department’s
initial proposed language was too broad
and could apply to arbitration
agreements unrelated to the school’s
provision of educational services, such
as arbitration agreements relating to the
use of campus parking facilities or other
student services.
After hearing from the negotiators,
and for the foregoing reasons, the
Department has concluded that it is
better to require schools to disclose the
existence of pre-dispute arbitration
agreements and class action waivers,
rather than, as was done in 2016,
outright ban these practices. We
acknowledge one negotiator’s concern
about the Department’s initial proposed
language and have altered the proposed
definition of ‘‘pre-dispute arbitration
agreement’’ to make clear that the
requirement applies only to agreements
requiring arbitration of any future
disputes between the parties relating to
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the making of a Direct Loan or the
provision of educational services for
which the student received title IV
funding. The Department believes that it
would be burdensome to schools and
the Department to require submission of
arbitration documentation (which also
may contain confidential information)
and are not proposing to include this
requirement here. We therefore propose
to rescind our 2016 final regulations
that banned pre-dispute arbitration
agreements and class action waivers, as
well as the requirement that schools
using arbitration submit specific
documentation to the Department.
Closed School Discharges (§§ 674.33,
682.402, and 685.214)
Statute: Sections 437(c) and 464(g)(1)
of the HEA provide for the discharge of
a borrower’s liability to repay a FFEL
Loan or a Perkins Loan if the student is
unable to complete the program in
which the student was enrolled due to
the closure of the school. The same
discharge is available to Direct Loan
borrowers under section 455(a) of the
HEA.
Current Regulations: Sections
674.33(g), 682.402(d), and 685.214
describe the qualifications and
procedures in the Perkins, FFEL, and
Direct Loan Programs for a borrower to
receive a closed school discharge. Under
§§ 674.33(g)(4), 682.402(d)(3), and
685.214(c), a Perkins, FFEL, or Direct
Loan borrower, respectively, must
submit a written request and supporting
sworn statement, under penalty of
perjury, to apply for a closed school
discharge. Sections 674.33(g)(4)(i)(B),
682.402(d), and 685.214 provide that, to
qualify for a closed school discharge a
student must have been enrolled in the
school at the time it closed or must have
withdrawn from the school not more
than 120 days before the school closed.
The regulations also provide that the
Secretary may extend the 120-day
window under exceptional
circumstances. Sections
674.33(g)(4)(i)(C), 682.402(d)(3)(ii)(C),
and 685.214(c)(1)(i)(C) provide that a
borrower may qualify for a closed
school discharge if the borrower did not
complete, and is not in the process of
completing, the program of study
through a teach-out at another school.
Proposed Regulations: Proposed
revisions to §§ 674.33(g)(4),
682.402(d)(3) and (d)(6)(ii)(G) and (H),
and 685.214(c) would replace the
requirement that, to apply for a closed
school loan discharge, the borrower
submit a sworn statement with a
requirement that the borrower submit a
completed application signed under
penalty of perjury.
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Proposed revisions to §§ 674.33(g),
682.402(d), and 685.214(c) would
extend the window for a borrower to
qualify for a closed school discharge
based on withdrawal from a closed
school without completion of a program
from 120 days before the school closed
to 180 days, and would modify some of
the examples of ‘‘exceptional
circumstances’’ under which the
Secretary may extend the proposed 180day period.
Proposed §§ 674.33(g)(4)(i)(D),
682.402(d)(3)(iii), and 685.214(c)(1)(ii)
would state that if a closing school
provided an opportunity to a borrower
to complete the program of study while
the school was still open by allowing
students to complete their program of
study before shutting down through an
orderly closure (referred to by
accreditors as a teach-out) approved by
the school’s accrediting agency and, if
applicable, the school’s State
authorizing agency, the borrower would
not qualify for a closed school
discharge.
Proposed revisions to
§ 682.402(d)(6)(ii)(F) would require a
guaranty agency that denies a closed
school discharge request to inform the
borrower of the opportunity to request
a review of the guaranty agency’s
decision by the Secretary and explain
how the borrower may request that
review. Proposed § 682.402(d)(6)(ii)(J)
would describe the responsibilities of
the guaranty agency and the Secretary if
the borrower requests a review.
Reasons:
Application Process
The current regulations refer to a
borrower submitting a sworn statement
made under penalty of perjury, but
borrowers now apply for closed school
discharges by filing a Federal closed
school discharge application. This
application includes several
certifications that the borrower must
make under penalty of perjury. The
closed school discharge application
takes the place of the sworn statement
that was formerly required, and several
of our proposed revisions to the
regulations reflect that change.
In the 2016 regulations, the
Department included provisions that
provided automatic closed school
discharges for borrowers who have not
re-enrolled in a Title IV-eligible
institution within three years of their
schools’ closures. See, e.g., 81 FR at
76038.
During the 2017–2018 negotiations,
some negotiators proposed that the
Department also provide for an
automatic closed school discharge in
certain circumstances. The negotiators
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proposed that a borrower who attended
a closed school and who did not reenroll within one year, or, alternatively,
three years, of the school closing be
granted a closed school discharge
without being required to submit an
application.
In these regulations, we are not
proposing an automatic closed school
discharge. Under existing
§§ 674.33(g)(3)(ii), 682.402(d)(8), and
685.214(c)(2), the Department may grant
a closed school discharge without an
application if the Secretary determines,
based on information in the Secretary’s
(or, in the case of a FFEL loan, the
guaranty agency’s) possession that the
borrower qualifies for the discharge.
Thus, the Secretary already has the
authority to grant a discharge without
an application in appropriate cases at
her discretion, and, therefore, we do not
believe that it is necessary to establish
in the proposed regulations a
requirement that the Secretary grant
automatic closed school discharges. In
addition, because an institution (or the
entity maintaining records from a closed
school) might withhold official
transcripts of borrowers who received a
defense to repayment of closed school
discharge, automatic discharges could
have collateral consequences for
students who did not opt-in.
Furthermore, through these proposed
regulations, the Department is
encouraging schools that are closing to
go through an orderly closure, which
includes offering appropriate teach-outs
to their students. Under the proposed
regulations, students who decline to
participate in an appropriate teach-out,
when made available by the institution
and approved by the accreditor (and, if
applicable, State authorizing entities)
are not eligible for a closed school
discharge. An application will be useful,
and in some cases necessary, for the
Department to determine whether the
student was provided with an
appropriate opportunity to complete a
teach-out. For these reasons, we are
proposing to rescind the regulations
concerning automatic closed school
discharge that were part of the 2016
final regulations.
Extending the Window To Qualify for a
Closed School Discharge From 120
Days to 180 Days
The HEA provides that a borrower
may receive a closed school discharge if
the borrower ‘‘is unable to complete the
program in which the student is
enrolled due to the closure of the
institution,’’ (sections 454(g)(1) and
437(c)(1)) but does not establish a
period prior to the closure of the school
that a borrower may withdraw and still
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qualify for a closed school discharge.
The Department has nevertheless long
interpreted the statute to allow
discharge for students who withdraw a
short time before a school closure,
recognizing that a precipitous closure
may be preceded by degradation in
academic quality or student services. In
2013, the Department expanded the
window for eligibility for a closed
school loan discharge from 90 to 120
days, meaning that students who
withdraw from the school within 120
days of the school’s closure are eligible
for closed school loan discharge.
In the 2016 final regulations, the
Department determined that the 120-day
look-back period to qualify for closed
school discharge in current regulations
is sufficient. The Department noted that
under current regulations in
§ 685.214(c)(1)(B), it has the authority to
extend the look-back period due to
‘‘exceptional circumstances.’’ At that
time, we believed that this provision
provided appropriate flexibility to the
Department in cases where it may be
necessary to extend the look-back
period. See 81 FR at 76040.
However, during the 2017–2018
negotiated rulemaking sessions, the
Department proposed to extend the
window for a borrower to qualify for a
closed school discharge from 120 days
to 150 days, and most negotiators
supported that proposal. Some
negotiators expressed concerns that
extending the window to 150 days
would significantly increase the number
of borrowers who could qualify for a
closed school discharge, even if those
borrowers could have graduated before
the school closed. They also noted that
closed school discharges apply to
locations of a school that are closed, not
just to schools that have closed entirely,
and many large universities have
campuses at different locations that they
may choose to close in a responsible,
planned manner. One negotiator noted
that schools often engage in short-term
partnerships with private entities to
provide instruction at specific offcampus locations. Even though such
programs may be intended to last for
only a short term to address a specific
need in the community, students
attending the school at these locations
could qualify for closed school
discharges. In the view of these
negotiators, extending the window for
eligibility for a closed school discharge
could have the effect of discouraging
innovation and creativity by schools
involving other locations.
Some negotiators expressed concern
that a longer window could lead to
strategic behavior on the part of
borrowers. For example, if a borrower is
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aware that a school will be closing, the
borrower could continue to attend the
school and take out more loans, with the
intention of getting the loans discharged
once the school closes. These borrowers
may be unaware that the institution
might withhold official transcripts from
students who receive closed school
discharges. Since a longer window
under which a borrower could qualify
for a closed school discharge would also
increase the opportunity for a borrower
to complete the program in a school that
is planning to close, these negotiators
argued that a borrower should not
qualify for a closed school discharge if
the borrower could have completed the
program before the school closure date.
Other negotiators did not agree that
borrowers should be ineligible for a
closed school discharge if they could
have completed the program at the
school prior to its closure. They pointed
out that schools that close precipitously
may show symptoms of failing months
before the actual closure date. These
negotiators stated that they have seen
evidence of degradation in their
interactions with such schools as
teachers and administrative staff
members leave and the quality of
services provided by the school
deteriorates. In the view of these
negotiators, borrowers at such schools
should qualify for a closed school
discharge, even if they could have
stayed at the failing school and
completed their program before the
school officially closed its doors.
Some of these negotiators proposed
extending the window for a closed
school discharge to a year, since, in
their view, a school that closes may
have problems well in advance of the
actual closure date. The negotiators
pointed out that a school that only
planned to open a location temporarily,
or that engaged in a planned,
responsible closure of a location, could
stop accepting new students at the
location, and commit to allowing the
current students to complete their
studies at the location before shutting
down—in other words, conduct an
orderly closure under an approved
teach-out plan—to avoid a dramatic
expansion of the borrowers entitled to
closed-school discharge under this
longer look-back period.
Other negotiators objected strongly to
the proposal to extend the window to a
full year. They stated that this would
put schools in the position of having to
track every student who may have
withdrawn or transferred during that
one-year period until those students
completed a program at another school,
creating a ‘‘quagmire’’ for schools.
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Based on the feedback we received
and the Department’s recent experience
with precipitous school closures, the
Department is proposing to extend the
period to 180 days—60 days longer than
provided in the current regulations. We
believe that 180 days makes the most
sense because it takes into account the
situation in which, as a result of the
summer break during which time many
institutions offer few or no classes, a
student who withdraws one semester
prior to a school’s precipitous closure
could have withdrawn as many as 180
days earlier.
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Exceptional Circumstances
The Department proposes
clarifications and modifications to
§§ 674.33(g)(4)(i)(B), 682.402(d), and
685.214 that provide examples of
‘‘exceptional circumstances’’ under
which the Secretary may extend the
period of time to provide a closed
school discharge. For example, we
propose replacing the reference in the
existing regulations to the ‘‘loss of
accreditation’’ with language referring to
‘‘revocation or withdrawal by an
accrediting agency of the school’s
institutional accreditation.’’
Generally, the negotiating committee
approved of these changes. One
negotiator proposed adding an
additional exceptional circumstance:
The school’s discontinuation of the
student’s program of study. However,
other negotiators noted that the closed
school discharge is intended for closed
school situations, not situations in
which a school terminates an academic
program. These negotiators believed that
adding a reference to the
discontinuation of a student’s academic
program in the ‘‘extenuating
circumstances’’ provision would be
inconsistent with the statutory intent of
the closed school discharge. Because the
closed school discharge regulations are
intended to address the closure of an
entire school or branch campus, as
opposed to discontinuation of a specific
program offered at such a location, we
agree with these negotiators. Therefore,
we have declined to include this
additional exceptional circumstance in
the proposed regulations.
Teach-Out Plans, Orderly Closures and
Transfer of Credits
Under these proposed regulations, we
are proposing that students who are
provided an opportunity to complete
their program through a teach-out plan
or an orderly closure approved by the
school’s accreditor and, if applicable,
the school’s State authorizing agency
would not have the right to receive a
closed school discharge as long as the
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school upheld the conditions of the
teach-out plan or orderly closure. We
believe that closing schools should be
encouraged to offer accreditor-approved
and, if applicable, State authorizerapproved teach-out plans and orderly
closures to allow students the
reasonable opportunity to complete the
academic programs, either at another
location after the school has closed, or
by continuing to offer classes to
students until they have completed their
program of study before the school
officially closes.
One negotiator noted that while
closing schools may conduct orderly
closures or offer teach-out plans, a
borrower can choose not to participate
in an orderly closure or a teach-out
plan. This negotiator argued that a
borrower should not qualify for a closed
school discharge if he or she could have
completed the program through an
orderly closure or through a teach-out
plan, but chose not to do so. In this
negotiator’s view, the law is written to
encourage borrowers in closed school
situations to complete their programs
under the approved teach-out plan or
through an orderly closure and not to
receive closed school discharges.
We agree that borrowers who have a
reasonable opportunity to complete
their academic programs through an
orderly closure or a teach-out plan
should not qualify for a closed school
discharge, if the orderly closure or the
teach-out plan has been approved by the
school’s accrediting agency and, if
applicable, the school’s State
authorizing agency. In such cases, the
closure of the school did not render the
student unable to complete the program
in which the student was enrolled.
Borrowers who attend closing schools
may be better served by completing
their programs, either at the school or at
another school through a teach-out plan,
than by having their loans forgiven and
being required to start their education
over at another institution. Students
should be encouraged to complete their
academic program, not to have their
loans discharged. And schools should
be encouraged to provide their students
with an opportunity to do so. It is for
this reason that accreditors are required
to review and approve a school’s teachout plan if the institution is at risk for
closure.
Department Review of Guaranty
Agency Denial of a Closed School
Discharge Request
In the Perkins Loan and Direct Loan
Programs, closed school discharge
determinations are made by the
Department. The Department is the loan
holder for all Direct Loans and becomes
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the loan holder for Perkins Loans held
by a school that closes. In the FFEL
Program, closed school discharge
determinations are generally made by
the guaranty agency. The current FFEL
Program regulations do not specifically
provide an opportunity for a review of
the guaranty agency’s determination of
a borrower’s eligibility for a closed
school discharge. Proposed
§ 682.402(d)(6)(ii)(F) would provide an
opportunity for the borrower to receive
Departmental review of closed school
discharge claims which have been
denied by the guaranty agency to
provide a more complete review of the
claims, comparable to that provided for
false certification discharge claims.
A negotiator pointed out that existing
regulations allow the Department to
review closed school discharge
application denials for Direct Loan
borrowers. This proposal is intended to
establish parity between the FFEL and
Direct Loan programs with regard to the
review of closed school discharge
applications.
Additional Closed School Discharge
Proposals
The negotiated rulemaking committee
also discussed several additional
proposed revisions to the closed school
discharge regulations.
Some negotiators proposed adding a
provision specifying that a borrower
who graduated prior to the school’s
closure could not qualify for a closed
school discharge. The Department does
not need to add such a provision. A
borrower who graduates prior to the
closure of a school is already ineligible
for closed school discharge because the
student has completed his or her
program of study and received a
credential.
One negotiator proposed narrowing
the scope of the closed school discharge
by disqualifying a borrower from a
closed school discharge if the borrower
completed a ‘‘comparable program’’ of
study at another school. Another
negotiator suggested defining
‘‘comparable program’’ as meaning a
program of equal or greater value or
quality, based on academic outcomes,
graduation rates, and default rates.
Another negotiator recommended
determining ‘‘comparable program’’
based on the Classification of
Instructional Programs (CIP) code plus
credential level. However, other
negotiators expressed concerns that this
proposal might push borrowers into
programs in which they originally did
not intend to enroll. They expressed
concern that a student may be pushed
into a program that is not really
‘‘comparable’’ to the borrower’s original
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program. A student may enroll in the
program because there is nothing else
comparable nearby, although the better
option for the student would have been
to apply for the closed school discharge.
Other negotiators questioned the value
of adding the ‘‘comparable program’’
language at all. One negotiator suggested
that, since a borrower can transfer
credits to another program, there is no
need to explicitly use or define the term
‘‘comparable program’’ in the
regulations.
Given the uncertain statutory
authority for, or effect of adding the
‘‘comparable program’’ language
suggested by the negotiator, the
Department declines to propose
including such a provision in the
regulations.
False Certification Discharges
(§ 685.215)
Statute: Section 437(c) of the HEA
provides for the discharge of a
borrower’s liability to repay a FFEL
Loan if the student’s eligibility to
borrow was falsely certified by the
school. The false certification discharge
provisions also apply to Direct Loans,
under the parallel terms, conditions,
and benefits provision in section 455(a)
of the HEA. Section 484(d) of the HEA
specifies the requirements that a student
who does not have a high school
diploma or a recognized equivalent of a
high school diploma must meet to
qualify for a title IV, HEA loan.
Current Regulations: Section
685.215(a)(1)(i) provides that a Direct
Loan borrower may qualify for a false
certification discharge if the school
certified the eligibility of a borrower
who was admitted on the basis of the
ability to benefit, but the borrower did
not in fact meet the eligibility
requirements in 34 CFR part 668 and
section 484(d) of the HEA, as applicable.
Section 685.215(c) and (d) describes the
qualifications and procedures for
receiving a false certification discharge.
Proposed Regulations: The proposed
changes to § 685.215(a)(1)(i) would
eliminate the reference to ‘‘ability to
benefit’’ and specify that a borrower
qualifies for a false certification
discharge if the borrower reported not
having a high school diploma or its
equivalent and did not satisfy the
alternative to graduation from high
school requirements in 34 CFR part 668
and section 484(d) of the HEA. Thus,
under proposed § 685.215(a)(1)(i), if a
school certified the eligibility of a
borrower who is not a high school
graduate (and does not meet the
applicable alternative to high school
graduation requirements) at the time the
loan was disbursed, the borrower would
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qualify for a false certification
discharge.
Proposed § 685.215(c) and (d) would
update the procedures for applying for
a false certification discharge. Proposed
§ 685.215(c)(1) would describe the
requirements a borrower must meet to
qualify for a discharge based on a false
certification of high school graduation
status. Proposed § 685.215(c)(1)(ii)
would specify that a borrower who was
unable to obtain an official transcript or
diploma from his or her high school
and, in place of a high school transcript
or diploma, submitted a written
attestation that the borrower had a high
school diploma, does not qualify for a
false certification discharge if the
borrower actually did not have a high
school diploma. The attestation would
have to be provided under penalty of
perjury.
Reasons:
Application Process
Current § 685.215(c) requires the
borrower to submit a ‘‘written request
and a sworn statement’’ to apply for a
false certification discharge. We propose
replacing this language with a
requirement that the borrower submit an
application for discharge on ‘‘a form
approved by the Secretary, signed under
penalty of perjury,’’ to bring the
regulations up to date with the current
process. Borrowers applying for false
certification discharges now submit a
Federal false certification discharge
application. This application includes
several certifications that the borrower
must make under penalty of perjury.
The false certification discharge
application takes the place of the sworn
statement that was formerly required.
False Certification of a Borrower
Without a High School Diploma or
Equivalent
We propose removing the ‘‘ability to
benefit’’ language from § 685.215(a)(1)(i)
because there is no longer a statutory
basis for certifying the eligibility of nonhigh school graduates based on an
‘‘ability to benefit.’’ Section 484(d) of
the HEA establishes different standards
under which a non-high school graduate
may qualify for title IV aid. We believe
that it is preferable to refer to section
484(d) of the HEA by cross-reference,
rather than to incorporate the statutory
language in the regulations. Under this
approach, the regulatory language will
incorporate any current or future
alternatives to the high school
graduation requirements specified in
section 484(d) of the HEA.
Some of the non-Federal negotiators
noted that a borrower may provide false
information to the school the borrower
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is applying to attend regarding their
high school graduation status. The
negotiators asserted that, unless the
school investigates the borrower’s claim
that he or she is a high school
graduate—for instance by requesting
transcripts, which are harder to falsify
than a diploma—the school may
unknowingly falsely certify the
borrower’s eligibility. One negotiator
proposed adding language specifying
that, for a borrower to qualify for a false
certification discharge, the school must
be unable to provide to the Department
clear and convincing evidence that the
student provided the school with
evidence of their high school graduation
status. The negotiator pointed out that
in some instances—for example with
homeschooled students—the school
basically only has a representation from
the student that the student is a high
school graduate. Under this proposal,
the borrower would have to demonstrate
that the school knowingly certified the
eligibility of the borrower even though
the borrower did not meet the high
school graduation requirements.
There was strong disagreement
between the negotiators over whether
the school must ‘‘knowingly’’ falsely
certify the high school graduation status
of a borrower for the borrower to qualify
for a false certification discharge. Some
negotiators noted that it is the school’s
responsibility to determine the
borrower’s eligibility. If the school does
not, and certifies eligibility anyway, the
borrower’s eligibility may have been
falsely certified, and the borrower
should qualify for the discharge. Other
negotiators felt that a mistaken
certification of eligibility should not
qualify a borrower for a false
certification discharge. One negotiator
pointed out that, regardless of whether
the school knew if the borrower was a
high school graduate, if the school
certified a non-high school graduate’s
eligibility, the borrower’s eligibility
would still have been falsely certified,
and the borrower would still qualify for
a false certification discharge. Other
negotiators expressed concern with this
proposal, noting that borrowers would
have a difficult time proving that the
school ‘‘knowingly’’ falsified the
borrower’s eligibility.
Under current regulations, a school
may be responsible for the repayment of
funds related to a false certification
discharge due to a school’s ‘‘negligent or
willful false certification’’ (34 CFR
685.308(a)(2)). It would be inconsistent
with these requirements to require that
a school would have to ‘‘knowingly’’
falsely certify a borrower’s eligibility for
the borrower to qualify for a false
certification discharge. However, the
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Department believes that schools should
be able to rely on an attestation from a
borrower that the borrower earned a
high school diploma in cases when the
borrower is unable to obtain an official
transcript or diploma from the high
school. Therefore, we are proposing
regulatory language that would provide
that when a borrower provides an
institution an attestation of their high
school graduation status for purposes of
admission to the institution, they may
not subsequently qualify for a false
certification discharge based on not
having a high school diploma.
Moreover, if the institution has
confirmed with a State authority that
the school was approved by that State
to issue high school diplomas at the
time of the borrower’s graduation from
that school, the institution must collect
evidence that a student has a bona fide
diploma from the school. The school
has no additional obligation to collect
transcripts or other information in order
to certify the student.
A negotiator noted that the current
regulations specify that the borrower
qualifies for a false certification
discharge if the borrower did not have
a high school diploma or recognized
equivalent at the time the loan was
originated. The negotiator pointed out
that the loan can be originated but the
funds might not be disbursed and
suggested that the date of disbursement
might be the appropriate date rather
than the date of origination. In addition,
a borrower could be a senior in high
school at the time the loan was
originated, with the expectation that the
borrower will have graduated high
school at the time of enrollment. While
a loan can be originated months before
a borrower enrolls in a school, it is not
disbursed until the student is enrolled.
The Department agrees that using
disbursement date rather than
origination date would be a more
accurate indicator that a school falsely
certified a borrower’s high school
graduation status, and has made that
change in the proposed language.
One negotiator suggested amending
the regulations to specify that a
borrower must have a ‘‘valid high
school diploma.’’ The negotiator
believed that this addition would
protect schools from companies that
create false diplomas for potential
student loan borrowers. Although the
2016 final regulations did not use the
phrase ‘‘valid high school diploma,’’
those regulations added language to 34
CFR 685.215 intended to state more
explicitly that a school’s certification of
eligibility for a borrower who is not a
high school graduate, and who does not
meet the alternative to high school
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graduate requirements, is grounds for a
false certification discharge. As
explained in the preamble to the NPRM
for the 2016 final regulations, the added
language was meant to address the
problem of schools encouraging
students to obtain false high school
diplomas to qualify for Direct Loans.
See 81 FR 39377. Upon further review
however, the Department believes that
the existing language of 34 CFR 685.215,
with its proposed updates for changes in
the Department’s statutory authority as
noted above, already covers such
circumstances. The Department
accordingly does not propose including
such additional language in the
regulations proposed in this NPRM, and
proposes to rescind these provisions of
the 2016 final regulations. A school still
falsely certifies a borrower’s eligibility if
it is aware that a student does not have
a high school diploma and encourages
the student to obtain a false diploma.
The addition of the word ‘‘valid’’ to the
requirement that a borrower have a high
school diploma would not have any
meaningful effect, as an ‘‘invalid’’ high
school diploma would not be a ‘‘high
school diploma’’ for the purposes of this
regulation.
In the 2016 final regulations, the
Department also added language to
clarify a provision in existing 34 CFR
685.215 that a borrower may receive a
false certification discharge of a Direct
Loan if the school certified the
eligibility of a student who, because of
a physical or mental condition, age,
criminal record, or other reason
accepted by the Secretary, would not
meet the requirements for employment
in the student’s State of residence in the
occupation for which the training
program for which the loan was
provided was intended—or in other
words, certified the student despite the
fact that the student had a disqualifying
status. 34 CFR 685.215(a)(1)(iii). Upon
further review, however, the
Department believes that the changes in
the 2016 final regulations did not alter
the operation of the existing regulation
as to disqualifying conditions in any
meaningful way, and as a result does
not propose such added language in
these regulations. We, therefore,
propose to rescind this provision of the
2016 final regulations.
Finally, in the 2016 final regulations,
the Department added that the
Department may consider evidence that
a school had falsified the Satisfactory
Academic Progress (SAP) of its students
to determine whether to discharge a
borrower’s loan without an application
from the borrower. 81 FR 76082 (text of
34 CFR 685.215(c)(8)). Existing 34 CFR
685.215 already provides that the
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Department may discharge a borrower’s
Direct Loan by reason of false
certification without an application.
Evaluation of an institution’s
implementation of their SAP policy is
already part of an FSA program review,
so there is already a mechanism in place
to identify inappropriate activities in
implementing an institution’s SAP
policy. Therefore, the Department
declines to include such a provision in
the regulations proposed in this NPRM
and proposes rescinding this provision
of the 2016 final regulations.
Financial Responsibility (§ 668.171
General)
Statute: Section 487(c)(1) of the HEA
authorizes the Secretary to establish
reasonable standards of financial
responsibility. Section 498(a) of the
HEA provides that, for purposes of
qualifying an institution to participate
in the title IV, HEA programs, the
Secretary must determine the legal
authority of the institution to operate
within a State, its accreditation status,
and its administrative capability and
financial responsibility.
Section 498(c)(1) of the HEA
authorizes the Secretary to establish
ratios and other criteria for determining
whether an institution has the financial
responsibility required to (1) provide
the services described in its official
publications, (2) provide the
administrative resources necessary to
comply with title IV, HEA requirements,
and (3) meet all of its financial
obligations, including but not limited to
refunds of institutional charges and
repayments to the Secretary for
liabilities and debts incurred for
programs administered by the Secretary.
Current Regulations: The current
regulations in § 668.171(a) mirror the
statutory requirements that to begin and
to continue to participate in the title IV,
HEA programs, an institution must
demonstrate that it is financially
responsible. The Secretary determines
whether an institution is financially
responsible based on its ability to
provide the services described in its
official publications, properly
administer the title IV, HEA programs,
and meet all of its financial obligations.
The Secretary determines that a
private non-profit or proprietary
institution is financially responsible if it
satisfies the ratio requirements and
other criteria specified in the general
standards under § 668.171(b) and
appendix A or B to subpart L of the
General Provisions regulations. Under
those standards, an institution:
• Must have a composite score of at
least 1.5, based on its Equity, Primary
Reserve, and Net Income ratios;
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• Must have sufficient cash reserves
to make required refunds;
• Must be current in its debt
payments. An institution is not current
in its debt payment if it is in violation
of any loan agreement or fails to make
a payment for 120 days on a debt
obligation and a creditor has filed suit
to recover funds under that obligation;
and
• Must be meeting all of its financial
obligations, including but not limited to
refunds it is required to make under its
refund policy or under § 668.22, and
repayments to the Secretary for debts
and liabilities arising from the
institution’s participation in the title IV,
HEA programs.
Proposed Regulations: We propose to
restructure § 668.171, in part, by
amending paragraph (b) and adding new
paragraphs (c) and (d) that provide that
an institution does not or may not be
able to meet its financial or
administrative obligations if it is subject
to one or more of the following actions
or events:
Mandatory triggering events:
• Liabilities from borrower defenses
to repayment or final judgments or
determinations. After the end of the
fiscal year for which the Secretary has
most recently calculated an institution’s
composite score, the institution incurs a
liability arising from borrower defense
to repayment discharges granted by the
Secretary, or a final judgment or
determination from an administrative or
judicial action or proceeding initiated
by a Federal or State entity and as a
result of that liability, the institution’s
recalculated composite score is less than
1.0, as determined by the Secretary
under proposed paragraph (e) of this
section.
• Withdrawal of owner’s equity. For a
proprietary institution whose composite
score is less than 1.5, there is a
withdrawal of owner’s equity from the
institution by any means, including by
declaring a dividend (unless the
withdrawal is a transfer to an entity
included in the affiliated entity group
on whose basis the institution’s
composite score was calculated), and as
a result of that withdrawal, the
institution’s recalculated composite
score is less than 1.0, as determined by
the Secretary under proposed paragraph
(e) of this section.
• SEC and Exchange Actions for
publicly traded institutions. The SEC
issues an order suspending or revoking
the registration of the institution’s
securities pursuant to section 12(j) of
the Securities and Exchange Act of 1934
(the ‘‘Exchange Act’’) or suspends
trading on the institution’s securities on
any national securities exchange
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pursuant to section 12(k) of the
Exchange Act or the national securities
exchange on which the institution’s
securities are traded delists, either
voluntarily or involuntarily, the
institution’s securities pursuant to the
rules of the relevant national securities
exchange.
Discretionary triggering events:
• Accrediting agency actions. The
institution is issued a show-cause order
that if not satisfied, would lead the
accreditor to withdraw, revoke or
suspend institutional accreditation.
• Loan agreement violations. The
institution violated a provision or
requirement in a security or loan
agreement with a creditor, and as
provided under the terms of that
security or loan agreement, a monetary
or nonmonetary default or delinquency
event occurs, or other events occur, that
trigger, or enable the creditor to require
or impose on the institution, an increase
in collateral, a change in contractual
obligations, an increase in interest rates
or payments, or other sanctions,
penalties, or fees.
• The institution is cited by a State
licensing or authorizing agency for
violating a State or agency requirement
and notified that its licensure or
authorization will be withdrawn or
terminated if the institution does not
take the steps necessary to come into
compliance with those requirements.
• 90/10 Revenue Requirement. For its
most recently completed fiscal year, a
proprietary institution did not derive at
least 10 percent of its revenue from
sources other than title IV, HEA
program funds, as provided under
§ 668.28(c).
• Cohort default rate (CDR). The
institution’s two most recent official
cohort default rates are 30 percent or
greater, as determined under 34 CFR
part 668, subpart N, unless the
institution files a challenge, request for
adjustment, or appeal under that
subpart with respect to its rates for one
or both of those fiscal years, and that
challenge, request, or appeal remains
pending, results in reducing below 30
percent the official cohort default rate
for either or both years, or precludes the
rates from either or both years from
resulting in a loss of eligibility or
provisional certification.
Also, we propose to add a new
paragraph (e) under which the Secretary
would recalculate an institution’s most
recent composite score for a mandatory
triggering event under proposed
paragraph (c)(1) by recognizing as an
expense the actual amount of the
liability incurred by an institution or by
accounting for the withdrawal of
owner’s equity. Specifically, the
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Secretary would use the audited
financial statements from which the
institution’s most recent composite
score was calculated and would account
for that expense or withdrawal by:
• For the actual liabilities incurred by
a proprietary institution, (1) increasing
expenses and decreasing adjusted equity
by that amount for the primary reserve
ratio, (2) decreasing modified equity by
that amount for the equity ratio, and (3)
decreasing income before taxes by that
amount for the net income ratio.
• For the withdrawal of owner’s
equity, (1) decreasing adjusted equity by
the amount for the primary reserve ratio,
and (2) decreasing modified equity by
that amount for the equity ratio.
• For the actual liabilities incurred by
a non-profit institution, (1) increasing
expenses and decreasing expendable net
assets by that amount for the primary
reserve ratio, (2) decreasing modified
net assets by that amount for the equity
ratio, and (3) decreasing change in net
assets without donor restrictions by that
amount for the net income ratio.
In addition, we propose to add a new
paragraph (f) under which an institution
would be required to notify the
Secretary no later than 45 days after the
end of its fiscal year if it did not satisfy
the 90/10 revenue requirement, and
notify the Secretary no later than 10
days after any other mandatory or
discretionary triggering event occurs. In
that notice, or in response to a
preliminary determination by the
Secretary that the institution is not
financially responsible based on one or
more of those actions or events, the
institution could:
• Demonstrate that the reported
withdrawal of owner’s equity was used
exclusively to meet tax liabilities of the
institution or its owners for income
derived from the institution;
• Show that the mandatory or
discretionary event has been resolved,
or demonstrate that the institution has
insurance that will cover all or part of
the liabilities that arise from final
judgments or determinations; or
• Provide information about the
conditions or circumstances that
precipitated that triggering event that
demonstrates that the action or event
has not or will not have a material
adverse effect on the institution.
• Show that the creditor waived a
violation of a loan agreement and if
applicable, identify any conditions or
changes to the loan agreement that the
creditor imposed in exchange for
granting the waiver.
Finally, the Secretary would consider
the information provided by the
institution in determining whether to
issue a final determination that the
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institution is not financially
responsible.
Reasons: Under the current process,
for the most part, the Department
determines annually whether an
institution is financially responsible
based on its audited financial
statements, which are submitted to the
Department six to nine months after the
end of the institution’s fiscal year.
Under these proposed regulations, we
may determine at the time that certain
actions or events occur that the
institution is not financially
responsible. We address the significance
of an action or event that occurs after
the close of an audited period (or, in
other words, between audit cycles), to
assess in a more timely manner whether
the institution, regardless of its
composite score, satisfies the statutory
requirements that it is able to provide
the services described in its
publications and statements, to provide
the administrative resources necessary
to comply with title IV, HEA
requirements, and to meet all of its
financial obligations. In doing so, we
propose to expand the range of events
that could make an institution not
financially responsible, from the
provisions under § 668.171(b)(3) relating
to whether an institution is current in
its debt payments, to other events that
may pose a material adverse risk to the
financial viability of the institution. In
cases where the Department determines
that an event poses a material adverse
risk, this approach would enable us to
address that risk contemporaneously by
taking the steps necessary to protect the
Federal interest.
Mandatory Triggering Events
With regard to liabilities arising from
defenses to repayment discharges
adjudicated by the Secretary or an
administrative or judicial action or
proceeding initiated by a Federal or
State entity, we would assess the risk by
determining whether the payment of
those liabilities would cause the
institution’s composite score to fall
below 1.0. As noted above, the actual
amount of the liability would be treated
as an expense and the Department
would recalculate the institution’s most
recent composite score using that
amount. Assuming that an institution’s
composite score is 1.0 or higher, if its
recalculated composite score does not
fall below 1.0, we would conclude that
the institution has the resources to pay
those liabilities and continue
operations. In cases where the
institution’s recalculated score is less
than 1.0, we would conclude that the
payment of those liabilities would have
a material adverse effect on its
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operations that warrants additional
oversight and financial protection.
During negotiated rulemaking, several
non-Federal negotiators argued that
including liabilities arising from judicial
or administrative actions initiated by a
Federal or State entity may cause small
or not material changes from an
accounting perspective, and reporting
those liabilities to the Department
would be burdensome and of little
value. They suggested that an institution
should report only those liabilities that
are material, as determined by the
institution or its accountant. While we
agree that reporting all liabilities from
actions resulting in final judgments or
determinations may not be necessary,
we are concerned that the subjective
nature of materiality evaluations could
result in an institution not reporting an
otherwise significant action. We believe
that a better, more objective, approach
would be to evaluate the impact of the
liability on the institution’s composite
score, regardless of the amount or
materiality of the liability.
The withdrawal of owner’s equity is
currently an event that an institution
reports to the Department under the
provisions of the zone alternative in
§ 668.175(d). An institution participates
under the zone alternative if its
composite score is between 1.0 and 1.5.
We proposed at negotiated rulemaking
to relocate this provision to the general
standards of financial responsibility
under § 668.171. Under those general
standards, this provision would still be
a reportable event, but only in cases
where an institution’s financial
condition is already precarious and any
withdrawal of funds from the institution
would further jeopardize its ability to
continue as a going concern. In this
NPRM, we propose to account for the
withdrawal of owner’s equity by
decreasing adjusted equity and modified
equity in recalculating the institution’s
composite score. Doing so would enable
the Department to quantify objectively
the impact of the withdrawal.
For publicly-traded institutions, we
believe that the SEC or stock exchangerelated issues listed in the proposed
regulations are actions which would
jeopardize the institution’s ability to
meet its financial obligations or
continue as a going concern.
When the SEC suspends trading on
the institution’s stock, the SEC does not
make this warning public or announce
that it is considering a suspension until
it determines that the suspension is
required to protect investors and the
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public interest.4 In that event, the SEC
posts the suspension and the grounds
for the suspension on its website.
Therefore, under the reporting
requirements in proposed § 668.171(e),
the institution would be required to
notify the Department within 10 days of
receiving notification from the SEC that
the institution is being suspended. The
SEC may decide to, for example,
suspend trading on the institution’s
stock based on (1) a lack of current,
accurate, or adequate information about
the institution, for example when the
institution is not current in filing its
periodic reports; (2) questions about the
accuracy of publicly available
information, including information in
institutional press releases and reports
and information about the institution’s
current operational status, financial
condition, or business transactions; or
(3) questions about trading in the stock,
including trading by insiders, potential
market manipulation, and the ability to
clear and settle transactions in the
stock.5 Because an action by the SEC to
suspend trading in, or delist, an
institution’s stock directly impairs an
institution’s ability to raise funds—
creditors may call in loans or the
institution’s credit rating may be
downgraded—the Department needs to
be informed of those actions in a timely
manner.
With regard to compliance with stock
exchange requirements, the major
exchanges typically require institutions
whose stock is listed to satisfy certain
minimum requirements such as stock
price, number of shareholders, and the
level of shareholder’s equity.6 Among
other things, if a stock falls below the
minimum price, the institution fails to
provide timely reports of its
performance and operations in its Form
10–Q or 10–K filings with the SEC, or
other requirements are not met, the
exchange may delist the institution’s
stock. Delisting is generally regarded as
the first step toward a Chapter 11
bankruptcy. However, before the
exchange initiates a process to delist the
stock, the exchange notifies the
institution and may, as applicable, give
the institution several days to respond
4 See SEC Investor Bulletin: Trading Suspensions,
available at www.sec.gov/answers/
tradingsuspension.htm.
5 Id.
6 See, e.g., New York Stock Exchange Rule 801.00:
Suspension and Delisting: Securities admitted to
the list may be suspended from dealings or removed
from the list at any time that a company falls below
certain quantitative and qualitative continued
listing criteria. When a company falls below any
criterion, the Exchange will review the
appropriateness of continued listing.
Available at nysemanual.nyse.com/lcm/sections/
lcmsections/chp_1_9/default.asp.
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with a plan of the actions it intends to
take to come into compliance with
exchange requirements.
With respect to an institution’s failure
to timely file a required annual or
quarterly report with the SEC, we noted
previously in this discussion that the
late filing of, or failure to file, a required
SEC report may precipitate an adverse
action by the SEC or a stock exchange.
Or, a late filing may limit the
institution’s ability to conduct certain
types of registered securities offerings.
In addition, capital markets tend to react
negatively in response to late filings. All
told, the consequences of late SEC filing
may impact the institution’s capital
position and its financial responsibility
for title IV purposes.
With regard to the proposed provision
regarding an institution that voluntarily
delists its stock; we note that this action
would typically relate to a change in
ownership that would be subject to
Department review. However, even if
that action does not trigger a change in
ownership, we believe the shift from
equity to private financing is a
significant event warranting review.
Discretionary Triggering Events
During negotiated rulemaking, the
Department proposed several actions or
events, all of which were discretionary,
that would likely have a material
adverse effect on an institution’s
financial condition. Some of the nonFederal negotiators noted that the 2016
final regulations contained a wider
range of triggering events, some
mandatory and some discretionary, and
urged the Department to adopt that
framework and those triggering events
in this NPRM to better protect
taxpayers. As previously discussed, we
are proposing in this NPRM only
mandatory triggering events whose
consequences are known and quantified
(e.g., the actual liabilities incurred from
defense to repayment discharge) and
objectively assessed through the
composite score methodology, or whose
consequences pose a severe and
imminent risk (e.g., SEC or stock
exchange actions) to the Federal interest
that warrant financial protection.
This approach differs from that in the
2016 final regulations. Those
regulations included as mandatory
triggering events (1) events whose
consequences were speculative (e.g.,
estimating the dollar value of a pending
lawsuit or pending defense to
repayment claims, or evaluating the
effects of fluctuations in title IV funding
levels), (2) events more suited to
accreditor action or increased oversight
by the Department (e.g., high drop-out
rates and unspecified State violations
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that may have no bearing on an
institution’s financial condition or
ability to operate in the State), and (3)
results of a test (e.g., a financial stress
test) whose future development and
application was unspecified. Upon
further review, we believe these
triggering events are inappropriate and
would have unnecessarily required
institutions to provide a letter of credit
or other financial protection. But we
propose to include some of the 2016
triggers as discretionary events- certain
accrediting agency actions, violations of
loan agreements, State licensure and
authorization violations, and high
cohort default rates. We are also
proposing to rescind the mandatory
triggering event provisions of the 2016
final regulations.
When an accrediting agency issues an
institutional accreditation show-cause
order, such action may call into
question the institution’s continued
ability to operate as an accredited
institution. As a discretionary trigger,
we would work with the institution and
the accreditor to determine whether that
action has or will have a material
adverse effect on the institution’s
condition or its ability to continue as a
going concern before determining
whether the institution is financially
responsible.
The Department also intends to
modify the provisions currently in
§ 668.171(b)(3) to address violations of
loan agreements as a discretionary
triggering event. That section currently
provides that an institution is not
current in debt payments if a loan
agreement violation is noted in its
audited financial statements or it is
more than 120 days delinquent in
making a payment and a creditor has
filed suit. The Department intends to
replace that rule with a discretionary
trigger that looks more holistically at the
nature and outcome of loan violations.
Doing so removes the constraints of
relying on disclosures in annual audits
or the filing of a lawsuit, and is more in
keeping with our goal of assessing
potential financial issues
contemporaneously. As noted in the
proposed provision, a violation of a loan
agreement can precipitate a number of
consequences that may have a material
adverse effect on an institution’s ability
to meet its financial obligations. For
example, the creditor may decide to
waive the violation entirely or waive it
in exchange for other concessions. In
any case, as a discretionary trigger, the
Department would work with the
institution to determine whether the
violation has or could have material
financial consequences before
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determining whether the institution is
financially responsible.
The Department similarly plans a
more targeted approach to violations of
State authorization or licensing
requirements. Unlike the 2016 final
regulations where an institution would
report to the Department any violation
of a State authorization or licensing
requirement, we propose to consider
only those violations that, if unresolved,
could lead to termination of the
institution’s ability to continue to
provide educational programs or
otherwise continue to operate in the
State. Therefore, we propose to rescind
these mandatory reporting provisions of
the 2016 final regulations.
The Department also proposes to treat
the 90/10 revenue requirement as a
discretionary triggering event. A
proprietary institution that fails the
requirement for one fiscal year is in
danger of losing its eligibility to
participate in the title IV, HEA programs
if it fails again in the subsequent fiscal
year. Along the same lines, an
institution whose cohort default rate is
30% or more for two consecutive years
is in danger of losing its title IV loan
eligibility if its default rate is 30% or
more in the subsequent year. In either
case, that risk of lost eligibility may
require the Department to seek financial
protection from the institution. While
the 2016 final regulations would have
required an affected institution to
provide a letter of credit or other
financial protection immediately, the
Department believes it is more
appropriate for the Department to
review the institution’s efforts to
remedy or mitigate the reasons for its
failure, to evaluate the institution’s
potential and plan to teach-out students
if closure appears inevitable, and to
assess the extent to which there were
anomalous or mitigating circumstances
leading to its failure, before determining
whether the institution is financially
responsible.
In response to requests by the nonFederal negotiators that a process be
created to allow an institution to
provide information about an action or
event to the Department before the
Department issues a final determination,
we suggested such a process during the
negotiations and propose that same
process in these regulations. Under that
process, an institution has the
opportunity to provide information for
reportable events twice–-once when it
notifies the Department that the event
occurred and then, if it has additional
information, whenever the Department
makes a preliminary determination that
the event would have a material adverse
impact on the institution. For the
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reporting requirements in proposed
paragraph (f), we adopt the timeframe
currently in § 668.28 for notifying the
Department of 90/10 failures. For all
other events addressed in these
proposed regulations, we believe 10
days provides sufficient time for
institutions to report those events and
for the Department to take action, if
needed.
Financial Ratios (§ 668.172)
Statute: Section 498(c)(1) of the HEA
authorizes the Secretary to establish
ratios and other criteria for determining
whether an institution has the financial
responsibility required to (1) provide
the services described in its official
publications; (2) provide the
administrative resources necessary to
comply with title IV, HEA requirements;
and (3) meet all of its financial
obligations, including but not limited to
refunds of institutional charges and
repayments to the Secretary for
liabilities and debts incurred for
programs administered by the Secretary.
Current Regulations: Section 668.172
defines the Primary Reserve, Equity, and
Net Income ratios that comprise the
composite score and Appendices A and
B illustrate how the composite score is
calculated using sample financial
statements from proprietary and private
non-profit institutions.
Proposed Changes: The Secretary
proposes to calculate a composite score
in accordance with new standards
issued by the Financial Standards
Accounting Board (FASB) in
Accounting Standards Update (ASU)
2016–02, ASC 842 (Leases). However,
the Department will need to update the
composite score calculation to take into
account this dramatic change in FASB
standards, which it cannot do
immediately. As a result, for 6 years
following the implementation of the
new FASB standards, or following the
publication of new composite score
formula regulations to take into account
the FASB change, whichever is shorter,
institutions that fail the composite score
based on the new FASB standards, but
would have had a passing composite
score under the former FASB standards
(with regard to leases), may request the
calculation of an alternative composite
score based on additional data provided
by the institution to the Department to
enable it to calculate an alternative
composite score excluding operating
leases. The Department will use the
higher of those two composite scores to
determine whether the institution is
financially responsible.
Reasons: The new FASB reporting
requirements could negatively impact
an institution’s composite score even
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though the underlying financial
condition of the institution has not
changed. Based on changes FASB
announced in February, 2016 in ASU–
2016–2, operating leases longer than 12
months will be recorded under GAAP as
separate liabilities and right-of-use
assets. Consequently, adding operating
leases to the Balance Sheet (for
proprietary institutions) or to the
Statement of Financial Position (for
non-profit institutions) could decrease
the Equity Ratio if the right-of-use assets
in the Modified Assets category
significantly increased compared to
Modified Equity or Modified Net Assets,
resulting in a lower composite score.
With that in mind, some of the nonFederal negotiators argued that, due to
the long-term nature of some leases, the
Department should allow an institution
some time to change its business model
regarding leases before applying the
new FASB standards to its existing
leases for purposes of calculating the
composite score. We agreed, and in the
final session of negotiated rulemaking
proposed a six year transition period
during which existing leases would be
treated under the previous FASB
guidance.
However, upon further review, we
believe that a transition period would
only partially defer and not adequately
address the consequences of the
accounting changes and how those
changes are reflected in the composite
score. While we recognize that schools
must adhere to the new FASB reporting
requirements, which will be reflected in
their audited statements, we believe that
including assets and liabilities
associated with those transactions in the
composite score, where no lease-related
assets or liabilities are currently
included, could encourage some
institutions to make changes in their
business model that have negative
consequences for students. To mitigate
a negative impact of the new lease
reporting requirements on their
composite score, institutions may enter
into shorter term but higher cost leases
instead of continuing in or entering into
longer term leases which typically have
better terms, such as lower monthly
lease rates and more cost-effective lease
improvements. Shorter, more expensive
leases may raise costs for institutions,
and therefore students, and could result
in more frequent campus relocations or
closures that may interfere with
students’ ability to complete their
programs and raise the risk to taxpayers
of increased numbers of closed school
student loan discharges. We believe that
it is undesirable to put an institution in
a position where it could incur
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increased costs from short-term leases or
where the institution would have to
relocate or close because it could not
negotiate or renew a favorable lease
agreement without jeopardizing its
composite score. In some instances,
even if the school is able to relocate to
another comparable facility, the State
authorizing body or the accreditor may
not approve that relocation if the new
facility is more than a certain
geographic distance or travel time away
from the original campus, if it is on a
different public transportation line or if
it lacks comparable access via public
transportation. In such a case, the
campus move is treated as a campus
closure, which requires the institution
to either teach-out the closing campus
or suffer the financial losses associated
with closed school loan discharges. The
higher costs of short-term leases or
relocation costs, or both, would likely
be passed on to students. Unfortunately,
the composite score currently has no
mechanism for automatic updates in the
event of changes in accounting
standards.
For these reasons, and because the
impact of the upcoming FASB lease
requirements is unknown, we believe it
is necessary to update the composite
score regulations to take into account
this and other FASB changes. Future
negotiated rulemaking will be required
to update the composite score
regulations, so until such time as
revised composite score regulations are
established, or for six years after
implementation of the new FASB
standards (for leases), the Department
will allow institutions the option to
continue calculating the composite
score under current GAAP standards.
Therefore, the Department proposes an
approach under which we will calculate
a composite score for all institutions
under the new FASB requirements
when they take effect since all audited
financial statements will be based on
the new requirements, but we will allow
institutions to provide additional data to
support the calculation of an alternative
composite score under current GAAP
standards (GAAP prior ASU–2016–2
implementation), and in such a case, to
use the higher of the two composite
scores to evaluate financial
responsibility, for the next six years or
until revised composite score
regulations are promulgated, which ever
period is shortest.
Appendix A to Subpart L, Part 668
Statute: Section 498(c)(1) of the HEA
authorizes the Secretary to establish
ratios and other criteria for determining
whether an institution has the financial
responsibility required to (1) provide
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the services described in its official
publications, (2) provide the
administrative resources necessary to
comply with title IV, HEA requirements,
and (3) meet all of its financial
obligations, including but not limited to
refunds of institutional charges and
repayments to the Secretary for
liabilities and debts incurred for
programs administered by the Secretary.
Current Regulations: As provided
under § 668.172(a), appendix A to
subpart L contains three sections that
illustrate how the composite score is
calculated for a proprietary institution.
Section 1 sets forth the ratios and
defines the ratio terms. Section 2
provides a model Balance Sheet and
Statement of Income and Retained
Earnings with numbered line entries
and shows the numbered entries that are
used to calculate each of the financial
ratios. Section 3 takes the calculated
ratios from Section 2 and applies
strength factors and weights associated
with each ratio to derive a blended, or
composite, score that the Secretary uses
to determine, in part, whether the
institution is financially responsible.
Proposed Changes: The Secretary
proposes revising these three sections
by amending the first section to reflect
changes in accounting standards and to
make other clarifying changes that the
Secretary believes will improve
compliance with the financial
responsibility standards. We propose to
add a new section 2 that would provide
a Supplemental Schedule which schools
would be required to provide as part of
their annual financial statement audit
submission. Proposed section 2 would
be titled, ‘‘Section 2: Financial
Responsibility Supplemental Schedule
Requirement and Example.’’ Proposed
Section 3 would combine sections 2 and
3 from the current regulations, and
would be titled, ‘‘Example Financial
Statements and Composite Score
Calculation.’’
Appendix A, Section 1
For a proprietary institution, the
Secretary proposes to revise the
numerator, Adjusted Equity, and the
denominator, Total Expenses, of the
Primary Reserve Ratio.
Changes to Adjusted Equity:
As currently defined, Adjusted Equity
includes ‘‘post-employment and
retirement liabilities’’ and ‘‘all debt
obtained for long-term purposes.’’ The
Secretary proposes changing these terms
to ‘‘post-employment and defined
benefit pension liabilities’’ and ‘‘all debt
obtained for long-term purposes, not to
exceed property, plant and equipment
(PP&E),’’ respectively. In addition, the
Secretary proposes to clarify the term
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‘‘unsecured related party receivables’’
by referencing the related entity
disclosure requirements under
§ 668.23(d). With regard to determining
the value of PP&E, which is currently
the amount net of accumulated
depreciation, the Secretary proposes to
include construction in progress and
lease right-of-use assets.
As noted above, we propose to amend
the current definition of ‘‘debt obtained
for long-term purposes’’, which
currently includes the short-term
portion of the debt, up to the amount of
PP&E. Specifically, we are proposing to
change the meaning of the term ‘‘debt
obtained for long-term purposes’’, to
include lease liabilities for lease rightof-use assets and the short-term portion
of the debt, up to the amount of net
PP&E. However, if an institution wishes
to include the debt as part of the total
debt obtained for long-term purposes,
including debt obtained through longterm lines of credit, the institution
would have to provide a disclosure in
the financial statements that the debt,
including lines of credit, exceeds twelve
months and was used to fund
capitalized assets (i.e., PP&E or
capitalized expenditures per Generally
Accepted Accounting Principles
(GAAP)). The disclosure for the debt
would include the issue date, term,
nature of capitalized amounts and
amounts capitalized. The debt obtained
for long-term purposes would be limited
to those amounts disclosed in the
financial statements that were used to
fund capitalized assets. Any other debt
amount, including long-term lines of
credit used to fund operations, would be
excluded from debt obtained for longterm purposes.
Changes to Total Expenses:
Currently, the regulations provide that
the term ‘‘Total Expenses’’ excludes
income tax, discontinued operations,
extraordinary losses or change in
accounting principle. The Department
proposes to change that term to ‘‘Total
Expenses and Losses’’ and define the
proposed term as: All expenses and
losses, (excludes income tax,
discontinued operations not classified
as an operating expense or change in
accounting principle), less any losses on
investments, post-employment and
defined benefit pension plans and
annuities. Any losses on investments
would be the net loss for the
investments and Total Expenses and
Losses would include the nonservice
component of net periodic pension and
other post-employment plan expenses.
Net Income Ratio
The Department proposes to modify
the numerator of the Net Income ratio,
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‘‘Income before Taxes,’’ and the
denominator, ‘‘Total Revenues.’’
Currently, ‘‘Income before Taxes’’ is
taken directly from the institution’s
audited financial statements. The
Department proposes to define ‘‘Income
before Taxes’’ to include all revenues,
gains, expenses and losses incurred by
the institution during the accounting
period. Income before taxes would not
include income taxes, discontinued
operations not classified as an operating
expense or changes in accounting
principle.
With regard to the denominator, we
propose to change the term ‘‘Total
Revenues’’ to ‘‘Total Revenues and
Gains.’’
We note that while the current
regulations define the term ‘‘Total
Pretax Revenues’’ (total operating
revenues + non-operating revenues and
gains, where investments gains should
be recorded net of investment losses),
that term was erroneously published
and we should have used the term Total
Revenues. The Secretary proposes to
correct that error and define the term,
‘‘Total Revenues and Gains’’ as all
revenues and gains not including
positive income tax amounts,
discontinued operations not classified
as an operating gain, or change in
accounting principle (investment gains
would be recorded net of investment
losses).
Reasons: The proposed changes are
intended to reflect current accounting
standards, particularly Accounting
Standards Update (ASU) 2016–2 Leases
(Topic 842), and clarify how the
composite score is calculated.
When implemented, ASU 2016–2 will
require all non-profit and proprietary
institutions to recognize the assets and
liabilities that arise from leases. In
accordance with FASB Concepts
Statement No. 6, Elements of Financial
Statements, all leases create an asset and
a liability as of the date of the Statement
of Financial Position, or Balance Sheet,
and therefore, an institution must
recognize those lease assets and lease
liabilities as of that date. This is a
change compared to the previous GAAP
approach, which did not require lease
assets and lease liabilities to be
recognized for most leases.
Under this ASU, a proprietary
institution is required to recognize in its
Balance Sheet a liability for the value of
the lease agreement (the lease liability)
and a right-of-use asset representing its
right to use the underlying asset for
lease terms longer than one fiscal year.
The principal difference from previous
accounting guidance is that the lease
assets and lease liabilities arising from
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operating leases will now be recognized
in the Balance Sheet.
The Subcommittee asked the
Department to consider including
defined benefit pension plan liabilities
as a retirement liability that would be
added back to Adjusted Equity. The
Subcommittee stated that changes in
accounting practice that now require
defined pension plan liabilities to be on
the face of the financial statements, as
well as, the required insurance for
pension liabilities and the timing of
when the liability would be payable, all
indicate that defined benefit plan
liabilities should not reduce Adjusted
Equity. In addition, the Subcommittee
argued that all other retirement
liabilities are already included in postemployment liabilities and rather than
having post-employment and retirement
liabilities for expendable net assets it
would be clearer to the community to
use post-employment and defined
benefit pension plan liabilities. The
Department agreed that the
Subcommittee proposals would clarify
how defined benefit pension plan
liabilities will be treated for purposes of
Adjusted Equity.
In the preamble to the notification of
final regulations published in the
Federal Register on November 25, 1997
(62 FR 62867) (1997 Regulations), the
Department was clear that the expenses
included in the Primary Reserve Ratio
included losses; however the appendix
did not include language concerning
losses. Since the inception of the
composite score as a measure of a
school’s financial health, the
Department has included losses as part
of the denominator for the Primary
Reserve Ratio. The proposed changes to
the denominator for the Primary Reserve
Ratio reflect changes in the accounting
terminology and clarify what has
consistently been the Department’s
practice. With regard to losses, the
Subcommittee suggested that there were
some losses that should not be reflected
in the Primary Reserve Ratio. The
Subcommittee proposed that the
Primary Reserve Ratio not include any
losses from post-employment and
defined benefit pension plans and
annuities. The Department agreed.
As a result of ASU 2016–2, the
Department proposes including the
right-of-use asset from leases as part of
PP&E (which is a component of
Adjusted Equity in the Primary Reserve
ratio). The Subcommittee recommended
that the Department include
construction in progress in PP&E for the
purpose of calculating the Primary
Reserve ratio. The Subcommittee
members pointed out that by its very
nature, construction in progress could
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not be considered an expendable asset
because it cannot be easily converted to
cash or cash equivalents when an
institution is in financial difficulty. The
Department agreed and proposes here to
include construction in progress with
PP&E.
Initially, the Subcommittee’s
discussion about how to treat debt
obtained for long-term purposes in
calculating the composite score, focused
around the change in accounting for
leases under ASU 2016–2. Under ASU
2016–2 the liability for leases is not
considered debt for accounting
purposes. The Subcommittee noted that
although the lease liability was not debt,
the liability was clearly associated with
PP&E and argued that it should be
included as debt obtained for long-term
purposes for the composite score. This
discussion then expanded to consider
the various types of debt and liabilities
that the Department encounters in
evaluating financial statements and
computing the composite score. In 2017,
both the Government Accountability
Office (GAO) and the Department’s
Office of Inspector General (OIG) issued
audit reports that found that the
Department was not doing enough to
limit manipulation of the composite
score to protect students from
institutions that could be in danger of
financial difficulty (‘‘Education Should
Address Oversight and Communication
Gaps in Its Monitoring of the Financial
Condition of Schools’’ (GAO–17–555) 7
and ‘‘Federal Student Aid’s Processes
for Identifying At-Risk Title IV Schools
and Mitigating Potential Harm to
Students and Taxpayers’’ (ED–OIG
A09Q0001) 8). The Department is aware
that some institutions use debt,
including long-term lines of credit, to
improve their composite scores without
actually using the debt for long-term
purposes. The use of debt to improve
the composite score, including longterm lines of credit, can be difficult to
identify from examining an institution’s
audited financial statements. When the
composite score was originally
developed, the Department’s intention
was that the long-term debt would be
added back for purposes of the
calculation of the expendable net assets
was the amount of debt that was used
for the purchase of capitalized assets.
We question the viability of an
institution that uses debt, including
long-term lines of credit, for current
operations as opposed to long-term
purposes. Consequently, the amount of
7 Available at: www.gao.gov/products/GAO-17555.
8 Available at: www2.ed.gov/about/offices/list/
oig/auditreports/fy2017/a09q0001.pdf.
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long-term debt that is added back for
expendable net assets should have some
relationship to PP&E—and therefore
should not be included in debt obtained
for long-term purposes if it is not used
for the purchase of capitalized assets.
The Subcommittee specifically
discussed the treatment of long-term
lines of credit with regard to debt
obtained for long-term purposes and
agreed with the Department’s proposed
treatment of long-term lines of credit.
The Department proposes extending this
treatment to all debt not used for longterm purposes to further reduce or
mitigate manipulation of the composite
score.
In the preamble to the 1997
Regulations, the Department was clear
that the calculation of expenses for the
Primary Reserve Ratio included losses;
however, the Appendices to subpart L
did not include language concerning
losses. Since the inception of the
composite score, the Department has
included losses as part of the
denominator for the Primary Reserve
Ratio. The proposed changes to the
denominator for the Primary Reserve
Ratio reflect changes in the accounting
terminology and clarify what has
consistently been the Department’s
practice. With regard to losses, the
Subcommittee suggested that there were
some losses that should not be reflected
in the Primary Reserve Ratio. The
Subcommittee proposed that the
Primary Reserve Ratio should not
include any losses on investments, postemployment and defined benefit
pension plans and annuities. The
Department agreed and has reflected
this change in the proposed regulations.
The Department proposes to add a
reference to the disclosure requirement
for unsecured related party transactions
under § 668.23(d). For both proprietary
and non-profit schools, related party
receivables or other related assets are
excluded from the composite score
calculation if the amount is not secured
and perfected at the date of the financial
statements. The Related Party disclosure
should provide enough detail about the
relationship, transaction(s) and any
conditions for the Department to be able
to make a determination on whether the
related party receivable or other related
assets are properly secured for inclusion
in the composite score calculation.
Appendices A and B, Section 2
Proposed changes: Under proposed
Section 2 for appendices A and B,
proprietary and non-profit institutions
would be required to submit a
Supplemental Schedule as part of their
audited financial statements. The
Supplemental Schedule would contain
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all of the financial elements required to
calculate the composite score and a
corresponding or related reference to the
Statement of Financial Position,
Statement of Activities, Schedule of
Natural to Functional Expenses, Balance
Sheet, Income Statement, or Notes to the
Financial Statements. The amount
entered in the Supplemental Schedule
for each element would tie directly to a
line item, be part of a line item, tie
directly to a note, or be part of a note
in the financial statements. In addition,
the audit opinion letter would contain
a paragraph referencing the auditor’s
additional analysis of the Supplemental
Schedule.
Reasons: As a result of the FASB
updates, some elements needed to
calculate the composite score would no
longer be readily available in the
audited financial statements,
particularly for non-profit institutions.
The Subcommittee suggested using a
Supplemental Schedule as a means to
address this issue. Moreover, by
referencing the financial statements, the
Supplemental Schedule would increase
transparency in how the composite
score is calculated for both institutions
and the Department. The Subcommittee
requested and received advice from
auditors and accountants that the
burden stemming from the
Supplemental Schedule would be
minimal. The Subcommittee believed,
and we agree, that any burden is
outweighed by the need for the
information and the increase in
transparency.
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Appendices A and B, Section 3
Proposed changes: Proposed Section 3
would combine, conceptually, Sections
2 and 3 of the current appendices.
While we do not propose to modify the
current strength factors and weights for
each, proposed Section 3 would be
updated to reflect changes in
terminology based on the changes in
accounting standards and modifications
to the item amounts used in the
example financial statements.
Reasons: We propose to revise current
Section 3 of appendices A and B to
conform with the proposed changes to
Sections 1 and 2 of those appendices.
Appendix B to Subpart L, Section 1
Statute: Section 498(c)(1) of the HEA
authorizes the Secretary to establish
ratios and other criteria for determining
whether an institution has the financial
responsibility required to (1) provide
the services described in its official
publications, (2) provide the
administrative resources necessary to
comply with title IV, HEA requirements,
and (3) meet all of its financial
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obligations, including but not limited to
refunds of institutional charges and
repayments to the Secretary for
liabilities and debts incurred in
programs administered by the Secretary.
Current Regulations: Appendix B to
subpart L contains three sections that
illustrate how the composite score is
calculated for a non-profit institution.
Specifically, Section 1 sets forth the
ratios and defines the ratio terms.
Section 2 provides a model Statement of
Activities and Balance Sheet with
numbered line entries and shows the
numbered entries that are used to
calculate each of the financial ratios.
Section 3 takes the calculated ratios
from Section 2 and applies strength
factors and weights associated with each
ratio to derive a blended, or composite,
score that the Secretary uses to
determine, in part, whether the
institution is financially responsible.
Proposed Changes: We propose to
revise appendix B by amending the
definitions of terms used in Section 1 to
reflect changes in accounting standards
and other changes that the Secretary
believes would clarify how the
composite score is calculated. We
previously noted in the discussion for
appendix A the proposed changes to
Sections 2 and 3 of appendix B.
Appendix B, Section 1
The Department proposes to modify
the definition of the terms ‘‘Expendable
Net Assets’’ and ‘‘Total Expenses’’ as
those terms are used in calculating the
Primary Reserve Ratio. Under the
current regulations, the ‘‘Expendable
Net Assets’’ are:
(unrestricted net assets) + (temporarily
restricted net assets)¥(annuities, term
endowments and life income funds that
are temporarily restricted)¥(intangible
assets)¥(net property, plant and
equipment) * + (post-employment and
retirement liabilities) + (all debt obtained
for long-term purposes) **¥(unsecured
related-party receivables).
*The value of property, plant and
equipment is net of accumulated
appreciation, including capitalized lease
assets.
** The value of all debt obtained for longterm purposes includes the short-term
portion of the debt, up to the amount of net
property, plant and equipment.
The Department proposes to revise
the definition of ‘‘Expendable Net
Assets’’ to be:
(Net assets without donor restrictions) + (net
assets with donor restrictions)¥(net
assets with donor restrictions: Restricted
in perpetuity) *¥(annuities, term
endowments and life income funds with
donor restrictions) **¥(intangible
assets)¥(net property, plant and
equipment) *** + (post-employment and
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defined benefits pension plan liabilities)
+ (all long-term debt obtained for longterm purposes, not to exceed total net
property, plant and
equipment) ****¥(unsecured related
party transactions) *****.
* Net assets with donor restrictions:
Restricted in perpetuity is subtracted from
total net assets. The amount of net assets
with donor restrictions: Restricted in
perpetuity is disclosed as a line item, part of
line item, in a note, or part of a note in the
financial statements.
** Annuities, term endowments and life
income funds with donor restrictions are
subtracted from total net assets. The amount
of annuities, term endowments and life
income funds with donor restrictions is
disclosed in as a line item, part of line item,
in a note, or part of a note in the financial
statements.
*** The value of property, plant and
equipment includes construction in progress
and lease right-of-use assets and is net of
accumulated depreciation/amortization.
**** All Debt obtained for long-term
purposes, not to exceed total net property,
plant and equipment includes lease liabilities
for lease right-of-use assets and the shortterm portion of the debt, up to the amount
of net property, plant and equipment. If an
institution wishes to include the debt,
including debt obtained through long-term
lines of credit in total debt obtained for longterm purposes, the institution must include
a disclosure in the financial statements that
the debt, including lines of credit exceeds
twelve months and was used to fund
capitalized assets (i.e., property, plant and
equipment or capitalized expenditures per
Generally Accepted Accounting Principles
(GAAP)). The disclosures that must be
presented for any debt to be included in
expendable net assets include the issue date,
term, nature of capitalized amounts and
amounts capitalized. Institutions that do not
include debt in total debt obtained for longterm purposes, including long-term lines of
credit, do not need to provide any additional
disclosures other than those required by
GAAP. The debt obtained for long-term
purposes will be limited to only those
amounts disclosed in the financial statements
that were used to fund capitalized assets.
Any debt amount including long-term lines
of credit used to fund operations must be
excluded from debt obtained for long-term
purposes.
***** Unsecured related party receivables
as required at 34 CFR 668.23(d).
Under the current regulations, the
term ‘‘Total Expenses’’ is defined as
‘‘Total unrestricted expenses taken
directly from the audited financial
statements.’’ We propose to change the
term to ‘‘Total Expenses without Donor
Restrictions and Losses without Donor
Restrictions.’’ In addition, the
Department proposes to define the new
term ‘‘Total Expenses without Donor
Restrictions and Losses without Donor
Restrictions’’ as all expenses and losses
without donor restrictions from the
Statement of Activities less any losses
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without donor restrictions on
investments, post-employment and
defined benefit pension plans, and
annuities. (For institutions that have
defined benefit pension and other postemployment plans, total expenses
include the nonservice component of
net periodic pension and other postemployment plan expenses and these
expenses will be classified as nonoperating. Consequently such expenses
will be labeled non-operating or
included with ‘‘other changes¥nonoperating changes in net assets without
donor restrictions’’ when the Statement
of Activities includes an operating
measure).
The numerator of the Equity Ratio,
Modified Net Assets, is currently
defined as ‘‘(total assets)¥(intangible
assets)¥(unsecured related-party
receivables).’’ We propose to change the
definition of Modified Net Assets to
‘‘(net assets without donor restrictions)
+ (net assets with donor
restrictions)¥(intangible
assets)¥(unsecured related party
receivables)’’.
For the Net Income Ratio, the current
regulations specify that the amounts for
both the numerator, ‘‘Change in
Unrestricted Net Assets,’’ and the
denominator, ‘‘Total Unrestricted
Revenue’’, are taken directly from the
audited financial statements. We
propose to rename the numerator as
‘‘Change in Net Assets without Donor
Restrictions,’’ and the denominator as
‘‘Total Revenue without Donor
Restriction and Gains without Donor
Restrictions.’’ In addition, the
Department proposes that the
denominator, Total Revenue, would
include amounts released from
restriction plus total gains. The
Department notes that with regard to
gains, investment returns are reported as
a net amount (interest, dividends,
unrealized and realized gains and losses
net of external and direct internal
investment expense). Institutions that
separately report investment spending
as operating revenue (e.g. spending from
funds functioning as endowment) and
remaining net investment return as a
non-operating item, will need to
aggregate these two amounts to
determine if there is a net investment
gain or a net investment loss (net
investment gains are included with total
gains).
Reasons: The proposed changes are
intended to reflect current accounting
standards and clarify how the composite
score is calculated. Many of the
proposed changes stem from significant
changes to the accounting standards,
primarily ASU 2016–2 Leases (Topic
842) and 2016–14 Not-for-Profit Entities
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(Topic 958), ASU 2016–2 and ASU
2016–14 respectively.
When implemented, ASU 2016–2 will
require all non-profit and proprietary
institutions to recognize the assets and
liabilities that arise from leases. In
accordance with FASB Concepts
Statement No. 6, Elements of Financial
Statements, all leases create an asset and
a liability as of the Statement of
Financial Position, or Balance Sheet,
date and, therefore, an institution must
recognize those lease assets and lease
liabilities as of that date.
A non-profit institution must
recognize in the Statement of Financial
Position a liability for the value of the
lease agreement (the lease liability) and
a right-of-use asset representing its right
to use the underlying asset for the lease
term. The principal difference from
previous guidance is that the lease
assets and lease liabilities arising from
operating leases should be recognized in
the Statement of Financial Position.
Under ASU 2016–14, a non-profit
institution must present on the face of
the Statement of Financial Position
amounts for two classes of net assets at
the end of the period, rather than for the
currently required three classes. That is,
the institution will report amounts for
net assets with donor restrictions and
net assets without donor restrictions, as
well as the currently required amount
for total net assets. Temporarily
restricted net assets, which were
previously reported, will be eliminated
as a class of net assets. A non-profit
institution must also present on the face
of the Statement of Activities the
amount of the change in each of the two
classes of net assets rather than the
currently required three net asset
classes, as well as report the currently
required amount of the change in total
net assets for the period. These changes
were made as a result of complexities
arising from using the three classes of
net assets which focus on the absence or
presence of donor imposed restrictions
and whether those restrictions are
temporary or permanent.
ASU 2016–14 eliminated the use of
the term ‘‘temporarily restricted net
assets’’ because of difficulties with
classifying assets as temporarily
restricted. On its face, under this ASU,
assets with donor restrictions would not
be considered expendable net assets. In
discussions with the Subcommittee, the
Department agreed that there are some
elements of assets with donor
restrictions that could be considered
expendable. An example of this would
be an endowment where the corpus is
permanently restricted by the donor, but
the earnings from the endowment can
be used to pay salaries. The
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Subcommittee put forward that the
primary element of assets with donor
restrictions that is not expendable is
‘‘net assets with donor restrictions:
restricted in perpetuity.’’ Subtracting
‘‘net assets with donor restrictions:
restricted in perpetuity’’ from net assets
with donor restrictions plus net assets
without donor restrictions roughly
approximates the amount that would
have been included in the composite
score using unrestricted net assets and
temporarily restricted net assets.
Likewise, using the amounts from
annuities, term endowments and life
income funds with donor restrictions,
approximates the amount of annuities,
term endowments and life income funds
that are temporarily restricted that
would have been used prior to the
proposed change.
The Subcommittee asked the
Department to consider including
defined benefit pension plan liabilities
as a retirement liability that would be
added back to expendable net assets.
The Subcommittee stated that changes
in accounting practice that now require
defined pension plan liabilities to be on
the face of the financial statements, as
well as the required insurance for
pension liabilities and the timing of
when the liability would be payable, all
indicate that defined benefit plan
liabilities should not reduce expendable
net assets. In addition, the
Subcommittee argued that all other
retirement liabilities are already
included in post-employment liabilities,
and rather than having postemployment and retirement liabilities
for expendable net assets, it would be
clearer to the community to use postemployment and defined benefit
pension plan liabilities. The Department
agreed that the Subcommittee proposals
would clarify how defined benefit
pension plan liabilities will be treated
for expendable net assets.
As a result of ASU 2016–2, the
Department proposes including the
right-of-use asset from leases as part of
PP&E (which is a component of
Expendable Net Assets in the Primary
Reserve ratio). During the general
discussions with the Subcommittee
about PP&E, the Subcommittee
recommended that the Department
should include construction in progress
in PP&E for purposes of calculating the
Primary Reserve ratio. The
Subcommittee pointed out that by its
very nature, construction in progress
could not be considered an expendable
asset because it cannot be easily
converted to cash or cash equivalents
when an institution is in financial
difficulty. The Department agreed and
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proposes here to include construction in
progress with PP&E.
Initially, the discussion in the
Subcommittee surrounding how to treat
debt obtained for long-term purposes in
calculating the composite score, focused
around the change in accounting for
leases under ASU 2016–2. Under ASU
2016–2 the liability for leases is not
considered debt for accounting
purposes. The Subcommittee noted that
although the lease liability was not debt,
the liability was clearly associated with
PP&E and argued that it should be
included as debt obtained for long-term
purposes in the composite score
calculation. This discussion then
expanded to consider the various types
of debt and liabilities that the
Department encounters in evaluating
financial statements and computing the
composite score. As noted above, in
2017, both GAO and OIG issued audit
reports that found that the Department
was not doing enough to limit
manipulation of the composite score to
protect students from institutions that
could be in danger of financial
difficulty. The Department is aware that
some institutions use debt, including
long-term lines of credit, to improve
their composite scores without actually
using the debt for long-term purposes.
The use of debt to improve the
composite score, including long-term
lines of credit, can be difficult to
identify from examining an institution’s
audited financial statements. When the
composite score was originally
developed, the long-term debt that was
intended to be added back for purposes
of expendable net assets was the amount
of debt that was used for the purchase
of capitalized assets. We question the
viability of an institution that uses debt,
including long-term lines of credit, for
current operations as opposed to longterm purposes. Consequently, the
amount of long-term debt that is added
back for expendable net assets should
have some relationship to PP&E—and
therefore should not be included in debt
obtained for long-term purposes if it is
not used for the purchase of capitalized
assets.
The Subcommittee specifically
discussed the treatment of long-term
lines of credit with regard to debt
obtained for long-term purposes and
agreed with the Department’s proposed
treatment of long-term lines of credit.
The Department proposes extending this
treatment to all debt not used for longterm purposes to further reduce or
mitigate manipulation of the composite
score.
In the preamble to the 1997
Regulations, the Department was clear
that expenses for the Primary Reserve
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Ratio included losses; however, the
Appendices to subpart L did not include
language concerning losses. Since the
inception of the composite score, the
Department has included losses as part
of the denominator for the Primary
Reserve Ratio. The proposed changes to
the denominator for the Primary Reserve
Ratio reflect changes in the accounting
terminology and clarify what has
consistently been the Department’s
practice. With regard to losses, the
Subcommittee suggested that there were
some losses that should not be reflected
in the Primary Reserve Ratio. The
Subcommittee proposed that the
Primary Reserve Ratio should not
include any losses without donor
restrictions on investments, postemployment and defined benefit
pension plans and annuities. The
Department agreed.
All of the proposed changes to the
Equity Ratio are based solely on changes
in accounting terminology as a result of
ASU 2016–14.
The change to the numerator for the
Net Income Ratio is based solely on
changes in accounting terminology as a
result of ASU 2016–14. The proposed
changes to the denominator are based
on changes in accounting terminology
and Department practice concerning
gains. In the preamble to the 1997
Regulations, the Department was clear
that revenue for the Net Income Ratio
included gains; however the
Appendices to subpart L did not include
language concerning gains. Since the
inception of the composite score, the
Department has included gains as part
of the denominator for the Net Income
Ratio.
The Department proposes to add a
reference to the regulatory disclosure
requirement for unsecured related party
transactions under § 668.23(d). While
the Department believes that this
reference promotes clarity,
Subcommittee members representing
the non-profit sector expressed concern
that certain aspects of related party
transactions unique to the non-profit
sector required more thorough
explanation. The Department agreed,
and provides additional information
below.
For both proprietary and non-profit
institutions, related party receivables or
other related assets are excluded from
the composite score if the amount is not
secured and perfected as of the date of
the financial statements. The Related
Party disclosure should provide enough
detail about the relationship,
transaction(s) and any conditions for the
Department to be able to make a
determination on whether the related
party receivable or other related assets
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are properly secured for inclusion in the
composite score.
For non-profit schools, related party
contributions receivables from board
members would be allowed to be
included in secured related party
receivables if there was no additional
relationship or transactions with the
board member or his/her family or
related entities and there were no
additional conditions associated with
the contribution if disclosed in the
related party disclosure.
Alternative Standards and
Requirements (§ 668.175)
Statute: Section 498(c)(3) of the HEA
provides that if an institution fails the
composite score or other criteria
established by the Secretary to
determine whether the institution is
financially responsible, the Secretary
must determine that the institution is
financially responsible if it provides
third-party financial guarantees, such as
performance bonds or letters of credit
payable to the Secretary, for an amount
that is not less than one-half of the
annual potential liabilities of the
institution to the Secretary for title IV,
HEA funds, including liabilities for loan
obligations discharged pursuant to
section 437 of the HEA, and to students
for refunds of institutional charges,
including required refunds of title IV,
HEA funds.
Current Regulations: As provided in
§ 668.175, an institution that is not
financially responsible under the
general standards in § 668.171 may
begin or continue to participate in the
title IV, HEA programs only by
qualifying under an alternative
standard.
Under the zone alternative in
§ 668.175(d), a participating institution
that is not financially responsible solely
because its composite score is less than
1.5 may participate as a financially
responsible institution for no more than
three consecutive years, but the
Secretary requires the institution to (1)
make disbursements to students under
the heightened cash monitoring or
reimbursement payment methods
described in § 668.162, and (2) provide
timely information regarding any
adverse oversight or financial event,
including any withdrawal of owner’s
equity from the institution. In addition,
the Secretary may require the institution
to (1) submit its financial statement and
compliance audits earlier than the date
specified in § 668.23(a)(4), or (2) provide
information about its current operations
and future plans.
Under the provisional certification
alternative in § 668.175(f), an institution
that is not financially responsible
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because it does not meet the general
standards in § 668.171(b), or because of
an audit opinion in § 668.171(d) or a
condition of past performance in
§ 668.174(a), may participate under a
provisional certification for no more
than three consecutive years, if the
institution (1) provides an irrevocable
letter of credit, for an amount
determined by the Secretary that is not
less than 10 percent of the title IV, HEA
program funds the institution received
during its most recently completed
fiscal year, (2) demonstrates that it was
current in its debt payments and has
met all of its financial obligations for its
two most recent fiscal years, and (3)
complies with the provisions under the
zone alternative.
Proposed Regulations: We propose to
relocate to proposed new § 668.171(c)
one of the oversight and financial events
that an institution currently reports to
the Department under the zone
alternative in § 668.175(d)(2)(ii)—any
withdrawal of owner’s equity from the
institution.
We propose to remove § 668.175(e)
because the transition year alternative,
which pertained only to fiscal years
beginning after July 1, 1997 and before
June 30, 1998, is no longer relevant.
Also, we propose to add a new
paragraph (h) that would expand the
types of financial protection the
Secretary may accept. Specifically, in
lieu of submitting a letter of credit, the
Secretary may permit an institution to:
• Provide the amount required in the
form of other surety or financial
protection that the Secretary specifies in
a notice published in the Federal
Register;
• Provide cash for the amount
required; or
• Enter into an arrangement under
which the Secretary would offset the
amount of title IV, HEA program funds
that an institution has earned in a
manner that ensures that, no later than
the end of a six- to twelve-month
period, the amount offset equals the
amount of financial protection the
institution is required to provide. Under
this arrangement, the Secretary would
use the funds offset to satisfy the debts
and liabilities owed to the Secretary that
are not otherwise paid directly by the
institution, and would provide to the
institution any funds not used for this
purpose during the period covered by
the agreement, or provide the institution
any remaining funds if the institution
subsequently submits other financial
protection for the amount originally
required.
In addition, we propose to amend the
zone and provisional certification
alternatives under § 668.175(d) and (f),
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to allow for these expanded types of
financial protection.
Reasons: Because the costs of
obtaining an irrevocable LOC have
increased over time, to the point where
financial institutions are not only
charging fees but in many cases
requiring the LOC to be fully
collateralized, we are proposing to allow
an institution to provide alternative
forms of financial protection that would
reduce the costs to an institution.
Providing cash would eliminate the cost
of fees associated with an LOC and the
administrative offset alternative would
relieve an institution from any
collateralization requirements or from
having to commit upfront the resources
needed to obtain the required financial
protection. However, we note that, to
implement an administrative offset, the
Department would need to control the
title IV funds flowing to the institution
and the current process for doing that is
to place the institution on the
heightened cash monitoring payment
method (HCM2) under § 668.162(d)(2).
The Secretary would provide funds to
the institution under HCM2, but would
withhold temporarily a portion of any
reimbursement claim payable to the
institution in an amount that ensures
that by the end of the offset period, the
total amount withheld equals the
amount of cash or the letter of credit the
institution would otherwise provide.
During negotiated rulemaking, we
proposed that the offset agreement
would have to provide that the entire
amount of the financial protection
required by the Department would have
to be in place within a nine-month
period. The non-Federal negotiators
argued that the Department should have
flexibility in setting the offset period
depending on the amount of protection
that is needed or the amount of the
offset that the institution could
reasonably provide on a monthly basis
as specified in the agreement. We agreed
and propose here the suggestion from
the non-Federal negotiators that the
total amount offset must be in place
within a six- to 12-month period, as
determined by the Department.
With regard to other types of surety,
we are not aware of any instruments or
surety products that would provide the
Department with the level of financial
protection, or ready access to funds, as
an irrevocable letter of credit. However,
should such surety products become
available that the Department finds
acceptable and that are less costly or
more readily available to institutions,
the Secretary would identify those
products in a notice published in the
Federal Register. After that, an
institution could use those products to
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satisfy the financial protection
requirements in these regulations.
Initial and Final Decisions (§ 668.90)
Statute: Section 498(d) of the HEA
authorizes the Secretary to consider the
past performance of an institution or of
a person in control of an institution in
determining whether an institution has
the financial capability to participate in
the title IV, HEA programs. Section
487(c)(1)(F) of the HEA, provides that
the Secretary shall prescribe such
regulations as may be necessary to
provide for the limitation, suspension,
or termination of the participation of an
eligible institution in any program
under title IV of the HEA.
Current Regulations: When the
Department proposes to limit, suspend,
or terminate a fully certified
institution’s participation in a title IV,
HEA program, the institution is entitled
to a hearing before a hearing official
under § 668.91. In addition to describing
the procedures for issuing initial and
final decisions, § 668.91 also provides
requirements for hearing officials in
making initial and final decisions in
specific circumstances.
The regulations generally provide that
the hearing official is responsible for
determining whether an adverse
action—a fine, limitation, suspension,
or termination—is ‘‘warranted,’’ but
direct that, in specific instances, the
sanction must be imposed if certain
predicate conditions are proven. For
instance, in an action involving a failure
by the institution to provide a surety in
the amount specified by the Secretary
under § 668.15, the hearing official is
required to consider the surety amount
demanded to be ‘‘appropriate,’’ unless
the institution can demonstrate that the
amount was ‘‘unreasonable.’’
Further, § 668.91(a)(3)(v) states that,
in a termination action brought on the
grounds that the institution is not
financially responsible under
§ 668.15(c)(1), the hearing official must
find that termination is warranted
unless the conditions in § 668.15(d)(4)
are met. Section 668.15(c)(1) provides
that an institution is not financially
responsible if a person with substantial
control over that institution exercises or
exercised substantial control over
another institution or third-party
servicer that owes a liability to the
Secretary for a violation of any title IV,
HEA program requirements, and that
liability is not being repaid. Section
668.15(d)(4) provides that the Secretary
can nevertheless consider the first
institution to be financially responsible
if the person at issue has repaid a
portion of the liability or the liability is
being repaid by others, or the institution
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demonstrates that the person at issue in
fact currently lacks that ability to
control or lacked that ability as to the
debtor institution.
Proposed Regulations: The Secretary
proposes to amend § 668.91(a)(3)(iii) by
substituting the terms ‘‘letter of credit or
other financial protection’’ for ‘‘surety’’
in describing what an institution must
provide to demonstrate financial
responsibility and adding
§ 668.171(b),(c), or (d) to the list of
sections under which a condition or
event may trigger a financial protection
requirement. Additionally, we are
proposing to modify § 668.91(a)(3)(iii) to
require the hearing official to uphold
the amount of a letter of credit or
financial protection demanded by the
Secretary, unless the institution
demonstrates that the events or
conditions on which the demand is
based no longer exist or have been
resolved, do not and will not have an
material adverse effect on the
institution’s financial condition, or the
institution has insurance that will cover
the liabilities arising from those events
or conditions. We propose to further
modify § 668.91(a)(3)(v) to list the
specific circumstances in which a
hearing official may find that a
termination or limitation action brought
for a failure of financial responsibility
for an institution’s past performance
failure under § 668.174(a), or a failure of
a past performance condition for
persons affiliated with an institution
under § 668.174(b)(1), was not
warranted. For the former, revised
§ 668.91(a)(3)(v) would state that these
circumstances would be consistent with
the provisional certification and
financial protection alternative in
§ 668.175(f). For the latter, the
circumstances would be those provided
in § 668.174(b)(2).
Reasons: The proposed changes to
§ 668.91(a)(3)(iii) would update the
regulations to reflect both the current
language in § 668.175 and proposed
changes to that section. We believe that
the new language would provide more
clarity than the current regulation,
which provides only that the institution
has to show that the amount was
‘‘unreasonable.’’ The proposed language
would clearly state that the amount of
the letter of credit or other financial
protection would be considered
unwarranted only if the reasons for
which the Secretary required the
financial protection no longer exist or
have been resolved, do not and will not
have an material adverse effect on the
institution’s financial condition, or the
institution has insurance that will cover
the liabilities arising from those events
or conditions.
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Our proposed revisions to
§ 668.91(a)(3)(iii) would reflect
previous, as well as proposed, changes
to the financial responsibility standards.
First, the current financial responsibility
standards in § 668.175 require an
institution in some instances to provide
a letter of credit to be considered
financially responsible. We propose to
modify § 668.91(a)(3)(iii) to reflect that
language as well as changes proposed to
§ 668.175 by substituting the terms
‘‘letter of credit or other financial
protection’’ for ‘‘surety.’’ Thus, the
proposed changes to § 668.91 would
clarify that a limitation, suspension, or
termination action may involve a failure
to provide any of the specified forms of
financial protection.
We further propose to modify
§ 668.91(a)(3)(iii) to state the specific
grounds on which a hearing official may
find that a limitation or termination
action for failure to provide financial
protection demanded is not warranted.
Under the proposed regulations, the
hearing official must accept the amount
of the letter of credit or financial
protection demanded by the Secretary,
unless the institution demonstrates that
the events or conditions on which the
demand for financial protection or letter
of credit is based no longer exist or have
been resolved, do not and will not have
an material adverse effect on the
institution’s financial condition, or the
institution has insurance that will cover
the liabilities arising from those events
or conditions. Consequently, under the
proposed regulations, the institution
could not claim that the event or
condition does not support the demand
for financial protection or that the
amount demanded is unreasonable
based on the institution’s assessment of
the risk posed by the event or condition.
The proposed changes to
§ 668.91(a)(3)(v) would also clarify the
regulation and conform it with existing
regulations describing the alternative
methods by which an institution may
meet the financial responsibility
standards. Section 668.91(a)(3)(v) would
be revised to state the grounds on which
a hearing official could find that a
termination or limitation action based
on an institution’s failure of financial
responsibility, an institution’s failure of
a past performance condition under
§ 668.174(a) or a failure of a past
performance condition for persons
affiliated with an institution under
§ 668.174(b)(1) was not warranted. The
changes would not add substantive new
restrictions, but simply conform
§ 668.91 to the substantive requirements
already in current regulations. Thus, as
revised, § 668.91(a)(3)(v) would require
the hearing official to find that the
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limitation or termination for adverse
past performance by the institution
itself was warranted, unless the
institution met the provisional
certification and financial protection
alternatives in current § 668.175(f). For
an action based on the adverse past
performance of a person affiliated with
an institution, the hearing official would
be required to find that limitation or
termination of the institution was
warranted unless the institution
demonstrated either proof of repayment
or that the person asserted to have
substantial control in fact lacks or
lacked that control, as already provided
in § 668.174(b)(2), or that the institution
has accepted provisional certification
and provided the financial protection
required under § 668.175.
This proposal is very similar to
changes made to this section (previously
designated as § 668.90) in the 2016 final
regulations. 81 FR 76072. It parallels the
changes made in those regulations to
conform this section to existing
regulations, but departs from them to
conform to changes we are proposing in
this notification. Specifically, because
we propose here different actions or
events that might cause an institution
not to be financially responsible than
were included in the 2016 final
regulations, the changes we now
propose to this section to this section
track our current proposal. Therefore,
we propose to rescind this provision of
the 2016 final regulations.
Limitation (§ 668.94)
Statute: Section 487(c)(1)(F) of the
HEA, 20 U.S.C. 1094, provides that the
Secretary shall prescribe such
regulations as may be necessary to
provide for the limitation, suspension,
or termination of an eligible institution’s
participation in any program under title
IV of the HEA.
Current Regulations: Section 668.86
provides that the Secretary may limit an
institution’s participation in a title IV,
HEA program, under specific
circumstances, and describes
procedures for the institution to appeal
the limitation. Current § 668.94 lists
types of specific restrictions that may be
imposed by a limitation action, and
includes in paragraph (i) ‘‘other
conditions as may be determined by the
Secretary to be reasonable and
appropriate.’’ 34 CFR 668.94(i).
The regulations at § 668.13(c) provide
that the Secretary may provisionally
certify an institution whose
participation has been limited or
suspended under subpart G of part 668,
and § 668.171(e) provides that the
Secretary may take action under subpart
G to limit or terminate the participation
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of an institution if the Secretary
determines that the institution is not
financially responsible under § 668.171
or § 668.175.
Proposed Regulations: The Secretary
proposes to amend § 668.94 to clarify
that a change in an institution’s
participation status from fully certified
to provisionally certified to participate
in a title IV, HEA program under
§ 668.13(c) is a type of limitation that
may be the subject of a limitation
proceeding under § 668.86.
Reasons: The proposed change to
§ 668.94 would clarify current policy
and provide for a more complete set of
limitations covered in § 668.94. The
2016 final regulations included this
same change to this regulation
(previously designated as § 668.93, see
81 FR 76072), and we propose it again
here to seek comment on it in the
context of our complete current
proposal.
Guaranty Agency (GA) Collection Fees
(34 CFR 682.202(b), 682.405(b), and
682.410(b)(2) and (4))
Statute: Section 428F(a) of the HEA
provides that to complete a FFEL
borrower’s loan rehabilitation, the FFEL
guaranty agency must sell the loan to a
FFEL Program lender or assign the loan
to the Secretary.
Section 428H(e)(2) of the HEA allows
a FFEL Program lender to capitalize
outstanding interest when the loan
enters repayment, upon default, and
upon the expiration of periods of
deferment and forbearance, but does not
specifically authorize the capitalization
of interest when the borrower
rehabilitates a defaulted loan.
Current Regulations: The current
FFEL Program regulations in §§ 682.202,
682.405, and 682.410 permit FFEL
Program lenders to capitalize interest
when the borrower enters or resumes
repayment and requires a guaranty
agency to capitalize interest when it
pays the FFEL Program lender’s default
claim. However, these regulations do
not specifically address whether a
guaranty agency may capitalize interest
when the borrower has rehabilitated a
defaulted FFEL Loan or whether a FFEL
Program lender may capitalize interest
when purchasing a rehabilitated FFEL
Loan from a guaranty agency. In
addition, the Department interprets
these regulations to bar guaranty
agencies from imposing collection costs
when a borrower enters into a
satisfactory repayment agreement
within 60 days of the first notice of
default sent to the borrower.
Proposed Regulations: The proposed
revisions to §§ 682.202, 682.405, and
682.410 would provide that the only
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time a guaranty agency may capitalize
interest owed by the borrower is when
it pays the FFEL Program lender’s
default claim. Therefore, the guaranty
agency would not be allowed to
capitalize interest when it sells a
rehabilitated FFEL Loan.
Similarly, the proposed regulations
would bar a FFEL Program lender from
capitalizing outstanding interest when
purchasing a rehabilitated FFEL Loan.
The proposed regulations would also
provide that when a guaranty agency
holds a defaulted FFEL Loan and the
guaranty agency has suspended
collection activity to give the borrower
time to submit a closed school or false
certification discharge application,
interest capitalization is not permitted if
collection on the loan resumes because
the borrower does not return the
appropriate form within the allotted
timeframe.
Finally, the Department proposes to
prohibit guaranty agencies from
charging collection costs to borrowers
who, within 60 days of receiving notice
of default, enter into an acceptable
repayment arrangement, including a
loan rehabilitation plan.
Reasons: Recently, the Department
became aware that some guaranty
agencies and FFEL Program lenders
were capitalizing interest when a
borrower rehabilitates a loan, while
others were not. In addition, some
guaranty agencies were capitalizing
interest when resuming collection on a
defaulted FFEL Loan when a borrower
had not submitted a closed school or
false certification discharge within a
specific timeframe. The Department
does not believe that interest
capitalization in either circumstance is
appropriate, and the Department does
not capitalize interest on loans that it
holds in comparable circumstances.
Additionally, to encourage borrowers
to enter into satisfactory repayment
plans, the Department proposes that
guaranty agencies may not assess
collection costs to a borrower who
enters into an acceptable repayment
agreement, including a rehabilitation
agreement, and honors that agreement,
within 60 days of receiving notice of
default.
The negotiators did not object to any
of these changes. In addition, the 2016
final regulations included the changes
we propose in this NPRM regarding
interest capitalization when a borrower
rehabilitates a loan, as well as when a
guaranty agency resumes collection on a
defaulted FFEL Loan when a borrower
had not submitted a closed school or
false certification discharge within a
specific timeframe. 81 FR 76079–80. We
propose these changes again here to
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seek comment on them in the context of
our complete current proposal.
The changes we propose regarding
collection costs for borrowers who enter
into an acceptable repayment
arrangement, including a loan
rehabilitation plan, within 60 days of
receiving notice of default were not
included in the 2016 final regulations.
These changes are consistent with the
interpretation and position that the
Department previously took in Dear
Colleague Letter (DCL) GE–15–14 (July
10, 2015). That DCL was withdrawn in
order to allow for public comment on
our interpretation, which we seek
through this notification.
Subsidized Usage Period and Interest
Accrual (34 CFR 685.200(f))
Statute: Section 455(q) of the HEA
provides that a first-time borrower on or
after July 1, 2013, is not eligible for
additional Direct Subsidized Loans if
the borrower has received Direct
Subsidized Loans for a period that is
equal to or greater than 150 percent of
the length of the borrower’s current
program of study (‘‘150 percent limit’’).
In addition, some borrowers who are not
eligible for Direct Subsidized Loans
because of the 150 percent limit become
responsible for the interest that accrues
on their loans when it would otherwise
be paid by the government. The statute
does not address what effect a discharge
of a Direct Subsidized Loan has on the
150 percent limit. The statute also does
not address whose responsibility it is to
pay the outstanding interest on any
remaining loans that have not been
discharged, but which have previously
lost eligibility for interest subsidy.
Current Regulations: Section
685.200(f)(4) provides two exceptions to
the calculation of the period of time that
counts against a borrower’s 150 percent
limit—the subsidized usage period—
that can apply based on the borrower’s
enrollment status or loan amount. The
regulations do not have an exception to
the calculation of a subsidized usage
period if the borrower receives a
discharge of his or her Direct Subsidized
Loan. They also do not address whose
responsibility it is to pay the
outstanding interest on any remaining
loans that have not been discharged, but
have previously lost eligibility for the
interest subsidy based on the borrower’s
remaining eligibility period and
enrollment.
Proposed Regulations: Proposed
§ 685.200(f)(4)(iii) would specify that a
discharge based on a school closure,
false certification, unpaid refund, or
borrower defense will lead to the
elimination, or recalculation, of the
subsidized usage period that is
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associated with the loan or loans
discharged.
The proposed regulations would also
specify that, when the full amount of a
Direct Subsidized Loan or a portion of
a Direct Subsidized Loan is discharged,
the entire subsidized usage period
associated with that loan is eliminated.
In the event that a borrower receives a
closed school, false certification, or,
depending on the circumstances,
borrower defense or unpaid refund
discharge, the Department would
completely discharge a Direct
Subsidized Loan or a portion of a Direct
Subsidized Consolidation Loan that is
attributable to a Direct Subsidized Loan.
The proposed regulations would also
specify that, when only a portion of a
Direct Subsidized Loan or a portion of
a Direct Consolidation Loan that is
attributable to a Direct Subsidized Loan
is discharged, the subsidized usage
period would be recalculated instead of
eliminated. Depending on the
circumstances, discharges due to a
borrower defense or unpaid refund
could result in only part of a Direct
Subsidized Loan or only a portion of the
part of a Direct Consolidation Loan that
is attributable to a Direct Subsidized
Loan being discharged.
The proposed regulations would
specify that when a subsidized usage
period is recalculated, the period is only
recalculated if the borrower’s subsidized
usage period was calculated as one year
as a result of receiving the Direct
Subsidized Loan in the amount of the
annual loan limit for a period of less
than an academic year. For example, if
a borrower received a Direct Subsidized
Loan in the amount of $3,500 as a firstyear student on a full-time basis for a
single semester of a two-semester
academic year, the subsidized usage
period would be one year. If the
borrower later receives an unpaid
refund discharge in the amount of
$1,000, the subsidized usage period
would be recalculated, and the
subsidized usage period would become
0.5 years because the subsidized usage
period was previously based on the
amount of the loan and, after the
discharge, is based on the relationship
between the period for which the
borrower received the loan (the loan
period) and the academic year for which
the borrower received the loan.
In contrast, if the borrower received a
Direct Subsidized Loan in the amount of
$3,500 as a first-year student on a fulltime basis for a full two-semester
academic year, the subsidized usage
period would be one year. If the
borrower later receives an unpaid
refund discharge in the amount of
$1,000, the subsidized usage period
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would still be one year because the
subsidized usage period would still be
calculated based on the relationship
between the loan period and the
academic year for which the borrower
received the loan.
Proposed § 685.200(f)(3) would
provide that, if a borrower receives a
discharge based on a school closure,
false certification, unpaid refund, or a
borrower defense discharge that results
in a remaining eligibility period greater
than zero, the borrower is no longer
responsible for the interest that accrues
on a Direct Subsidized Loan or on the
portion of a Direct Consolidation Loan
that repaid a Direct Subsidized Loan,
unless the borrower once again becomes
responsible for the interest that accrues
on a previously received Direct
Subsidized Loan or on the portion of a
Direct Consolidation Loan that repaid a
Direct Subsidized Loan, for the life of
the loan.
For example, suppose a borrower
receives Direct Subsidized Loans for
three years at school A and then
transfers to school B and receives Direct
Subsidized Loans for three additional
years. Further suppose that at this point,
the borrower has no remaining
Subsidized Loan eligibility period and
enrolls in an additional year of
academic study at school B, which
triggers the loss of interest subsidy on
all Direct Subsidized Loans received at
schools A and B. If the borrower later
receives a false certification discharge
with respect to school B, the borrower’s
remaining eligibility period is now
greater than zero. The borrower is no
longer responsible for paying the
interest subsidy lost on the three loans
from school A. If the borrower then
enrolled in school C and received three
additional years of Direct Subsidized
Loans, resulting in a remaining
eligibility period of zero, and then
enrolled in an additional year of
academic study, the borrower would
lose the interest subsidy on the Direct
Subsidized Loans received at schools A
and C.
Reasons: The proposed regulations
would clarify and codify the
Department’s current practice in this
area. Under the circumstances in which
a borrower receives a closed school,
false certification, borrower defense, or
unpaid refund discharge, the borrower
has not received all or part of the benefit
of the loan due to an act or omission of
the school. In such an event, we believe
that a student’s eligibility for future
loans and the interest subsidy on
existing loans should not be negatively
affected by having received the loan.
Accordingly, under the proposed
regulations, we would increase the
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borrower’s eligibility for Direct
Subsidized Loans or reinstate the
interest subsidy on other Direct
Subsidized Loans under the 150 percent
limit where the borrower receives a
discharge of a Direct Subsidized Loan
and the discharge was based on an act
or an omission of the school that caused
the borrower to not receive all or part
of the benefit of the loan. The
negotiators did not raise any objections
to this change. The 2016 final
regulations included these same
changes to this regulation (81 FR
76080), and we propose them again here
to seek comment on them in the context
of our complete current proposal.
Appendix A to Subpart L, Part 668:
Ratio Methodology for Proprietary
Institutions
Section 1: Ratio and Ratio Terms
Primary Reserve Ratio Adjusted Equity
Total Expenses and Losses
Equity Ratio Modified Equity
Modified Assets
Net Income Ratio Income before Taxes
Total Revenues and Gains
Definitions
Adjusted Equity = (total owner’s equity)
¥ (intangible assets) ¥ (unsecured
related-party receivables) * ¥ (net
property, plant and equipment) ** +
(post-employment and defined
benefit pension liabilities) + (all
debt obtained for long-term
purposes, not to exceed total net
property, plant and equipment) ***
Total Expenses and Losses excludes
income tax, discontinued operations not
classified as an operating expense or
change in accounting principle and any
losses on investments, post-employment
and defined benefit pension plans and
annuities. Any losses on investments
would be the net loss for the
investments. Total Expenses and Losses
include the nonservice component of
net periodic pension and other postemployment plan expenses.
Modified Equity = (total owner’s equity)
¥ (intangible assets) ¥ (unsecured
related-party receivables)
Modified Assets = (total assets) ¥
(intangible assets) ¥ (unsecured
related-party receivables)
Income before Taxes includes all
revenues, gains, expenses and losses
incurred by the school during the
accounting period. Income before taxes
does not include income taxes,
discontinued operations not classified
as an operating expense or changes in
accounting principle.
Total Revenues and Gains does not
include positive income tax amounts,
discontinued operations not classified
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as an operating gain, or change in
accounting principle (investment gains
should be recorded net of investment
losses.
* Unsecured related party receivables
as required at 34 CFR 668.23(d).
** The value of property, plant and
equipment includes construction in
progress and lease right-of-use assets,
and is net of accumulated depreciation/
amortization.
*** All debt obtained for long-term
purposes, not to exceed total net
property, plant and equipment includes
lease liabilities for lease right-of-use
assets and the short-term portion of the
debt, up to the amount of net property,
plant and equipment. If an institution
wishes to include the debt, including
debt obtained through long-term lines of
credit in total debt obtained for longterm purposes, the institution must
include a disclosure in the financial
statements that the debt, including lines
of credit exceeds twelve months and
was used to fund capitalized assets (i.e.,
property, plant and equipment or
capitalized expenditures per Generally
Accepted Accounting Principles
(GAAP)). The disclosures that must be
presented for any debt to be used in
adjusted equity include the issue date,
term, nature of capitalized amounts and
amounts capitalized. Institutions that do
not include debt in total debt obtained
for long-term purposes, including longterm lines of credit, do not need to
provide any additional disclosures other
than those required by GAAP. The debt
obtained for long-term purposes will be
limited to only those amounts disclosed
in the financial statements that were
used to fund capitalized assets. Any
debt amount including long-term lines
of credit used to fund operations must
be excluded from debt obtained for
long-term purposes.
Section 2: Financial Responsibility
Supplemental Schedule Requirement
and Example
A Supplemental Schedule must be
submitted as part of the required
audited financial statements
submission. The Supplemental
Schedule contains all of the financial
elements required to compute the
composite score. Each item in the
Supplemental Schedule must have a
reference to the Balance Sheet,
Statement of (Loss) Income, or Notes to
the Financial Statements. The amount
entered in the Supplemental Schedules
should tie directly to a line item, be part
of a line item, tie directly to a note, or
be part of a note in the financial
statements. When an amount is zero, the
institution would identify the source of
the amount as NA (Not Applicable) and
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enter zero as the amount in the
Supplemental Schedule. The audit
opinion letter must contain a paragraph
that references the auditor’s additional
analysis of the financial responsibility
Supplemental Schedule.
Executive Orders 12866, 13563, and
13771
Under Executive Order 12866, the
Secretary must determine whether this
regulatory action is ‘‘significant’’ and,
therefore, subject to the requirements of
the Executive Order and subject to
review by the Office of Management and
Budget (OMB). Section 3(f) of Executive
Order 12866 defines a ‘‘significant
regulatory action’’ as an action likely to
result in a rule that may—
(1) Have an annual effect on the
economy of $100 million or more, or
adversely affect a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
State, local, or tribal governments or
communities in a material way (also
referred to as an ‘‘economically
significant’’ rule).
(2) Create serious inconsistency or
otherwise interfere with an action taken
or planned by another agency;
(3) Materially alter the budgetary
impacts of entitlement grants, user fees,
or loan programs or the rights and
obligations of recipients thereof; or
(4) Raise novel legal or policy issues
arising out of legal mandates, the
President’s priorities, or the principles
stated in the Executive order.
Under Executive Order 12866,9
section 3(f)(1), this regulatory action is
economically significant and subject to
review by OMB. Also under Executive
Order 12866 and the Presidential
Memorandum ‘‘Plain Language in
Government Writing’’, the Secretary
invites comment on how easy these
regulations are to understand in the
Clarity of the Regulations section.
Under Executive Order 13771,10 for
each new regulation that the
Department proposes for notice and
comment or otherwise promulgates that
is a significant regulatory action under
Executive Order 12866 and that imposes
total costs greater than zero, it must
identify two deregulatory actions. For
FY 2018, no regulations exceeding the
agency’s total incremental cost
allowance will be permitted, unless
required by law or approved in writing
9 Exec. Order No. 12866, 58 FR 190 (October 4,
1993). Regulatory Planning and Review. Available
at: www.reginfo.gov/public/jsp/Utilities/EO_
12866.pdf.
10 Exec. Order No. 13771, 82 FR 22 (January 30,
2017). Reducing Regulation and Controlling
Regulatory Costs. Available at: www.gpo.gov/fdsys/
pkg/FR-2017-02-03/pdf/2017-02451.pdf.
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by the Director of OMB. These proposed
regulations are a deregulatory action
under E.O. 13771 and therefore the twofor-one requirements of E.O. 13771 do
not apply.
We have also reviewed these
regulations under Executive Order
13563, which supplements and
explicitly reaffirms the principles,
structures, and definitions governing
regulatory review established in
Executive Order 12866. To the extent
permitted by law, Executive Order
13563 requires that an agency—
(1) Propose or adopt regulations only
on a reasoned determination that their
benefits justify their costs recognizing
that some benefits and costs are difficult
to quantify);
(2) Tailor its regulations to impose the
least burden on society, consistent with
obtaining regulatory objectives and
taking into account—among other
things, and to the extent practicable—
the costs of cumulative regulations;
(3) In choosing among alternative
regulatory approaches, select those
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety,
and other advantages; distributive
impacts; and equity);
(4) To the extent feasible, specify
performance objectives, rather than the
behavior or manner of compliance a
regulated entity must adopt; and
(5) Identify and assess available
alternatives to direct regulation,
including economic incentives—such as
user fees or marketable permits—to
encourage the desired behavior, or
provide information that enables the
public to make choices.
Executive Order 13563 also requires
an agency ‘‘to use the best available
techniques to quantify anticipated
present and future benefits and costs as
accurately as possible.’’ The Office of
Information and Regulatory Affairs of
OMB has emphasized that these
techniques may include ‘‘identifying
changing future compliance costs that
might result from technological
innovation or anticipated behavioral
changes.’’
Under Executive Order 13563,11 the
Secretary certifies that the best available
techniques were used to quantify the
impacts of these regulations. Finally, the
Secretary certifies that this regulatory
action would not unduly interfere with
State, local, and tribal governments in
11 Public Law 106–554 appendix C 114 STAT
2763A–153–155. section 515 Available at:
www.gpo.gov/fdsys/pkg/PLAW-106publ554/pdf/
PLAW-106publ554.pdf.
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the exercise of their governmental
functions.
The Department has analyzed the
need for regulatory action, alternatives
available to it, and measured the impact
of the changes that would result from
the proposed regulations relative to the
existing regulatory baseline under a
cost-benefit approach. The required
Accounting Statement is included in the
Net Budget Impacts section.
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Regulatory Impact Analysis (RIA)
As further detailed in the Net Budget
Impacts section, this proposed
regulatory action would have an annual
effect on the economy of approximately
$697 million in transfers among
borrowers, institutions, and the Federal
Government related to defense to
repayment and closed school
discharges, as well as $1.15 million in
costs to comply with paperwork
requirements. This economic estimate
was produced by comparing the
proposed regulation to the PB2019
budget. As explained in Section
(B)(1)(Baseline) of this RIA, we compare
the proposed regulations to the delayed
2016 regulations. We discuss the need
for regulatory action; regulatory
alternatives considered; costs, benefits,
and transfers; net budget impacts and
accounting statement; regulatory
flexibility act (small business impacts);
and paperwork reduction.
A. Need for Regulatory Action
These proposed regulations address a
significant increase in burden resulting
from the vast increase in borrower
defense claims since 2015. The 2016
borrower defense regulations fail to
adequately address this increase in
burden. These proposed regulations
reduce burden by restoring the
limitation of defense to repayment
claims to those loans that are in certain
collections proceedings, provide an
opportunity for institutions to submit a
response to borrower allegations, and
provide for the Secretary to recover
losses from institutions.
Although the borrower defense to
repayment regulations have provided an
option for borrower relief for borrowers
in a collections proceeding since 1994,
in 2015 the number of borrower defense
to repayment claims increased
dramatically when institutions owned
by Corinthian Colleges, Inc., were
placed on Heightened Cash Monitoring
1 (HCM1) status with an additional 20
day hold and the company declared
bankruptcy. Students enrolled at
Corinthian campuses and those who
had left the institution within 120 days
of its closure were eligible for a closed
school loan discharge. The Department
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decided to also provide student loan
discharge to additional borrowers who
did not qualify for a closed school loan
discharge, but could qualify under a
new interpretation of the defense to
repayment regulation (34 CFR
685.206(c)). The Department encouraged
Corinthian borrowers to submit defense
to repayment claims, which it agreed to
consider for all Corinthian-related loans,
including those not in a collections
proceeding. We refer to these claims as
affirmative claims, as opposed to
defensive claims, which require the loan
to be in a collections proceeding.
This resulted in a significant increase
in claim volume compared to the prior
years, when claim volume was no more
than 10 in any given year. Since 2015,
the Department has considered both
affirmative and defensive claims, thus
significantly expanding the number of
claims received and the potential cost to
the Federal budget. The 2016
regulations also provide that borrowers
could submit both affirmative and
defensive claims.
The proposed regulations revert back
to the plain meaning of the regulation,
as it had been implemented prior to
2015, such that only those borrowers in
a collection proceeding would have a
mechanism by which they could
exercise defenses to repayment. With
the anticipated substantial increase in
the number of defense to repayment
applications, the Department believes
that revisions to the 2016 regulations are
necessary.12 However, the Department
is also seeking comment on continuing
to accept affirmative claims and, if such
claims were accepted, on ways of
reducing burden and taxpayer liability
associated with affirmative claims, since
borrowers have nothing to lose by
attempting to seek student loan relief,
even if misrepresentation or harm as a
result of misrepresentation did not
occur. In addition, provisions in the
2016 regulation that enable the
Secretary to initiate defense to
repayment claims on behalf of entire
classes of borrowers in a collection
proceeding to exercise defenses to
repayment as a last resort after
exhausting other available consumer
protection processes. The Department
also realized that claims received from
borrowers who had attended
institutions that the Department had not
investigated or found instances of
misrepresentation (i.e., other than
Corinthian)create the potential for
12 U.S. Department of Education Office of
Inspector General (December 8, 2017), ‘‘Federal
Student Aid’s Borrower Defense to Repayment Loan
Discharge Process’’, retrieved from www2.ed.gov/
about/offices/list/oig/auditreports/fy2018/
i04r0003.pdf.
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unsubstantiated claims that place no
burden on the part of the borrower, but
significant burden on the part of the
Department, it needed a mechanism to
collect evidence from institutions and to
provide an opportunity for those
institutions to defend themselves
against frivolous claims. Because an
institution might withhold official
transcripts from students who receive a
defense to repayment loan discharge, (as
institutions are permitted to do in the
case of loan discharges), automatic
discharges could have collateral
consequences for students who
unknowingly had their loans
discharged. An ‘‘opt out’’ mechanism
could result in borrowers who
unknowingly lose the ability to verify
the credentials they earned using the
subsequently discharged loans.
Therefore, the Department believes that
it is imperative that individual
borrowers apply for a closed school loan
discharge rather than receiving it
automatically.
The group discharge process, which
would be removed by the proposed
regulations, may otherwise create large
and unnecessary liabilities for taxpayer
funds. If group claims initiated by the
Secretary include borrowers who were
not subjected to the misrepresentation,
did not rely on a misrepresentation to
make an enrollment decision, or were
not harmed by the misrepresentation
then those borrowers’ loans should not
be forgiven with taxpayer funds. The
Department believes that institutions
should be held accountable for acts or
omissions that constitute
misrepresentation, but that arbitration,
other student complaint resolution or
legal proceedings brought in State court
should serve as the primary means for
borrowers to seek remedies against such
acts.
The increased number of school
closures in recent years has prompted
the Department to review regulations
related to closed schools and therefore
to propose changes to them. Under the
current regulations, students who are
enrolled at institutions that close, as
well as those who left the institution no
more than 120 days prior to the closure,
are entitled to a closed school student
loan discharge provided that the student
does not transfer credits from the closed
school and complete the program at
another institution. To ensure that
borrowers who left an institution in the
semester prior to its closure do not lose
eligibility for closed school discharge
because of a summer break, the
Department proposes to expand the
closed school discharge window from
120 days to 180 days prior to the
school’s closure. These regulations also
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incentivize institutions to provide
students with an opportunity to
complete their program through an
approved teach-out opportunity that
takes place at the closing institution or
at another institution. The teach-out
opportunity must be approved by the
accreditor and, if applicable, the State
authorizing agency. In the proposed
regulation, a borrower given the
opportunity to complete his or her
program through an orderly teach-out at
a closing institution, or through a
partnership with another institution,
would not be eligible for closed school
loan discharge. This mirrors the existing
regulations that disallow students who
transferred credits from the closed
school to another school, or who
finished the program elsewhere, to
qualify for the closed school loan
discharge. The teach-out opportunity
must be approved by the accreditor and,
if applicable, the State authorizing
agency to ensure that the institution or
its teach-out partner institution
continues to provide educational and
student support services that meet the
accreditor’s and agency’s standards.
Although the 2016 regulations included
an automatic closed school loan
discharge for eligible borrowers who did
not re-enroll within 3 years of their
school’s closure, upon further
consideration, the Department has
determined that this could have
unintended consequences for students
because an institution, or the custodian
of its student records, is permitted to
and might withhold the official
transcripts of borrowers who received a
closed school discharge. Although the
2016 regulation included an opt-out
provision, students who miss the
notification (perhaps due to a change in
email or mailing address) or who do not
fully understand the opportunity or its
potential consequences, could end up
by default participating in an action that
could prevent them from verifying their
credits or credential in the future. The
Department has heretofore favored optin requirements rather than opt-out
requirements, such as in the case of
Trial Enrollment Periods (https://
ifap.ed.gov/dpcletters/GEN1112.html),
to be sure that a student’s omission does
not result in actions with negative
financial or academic consequences.
The opt-out provision also could
increase the cost to the taxpayer,
including for borrowers who are not
seeking relief, because default
provisions typically capture a much
larger population than opt-in
provisions. Therefore, the proposed
regulations require borrowers to submit
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an application in order to receive a
closed school loan discharge.
The proposed regulations also update
the Department’s regulations regarding
false certification loan discharges in
response to the change made to the HEA
by Public Law 112–74, Consolidated
Appropriations Act, 2012, that
eliminated the option for students who
did not have a high school diploma or
its equivalent to receive Title IV aid by
demonstrating the ability to benefit and
to codify current practices. Whereas the
ability to benefit test once allowed
students who were unable to obtain an
official high school transcript or
diploma to qualify for Title IV aid by
other mechanisms, the elimination of
this test prevents them from receiving
Title IV aid. Now when a student is
unable to obtain an official high school
transcript, but attests in writing under
penalty of perjury that he or she has
completed a high school degree, the
borrower may receive title IV financial
aid, but will not then be eligible for a
false certification discharge if the
borrower had misstated the truth in
signing the attestation.
These proposed regulations also
address several provisions related to
determining the financial responsibility
of institutions and requiring surety in
the event that the school’s financial
health is threatened. The Financial
Accounting Standards Board (FASB)
recently issued updated accounting
standards that change the way that lease
liabilities are considered in determining
an institution’s financial position. To
align with these new standards, these
proposed regulations update the
definition of terms used in 34 CFR part
668, subpart L, appendices A and B,
which are used to calculate an
institution’s composite score. The
composite score methodology must be
updated to align with the new FASB
standards, but in the meantime, the
misalignment between the new FASB
standards and the old composite score
methodology could have unintended
consequences. Some of these
consequences could include institutions
signing shorter term equipment or
facilities leases, thereby increasing the
cost of education, or potentially even
closing schools whose financial position
hasn’t changed from prior years, thereby
increasing the number of closed school
loan discharges. Therefore, the
Department would continue to calculate
the composite score under the prior
FASB standard (‘‘alternative composite
score’’) for institutions that would have
passed the composite score under that
standard but not the current standard.
This alternative composite score
methodology will be in place for the six
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years following the implementation of
the new FASB standard or until an
updated composite score is developed
through negotiated rulemaking,
whichever is sooner.
In addition, the proposed regulations
expand the financial responsibility
requirements and add surety
requirements in response to certain
triggering events that occur between
audit cycles. Instead of relying solely on
information contained in an
institution’s audited financial
statements, which are submitted to the
Department six to nine months after the
end of the institution’s fiscal year, we
propose to determine at the time that
certain events occur whether those
events have a material adverse effect on
the institution’s financial condition. In
cases where the Department determines
that an event poses a materially adverse
risk, this approach would enable us to
address that risk quickly by taking the
steps necessary to protect the Federal
interest.
We adopted a similar approach in the
2016 final regulations, but here we
propose to focus on known and
quantifiable expenses. For example, the
actual liabilities incurred from defense
to repayment discharges could trigger
surety requirements, but the existence of
pending litigation may or may not have
a financial impact on the school. We are
proposing additional surety
requirements for other metrics or events
for which the potential consequences
pose a severe and imminent risk (for
example, SEC or stock exchange actions)
to the Federal interest.
We propose other triggering events,
such as high cohort defaults rates, loan
agreement violations, and accrediting
agency actions, that could have a
material adverse effect on an
institution’s operations or its ability to
continue operating, but the Department
intends to fully consider the
circumstances surrounding such event
before making a determination that the
institution is not financially
responsible. In that regard, these
proposed regulations do not contain
certain mandatory triggering events that
were included in the 2016 regulations
because the cost and burden of seeking
surety is significant, and in many cases
speculative events, such as pending
litigation or pending defense to
repayment claims, may be resolved with
no or minimal financial impact on the
institution. Similarly, while the 2016
regulations included a mandatory surety
for all State law violations, the
Department recognizes that many
violations do not threaten the financial
stability or existence of the institution
and therefore should not trigger
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mandatory surety requirements. These
regulations also do not include as a
mandatory triggering event the results of
a financial stress test, which was
included in the 2016 regulations
without an explanation of what that
stress test would be and on what
empirical basis it would be developed.
B. Alternatives Considered
The Department and the non-Federal
negotiators exchanged proposals on
every topic included in these proposed
regulations. The table below provides a
side-by-side comparison of the 2016
regulations, the proposed regulations,
and two alternatives—Scenario 1 and
Scenario 2. OMB circular A–4 requires
that agencies carefully consider all
appropriate alternatives for the key
attributes or provisions of a rule. They
generally should analyze at least three
options: The preferred option; a more
stringent option that achieves additional
benefits (and presumably costs more)
beyond those realized by the preferred
option; and a less stringent option that
costs less (and presumably generates
fewer benefits) than the preferred
option. The 2016 regulations are
summarized in this section and are also
available to the reader online.13 The
specifics of the alternatives selected are
discussed more thoroughly in this
section. Scenario 1 reflects a more
stringent option. Scenario 2 reflects the
regulations currently in effect (which in
the case of defense to repayment dates
back to 1994). Further, the HEA refers
to proprietary institutions, but some of
the Department’s prior notifications and
regulations use the term ‘‘private, forprofit institutions.’’ For the purposes of
discussion, the Department defines
private, for-profit institutions to be the
same as proprietary institutions, and
uses the term ‘‘proprietary institution’’
throughout in order to be consistent
with the HEA.
TABLE 1—COMPARISON OF ALTERNATIVES
Baseline
Proposal
Scenario 1
Closed school discharge eligibility window.
Closed school discharge exclusions.
Borrower Defense claims accepted.
Party that adjudicates borrower
defense claims.
Standard for borrower defense
claims.
Borrower defense application
process.
120 days ..................................
180 days ..................................
150 days ..................................
120 days.
Borrower completed teach-out
or transferred credits.
Affirmative and defensive ........
School offered a teach-out
plan.
Defensive only .........................
School offered a teach-out
plan.
Affirmative and defensive ........
Borrower completed teach-out
or transferred credits.
Defensive only.
Department ..............................
Department ..............................
State court or arbiter ...............
Department.
Federal Standard .....................
Federal standard .....................
State laws ................................
State laws.
Application ...............................
Forbearance during adjudication Interest accrues.
No FASB updates ....................
Select borrower defense in response to wage garnishment
or similar actions.
Forbearance not necessary .....
Submit judgment from state
court or similar using application.
Forbearance not necessary .....
Submit sworn attestation or
application.
Loans associated with BD
claims.
Composite score calculation
and timeline.
Higher of current or FASB-updated score forever.
Financial responsibility triggers
Reporting that automatically
results in surety request.
New reporting that may result
in surety request.
Notification of mandatory arbitration and class action waivers.
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Topic
Prohibits mandatory arbitration
clauses and class action
waivers.
On website
counseling.
Higher of current or FASB-updated score for 6 years, then
FASB-updated score.
New reporting that automatically results in surety request.
On website, during entrance
and exit counseling, and annually by email to students.
1. Baseline
Usually, the impact of a regulation is
quantified relative to the regulations
currently in effect, which in this case
would be the borrower defense
regulations from 1995, and associated
data. However, this impact analysis
does not follow that practice because
the 2016 regulations, although not yet in
effect, would go into effect were it not
for these proposed regulations.
Therefore, this analysis compares the
proposed regulations to the 2016
borrower defense regulations rather than
the 1995 regulations. Similarly, the
delayed 2016 regulations on financial
responsibility, closed school discharges,
and false certification discharges are
used as a baseline for these topics.
Composite score calculations and FASB
standards were not covered in the 2016
regulations, so they are compared to the
regulations currently in effect.
and
entrance
2. Summary of Proposed Regulations
The proposed regulations would
amend the baseline regulations to
update composite score calculations to
comply with new FASB standards,
create an alternative composite score
that does not include new FASB
standards for lease liabilities, require
institutions to disclose fewer adverse
events to the Department and notify
students of mandatory arbitration or
class-action prohibitions, permit
mandatory arbitration clauses and classaction waivers, expand the closed
school discharge eligibility period,
modify the conditions under which a
Direct Loan borrower may qualify for
false certification and closed school
discharges, create a different process for
adjudicating defense to repayment
applications, and, as part of the
adjudication process, provide that the
Secretary will used the revised
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Forbearance during adjudication Interest accrues.
No FASB updates.
None.
None.
misrepresentation standard explained in
this NPRM, request evidence from
institutions prior to completing
adjudication of any borrower defense
claims. Finally, the Department is also
proposing changes to the regulations
regarding subsidy usage periods and
collection costs charged by guaranty
agencies.
3. Alternative Scenario 1
Under Scenario 1, the Department
would require borrowers to submit a
judgment from a Federal or State court
or arbitration panel to qualify for a
defense to repayment discharge.
Scenario 1 would not include a process
for the Department to adjudicate claims
because claimants would already have
obtained a decision from a court or
arbitrator at the State level. This
alternative would place an increased
burden on borrowers if they decide to
13 https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/
pdf/2016-25448.pdf.
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hire a lawyer in order to present their
claims to a State court or incur costs
associated with an arbitration
proceeding. Moreover, because
consumer protection laws vary by State,
a borrower filing a claim in one State
may be subject to different criteria
compared to a borrower filing a defense
to repayment claim in another State. It
may also be unclear as to which State
serves as the relevant jurisdiction for a
given borrower.
Under Scenario 1, a guaranty agency
would be able to charge a borrower
collection fees and capitalize interest
after rehabilitating a loan. The closed
school discharge eligibility window
would be expanded to 150 days, but
only students whose institutions did not
offer them a teach-out plan would be
eligible for such a discharge.
This scenario would require an
institution to notify current and
potential students of its pre-dispute
arbitration and class-action waiver
policies on its website, at entrance and
exit counselling for all title IV
borrowers, and annually to all enrolled
students by email. Institutions would
also be required to disclose certain
financial responsibility risk events to
the Department if they occur.
Lastly, this scenario would implement
revisions to FASB standards in the
calculation of an institution’s composite
score without a transition period and
would prevent an institution from
appealing the composite score
calculation. This scenario would
include a requirement that the
institution automatically provide a
surety in the event that a financial
responsibility risk event occurs.
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4. Alternative Scenario 2
Scenario 2 would be to rescind the
2016 regulations on borrower defenses
and go back to the 1995 regulations. In
Scenario 2 the Department would accept
only defensive borrower defense claims
to repayment applications or
attestations and adjudicate them,
applying a State law standard. Under
this alternative, borrowers could elect to
have loans placed in forbearance while
their claims are adjudicated.
Scenario 2 would return the eligibility
period for closed school discharge to
120 days. Borrowers who complete a
teach-out or transfer credits would not
qualify. The technical changes to the
false certification discharge provisions
reflected in the 2016 regulations would
be rescinded.
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C. In Scenario 2, no Changes to the
Composite Score or Financial
Responsibility Standards Would Be
Made as a Result of Changes to the
FASB Standards
Under this scenario, a guaranty
agency could not capitalize interest or
charge collection fees on a loan that is
sold following the completion of loan
rehabilitation, which is current
Department practice in the Direct Loan
Program.14
Costs, Benefits, and Transfers
These proposed regulations will affect
all parties participating in the title IV,
HEA programs. In the following
sections, the Department discusses the
effects these proposed regulations may
have on borrowers, institutions,
guaranty agencies, and the Federal
government.
1. Borrowers
These proposed regulations would
affect borrowers relative to defense to
repayment applications, closed school
discharges, false certification
discharges, loan rehabilitation, and
institutional disclosures. Borrowers may
benefit from an ability to appeal to the
Secretary if a guaranty agency denies
their closed school discharge
application, from the cost savings and
campus stability associated with longer
leases from a more generous ‘‘look
back’’ period with regard to closed
school loan discharges, and from the
ability to increased opportunities for
borrowers to complete their program
through an approved teach-out plan.
Borrowers are also more likely to have
their defense to repayment applications
processed and decided more quickly if
the Department has a smaller volume of
unjustified or ineligible claims.
Borrowers may be disadvantaged by
receiving fewer opportunities to
discharge loans if the Department
returns to the pre-2015 practice of
accepting defense to repayment claims
only from borrowers in a collections
proceeding. In addition, the Department
is concerned that students could engage
in strategic defaults in order to avail
themselves to defense to repayment
relief. Students who default and then
are unsuccessful in receiving defense to
repayment loan relief may suffer
additional financial penalties and have
the default listed on their credit report.
Therefore, the Department is
considering continuing to accept
affirmative claims to enable borrowers
who are harmed by misrepresentations
to seek relief while they are in
repayment. In the event that the
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Department continues to accept
affirmative claims, it will place certain
limits and conditions on the affirmative
claims process to serve borrowers who
were harmed while preventing frivolous
claims. These limits will also ensure
that the affirmative claim process aligns
with the Department’s record retention
policies so that institutions will have
the ability to respond to the borrower’s
claim. Some borrowers may incur
burden to review institutional
disclosures on mandatory arbitration
and class action waivers, or to complete
applications for defense to repayment
discharges, and there could be
additional burden to borrowers who
would otherwise, through no affirmative
action on their part, be included in a
class-action proceeding.
a. Borrower Defenses
When defense to repayment discharge
applications are successful, dollars are
transferred from the Federal government
to borrowers because borrowers are
relieved of an obligation to pay the
government for the loans being
discharged. As further detailed in the
Net Budget Impacts section, the
Department estimates that annualized
transfers from the Federal Government
to affected borrowers, partially
reimbursed by institutions, would be
reduced by $693.9 million. This is based
on the difference in cashflows
associated with loan discharges when
the proposed regulations are compared
to the President’s Budget 2019 baseline
(PB2019) and discounted at 7 percent.
The proposed regulations do not
include a formula for computing partial
discharges because partial discharges
are based on the nature of each
borrower’s application and the
magnitude of the harm experienced by
the borrower. The Department is
interested in options for determining
partial relief and invites commenters to
submit specific formulae for
determining partial relief derived from
an assessment of the financial harm the
borrower experienced, as well as
sources of data that could be used to
support the recommended formulae. To
the extent borrowers with successful
defense to repayment claims have
subsidized loans, the elimination or
recalculation of the borrowers’
subsidized usage periods could relieve
them of their responsibility for accrued
interest and make them eligible for
additional subsidized loans. A borrower
defense discharge is a remedy available
to students when other consumer
protection tools are ineffective. Students
harmed by institutional
misrepresentations continue to have the
right to seek relief directly from the
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institution through arbitration, lawsuits
in State court, or other available means.
Borrowers would possibly receive
quicker and more generous financial
remedies from institutions through
arbitration since schools may be more
motivated to make students whole in
order to avoid defense to repayment
claims. The 2016 regulations would
have eliminated this complaint
resolution option by prohibiting
mandatory arbitration, and while
institutions may have continued to
provide voluntary arbitration, schools
may not have made it obvious to
students how to avail themselves of
arbitration opportunities. The proposed
regulation allows for mandatory
arbitration clauses, but requires
institutions to provide the borrower
with information about the meaning of
a mandatory arbitration clauses and
how to use the arbitration process in the
event of a complaint against the
institution. The benefit of arbitration is
that it is more accessible and less costly
to students and institutions than
litigation. For borrowers who seek relief
from a court, there may be additional
advantages since courts can award
damages beyond the loan value, which
the Department cannot do. The
proposed regulations, therefore, would
provide borrowers with the incentive to
seek redress first from institutions that
should incur the cost of the harm to the
student. Only as a last resort should
taxpayer funds be used to pay the costs
of institutional misrepresentations.
b. Closed School Discharges
Some borrowers may be impacted by
the proposed changes to the closed
school discharge regulations. These
proposed regulations would extend the
window for a student’s eligibility for a
closed school discharge from 120 to 180
days from the date the school closed, to
account for the days a student would be
unable to attend an institution during a
summer term at institutions that offer no
or only limited classes during that time.
The regulations would provide that
borrowers offered a reasonable teach-out
plan by their institutions would not be
eligible for closed school discharges, if
the plan was approved by the
institution’s accrediting agency and, if
applicable, the institution’s State
authorizing agency. These proposed
regulations also eliminate the
regulations that provided for an
automatic closed school discharge
without application for students that
had not received a closed school
discharge or re-enrolled at a title IV
participating institution within 3 years
of a school’s closure. While the
automatic discharge may benefit some
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students who no longer would need to
submit an application to receive relief,
it may have disadvantaged students who
wish to continue their education at a
later time or provide proof of credit
completion to future employers. There
could also be tax implications
associated with closed school loan
discharges, and borrowers should be
aware of those implications and given
the opportunity to make a decision
according to their needs and priorities.
The expansion of the eligibility period
would increase the number of students
eligible under this criterion and
encourage institutions to provide
opportunities for students to complete
their programs in the event that a school
plans to close. The reduced availability
of closed school discharges because of
the teach-out provision and the
elimination of the 3-year automatic
discharge may reduce debt relief for
students who believe that their
education provided no benefits, but
have not tried to transfer credits or
complete their program elsewhere. As
further detailed in the Net Budget
Impacts section, the Department
estimates that annualized closed school
discharge transfers from the Federal
Government to affected borrowers
would be reduced by $96.5 million,
primarily due to the elimination of
automatic closed school discharges.
This is based on the difference in
cashflows associated with loan
discharges when the proposed
regulations are compared to the
President’s Budget 2019 baseline
(PB2019) and discounted at 7 percent.
The Department’s accreditation
standards 15 require accreditors to
approve teach-out plans at institutions
under certain circumstances, which
emphasizes the importance of these
plans to ensuring that students have a
chance to complete their program
should the school decide, or be
required, to close. Teach-out plans that
would require extended commuting
time for students or that do not cover
the same academic programs as the
closing institution likely would not be
approved by accreditors, and therefore
would not negate a student’s access to
closed school discharges. In addition, an
institution whose financial position is
so degraded that it could not provide
adequate instructional or support
services would similarly not have their
teach-out plan approved, thus enabling
borrowers at those institutions to obtain
a closed school discharge. In the case of
two large, precipitous closures in 2015
and 2016, it is possible that enabling
those institutions to teach-out their
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CFR 602.24(c).
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37289
current students—including by
arranging teach-outs plans delivered by
other institutions or under the oversight
of a qualified third party—would have
benefited students and saved hundreds
of millions of dollars of taxpayer funds.
Large numbers of small, private nonprofit colleges could close in the next 10
years, which could contribute
significantly to the cost of closed school
discharges if these institutions are not
encouraged to provide high quality
teach-out options to their students.16 By
way of example, Mt. Ida College
announced 17 that it would close at the
end of the Spring 2018 semester and
while the institution had considered
entering into a teach-out arrangement
with another institution, this did not
materialize. While there may be other
institutions that will accept credits
earned at Mt. Ida, due to the distance
between Mt. Ida and other campuses, it
may be impractical for the student to
attend another institution.18 A proper
teach-out plan may have enabled more
students to complete their program. The
requirement of accreditors to approve
such options ensures protection for
borrowers to ensure that a teach-out
plan provides an accessible and high
quality opportunity to complete the
program.
c. False Certification Discharges
Some borrowers may be impacted by
the proposed changes to the false
certification discharge regulations,
although this provision of the proposed
regulations simply updates the
regulations to codify current practice
required as a result of the removal of the
ability to benefit option as a pathway to
eligibility for title IV aid. In the past, a
student unable to obtain a high school
diploma could still receive title IV funds
if he or she could demonstrate that he
or she could benefit from a college
education.
With that pathway eliminated by a
statutory change, prospective students
unable to obtain high school transcripts
when applying for admission to a
postsecondary institution would be
allowed to certify to their institutions
that they graduated from high school or
completed a home school program and
qualify for Federal financial aid. At the
same time, it will disallow students who
misrepresented the truth in signing such
an attestation from subsequently seeking
16 www.insidehighered.com/news/2017/11/13/
spate-recent-college-closures-has-some-seekinglong-predicted-consolidation-taking.
17 www.insidehighered.com/news/2018/04/09/
mount-ida-after-trying-merger-will-shut-down.
18 www.insidehighered.com/news/2018/04/23/
when-college-goes-under-everyone-suffers-mountidas-faculty-feels-particular-sense.
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false certification discharge. Although
the Department has not seen an increase
in false certification discharges as a
result of the elimination of the ability to
benefit option, given the increased
awareness of various loan discharge
programs, the Department believes it is
prudent to set forth in regulation that in
the event a student falsely attests to
having received a high school diploma,
the student would not be eligible for a
false certification discharge. Codifying
this practice will not have a significant
impact, but will ensure that students
unable to obtain an official diploma or
transcript will retain the opportunity to
participate in postsecondary education.
The Department does not believe that
there are significant numbers of
students who are unable to obtain an
official transcript or diploma, but recent
experiences related to working with
institutions following natural disasters
demonstrates that this alternative for
those unable to obtain an official
transcript is important.
d. Institutional Disclosures of
Mandatory Arbitration Requirements
and Class Action Waivers
Borrowers, students, and their
families would benefit from increased
transparency from institutions’
disclosures of mandatory arbitration
clauses and class action lawsuit waivers
in their enrollment agreements. Under
the proposed regulations, institutions
would be required to disclose that their
enrollment agreements contain class
action waivers and mandatory
arbitration clauses. Institutions would
be required to make these disclosures to
students, prospective students,
borrowers, and their families on
institutions’ websites and in their
marketing materials. Further, borrowers
would be notified of these during
entrance counselling. As further
discussed in the Paperwork Reduction
Act section, we estimate there is 5
minutes of burden to 342,407 borrowers
annually at $16.30 19 per hour to review
these notifications during entrance
counseling, for an annual burden of
$446,506.
As institutions began preparing to
implement the 2016 regulations, some
eliminated both mandatory and
voluntary arbitration provisions to be
sure they would be in compliance with
the letter and spirit of the regulations.
Under the proposed regulations,
institutions would be able to include
these provisions in their enrollment
agreements. The effect will be to require
19 Students’ hourly rate estimated using BLS for
Sales and Related Workers, All Other, available at:
www.bls.gov/oes/2017/may/oes_nat.htm#41-9099.
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borrowers to redress their grievances
through a quicker and less costly
process, which we believe will benefit
both the institution and the borrower by
introducing the judgment of an
impartial third party, but at a lower cost
and burden than litigation. Arbitration
may be in the best interest of the student
because it could negate the need to hire
legal counsel and result in adjudication
of a claim more quickly than in a
lawsuit or the Department’s 2016
borrower defense claim adjudication
process. Mandatory arbitration also
reduces the cost impact of unjustified
lawsuits to institutions and to future
students, because litigation costs are
ultimately passed on to future students
through tuition and fees. It also
increases the likelihood that damages
will be paid directly to students, rather
than used to pay legal fees.
2. Institutions
Institutions will be impacted by the
proposed regulations in the areas of
borrower defenses, closed school
discharges, false certification
discharges, FASB accounting standards,
financial responsibility standards, and
information disclosure. The benefits to
institutions include a decrease in the
number of reimbursement requests
resulting from Department-decided loan
discharges based on borrower defenses,
closed school, and false certification; an
increased involvement in the borrower
defense adjudication process; the ability
to continue to receive the benefit from
the cost savings associated with longerterm leases and reduced relocation costs
until such time as the composite score
methodology can be updated through
future negotiated rulemaking; and the
ability to incorporate arbitration and
class action waivers in enrollment
agreements. Institutions may incur costs
from increased arbitration and internal
dispute resolution and increased
expenses to provide for teach-out plans
in the event of a school closure.
1. Borrower Defenses
Most institutions would not be
burdened by the proposed regulatory
changes in borrower defense to
repayment. We estimate that successful
defense to repayment applications
under the proposed Federal standard
and process for defensive claims will
affect only a small proportion of
institutions. The Department expects
that the changes in these regulations
would result in fewer successful defense
to repayment applications, and therefore
fewer discharges of loans. Therefore, the
Department expects to request fewer
repayment transfers from institutions to
cover discharges of borrowers’ loans.
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Under the main budget estimate
explained further in the Net Budget
Impacts section, the Department
estimates an annual reduction of
reimbursements of borrower defense
claims from institutions to the
government of $223 million under the
seven percent discount rate. However,
the Department believes that by
requiring institutions that utilize
mandatory arbitration clauses to provide
plain language information to students
about the role of mandatory arbitration
clauses and the process to access
arbitration, more students may take
advantage of arbitration to settle
disputes. In addition, given the benefits
to both students and institutions of
resolving complaints through
arbitration, more institutions could offer
arbitration opportunities, which could
result in added costs to institutions for
arbitration and added financial benefits
to students who may more easily seek
and be awarded financial remedies.
2. Closed School Discharges
A small percentage of institutions
close annually, with some institutions
providing teach-out opportunities to
enable students to complete their
programs and others leaving students to
navigate the closure on their own,
resulting in their eligibility for closed
school loan discharges. Although the
proposed regulations expand the
eligibility window for students who left
the institution but are still eligible to
receive closed school loan discharges
from 120 to 180 days it codifies current
practice under which borrowers who
were provided an approved teach-out
plan by their institution will have
completed their credential, and
therefore would not qualify for closed
school loan discharges. The Department
has worked with a number of schools
that have successfully completed teachout plans, to the benefit of borrowers
and taxpayers. As additional schools
close in the future, the Department
wants to encourage them to engage in
orderly teach-outs rather than
precipitous closures. We believe the
proposed regulations would encourage
institutions to provide teach-out
opportunities, despite their high cost, if
they reduce the total liability that would
result from having to reimburse the
Secretary for losses due to closed school
discharges. While teach-outs are costly
to institutions, they better serve
students and reduce the risk to
taxpayers, and therefore should be
incentivized.
Title IV-granting institutions are
required by their accreditors 20 to have
20 34
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an approved teach-out plan on file and
to update that plan with more specific
information in the event that the
institution is financially distressed, is in
danger of losing accreditation or State
authorization, or is considering a
voluntary teach-out for other reasons.
Because accreditors, and in some cases,
State authorizing agencies, must
approve teach-out plans and carefully
monitor teach-out activities, only those
students who can be provided a high
quality education will not be eligible for
a closed school loan discharge under
this provision.
The Department is not including in
these regulations provisions for
automatic closed school discharges for
students who do not complete their
program 3 years after the school closed,
which it included in the 2016
regulations. It is inappropriate for the
Secretary to grant such loan discharges
without receiving an application from
the borrower.
These proposed regulations will
encourage more institutions to engage in
teach-out plans rather than precipitous
closures, which would generate
significant savings to taxpayers.
Although teach-outs have considerable
cost for institutions, these costs will be
offset by reducing the number of
borrowers who seek and are granted
closed school discharges. It is important
to keep in mind that closed schools
include branch campuses and
additional locations of main campuses
that continue to operate. The
Department has recognized the benefits
of helping students complete their
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programs prior to school closures, and
therefore sees benefit in promoting
orderly teach-outs.
3. False Certification Discharges
A small percentage of institutions are
affected by false certification discharges
annually. However, elimination of the
ability to benefit option for Title IV
eligibility could result in growth in the
coming years of the number of students
who enroll having attested to receiving
a high school diploma since an official
high school diploma or transcript is not
available. To ensure that the unintended
consequence of this policy change is not
an increase in the frequency or cost of
false certification discharges, the
Department believes it is necessary to
specify that a student who
misrepresents his or her high school
completion status under penalty of
perjury cannot then pursue a false
certification loan discharge due to noncompletion of high school, a GED or a
home school program.
The proposed regulations would
continue to permit institutions to obtain
written assurance from prospective
students who are unable to obtain their
high school transcripts when applying
for admission and Federal financial aid,
without exposing themselves to
financial liabilities should those
students misrepresent the truth in their
attestations. Although we believe this
proposed regulation will not have a
significant impact in the short term,
primarily because the Department
receives very few false certification
discharge requests, the elimination of
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37291
the ability to benefit option could result
in increased numbers of enrollments by
attestation, which could in turn increase
the frequency and cost of false
certification discharges in the future.
The proposed regulations also will
protect institutions as they seek to serve
students who are pursuing
postsecondary education but cannot
obtain an official diploma or transcript.
This provision may result in small
cost savings to some affected
institutions, but mostly it ensures that
adult students who are most likely to
have difficulty in obtaining official
transcripts maintain the ability to
pursue higher education without
increasing the risk of financial losses to
taxpayers.
4. Financial Responsibility Standards
Both the 2016 final regulations and
the proposed regulations include
conditions under which institutions
would have to provide a letter of credit
or other form of surety in order to
continue to participate in the title IV,
HEA programs. The following table
compares the financial responsibility
triggers established by the 2016 final
regulations and in the proposed
regulations. Mandatory events or actions
automatically result in a determination
that the institution is not financially
responsible and trigger a request for
surety from the institution, whereas
discretionary events or actions give the
Secretary the discretion to make that
determination at the time the event or
action may occur.
BILLING CODE 4000–01–P
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Table 2: Financial Responsibility Triggers
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Non-Title IV
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(90/10): fails
in most recent
fiscal year
At proprietary
institutions
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Proposed Regulation
Change Summary
Actual expense
incurred from a
triggering event
Eliminates
projected
expenses
Department has
discharged loans
resulting from
adjudicated claims
• Changed from
Discretionary
to Mandatory
• Reduced to
actual
discharges
only
• Final judgment in a Reduced to
judicial
final
judgments with
proceeding,
public records
administrative
proceeding, or
determination
Excludes transfers
Revised
to affiliated
entities included in
composite score or
to an owner
At proprietary
No Change
institutions
Sfmt 4725
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EP31JY18.003
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......
Financial
Responsibility
2016 Regulation
Trigger
Action or Event Actual or projected
triggers
expenses incurred
Secretary
from a triggering
decision and
event
surety to
Department
Defense to
Department has
repayment that
received or
does or could
adjudicated claims
lead to an
associated with the
institution
institution
repaying
government for
discharges
Lawsuits and
• Final judgment in a
Other Actions
judicial
that does or
proceeding,
could lead to
administrative
institution
proceeding or
paying a debt
determination, or
or incurring a
final settlement
liability
• Legal action
brought by a
Federal or State
Authority pending
for 120 days
•Other lawsuits that
have survived a
motion for summary
judgment or the
time for such a
motion has passed
Withdrawal of
Excludes transfers
Owner's Equity
between institutions
at proprietary
with a common
institutions
composite score
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
2016 Regulation
Proposed Regulation
Two most recent
rates are 30 percent
or above after any
challenges or
appeals
SEC or Exchange • Warned SEC may
Actions
suspend trading
regarding the
• Failed to file
institution's
required report
stock (Publicly
with SEC on-time
Traded
• Notified of
Institutions)
noncompliance with
Stock exchange
requirements
• Stock delisted
Accreditor
Actions Teach-Outs
Accreditor requires Removed
institution to
submit a teach-out
plan for closing the
institution, a
branch, or
additional location
Programs one year
Removed
away from losing
their eligibility
for title IV, HEA
program funds due to
GE metrics
Gainful
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!II
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§
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Two most recent
rates are 30 percent
or above after any
challenges or
appeals
•Notified that SEC
will suspend
trading
• Failed to file
required report
with SEC on-time
and outside of a
negotiated
extension
• Notified of
noncompliance with
Stock exchange
requirements
• Stock delisted
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No Change
Changed
notification
requirements
from warning
by the SEC,
which a
publicly
traded company
is not
required to
communicate to
shareholders,
to a
notification
by the SEC,
about which a
company must
notify
shareholders.
Reduced
liability
Regulatory
update
Accreditor issues a
show-cause order
that, if not
resolved, would
result in the loss
of institutional
accreditation.
Sfmt 4725
Change Summary
31JYP3
Limits trigger
to accreditor
actions that
could lead to
loss of
institutional
accreditation
and/or closure
of the school
EP31JY18.004
Financial
Responsibility
Trigger
Cohort Default
Rates
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BILLING CODE 4000–01–C
Some institutions may incur burden
from the requirement to report any
action or event described in § 668.171(e)
within the specified number of days
after the action or event occurs. As
further explained in the Paperwork
Reduction Act of 1995 section, the
Department estimates the burden for
reporting these events to the Secretary
would be 720 hours annually for private
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schools and 2,274 hours for proprietary
institutions for a total burden of 2,994
hours. Using an hourly rate of $44.41,21
we estimate that the costs incurred by
this regulatory change would be
$132,964 annually ($44.41*2,994).
21 Hourly wage data uses the Bureau of Labor
Statistics, available at swww.bls.gov/ooh/
management/postsecondary-educationadministrators.thm.
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FASB is a standard-setting body that
establishes generally accepted
accounting principles and the
Department requires that institutions
participating in the title IV, HEA
programs file audited financial
statements annually, with the audits
performed under FASB standards.
Therefore, financial statements will
begin to contain elements that are either
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new or reported differently, including
long-term lease liabilities. These
changes were not included in the 2016
regulations and are new to these
proposed regulations.
Changes in the definition of terms
used under the financial responsibility
standards are being proposed to align
the regulations with current FASB
standards.22 However, the new FASB
lease standard could have a profound
impact on an institution’s composite
score and the Department has no
mechanism to make a timely adjustment
to the composite score calculation to
accommodate this change. The
Department also has no data to
understand what the impact of this
change will be on institutional
composite scores. Models were created
in SAS 23 to perform impact and
sensitivity analyses on the proposed
changes to the composite score
calculations. However, the Department
does not have structured data for these
12 values used in the calculation:
• Lease Right-of-use Assets (VAR1);
• Lease Right-of-use Liabilities
(VAR2);
• Net Assets With Donor Restrictions
(VAR3);
• Net Assets Without Donor
Restrictions (VAR4);
• Net Assets With Donor Restrictions:
Restricted in Perpetuity (VAR5);
• Post–employment and defined
benefit pension plan liabilities (VAR6);
• Loss for defined pension and other
post-employment, investments and
annuities (VAR7);
• Investment Gains (VAR8);
• Non-operating investment amount
needed for separation of expenses
(VAR9);
• Annuities, term endowments and
life funds not restricted in perpetuity
(VAR10);
• Construction in process (VAR11);
and
• Debt purpose and related amount
(VAR12).
The Department invites commenters
to submit data to the Department on
these variables. Specific, numeric values
submitted will be considered for
inclusion in the Department’s models
prior to publication of the final
regulations. We invite submission of
data at the institutional level as well as
means or medians. Please submit data in
the format provided in Tables 3 and 4
(data without OPEID will also be
accepted).
TABLE 3—FINANCIAL DATA FOR PROPRIETARY INSTITUTIONS
OPEID
VAR1
VAR2
VAR3
VAR4
VAR5
VAR6
VAR7
VAR8
VAR9
VAR10
VAR11
VAR12
VAR9
VAR10
VAR11
VAR12
Median
Mean
TABLE 4—FINANCIAL DATA FOR NONPROFIT INSTITUTIONS
OPEID
VAR1
VAR2
VAR3
VAR4
VAR5
VAR6
VAR7
VAR8
Median
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Mean
Therefore, while the Department must
obtain audited financial statements
prepared in accordance with FASB
standards, and it will automatically
calculate a composite score for all
institutions using the audited financial
statements, those institutions that wish
to have an alternative composite score
calculated based on the current
methodology (minus long term lease
liabilities) can provide supplemental
data to the Department and request the
alternative score to be calculated. The
Department will use the higher of the
two scores to determine an institution’s
financial responsibility. Under this
proposal, an institution can continue to
rely on long-term leases that reduce
costs, increase campus stability and
prevent increased school closures that
result from short-term leases that cannot
be extended or satisfactorily
renegotiated.
The Department may use the data it
would collect under the proposed
regulations to conduct analyses that
might inform future negotiated
rulemaking to update the composite
score methodology. As explained
further in the Paperwork Reduction Act
of 1995 section, 1,896 proprietary
institutions and 1,799 private
institutions will each need 1 hour
annually to prepare a Supplemental
Schedule to post along with their
annual audit ((1,896+1,799) × 1 hour ×
$44.41). This will result in an additional
annual burden of $164,095. Further, 450
private institutions and 474 proprietary
institutions would each need 15
minutes to request that the Secretary
make the second composite score
calculation, for an additional annual
burden of $10,303. The Department is
not yet receiving these data on
22 www.fasb.org/jsp/FASB/Page/
LandingPage&cid=1175805317350.
23 SAS Software. SAS Institute Inc. SAS and all
other SAS Institute Inc. product or service names
are registered trademarks or trademarks of SAS
Institute Inc., Cary, NC, USA.
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institutions’ financial statements, so it is
unable to quantify anticipated changes.
We invite data submissions in this
section for the Department to use in
composite score sensitivity analyses. If
the Department receives a sufficient
number of complete data submissions, it
may include this sensitivity analysis in
the RIA in the final regulations.
5. Enrollment Agreements
The proposed regulations would
permit institutions to include
mandatory arbitration clauses and class
action waivers in enrollment agreements
they have with students receiving title
IV financial aid. These provisions were
prohibited by the 2016 regulations. The
recent Supreme Court decision in Epic
Systems Corp. v. Lewis, 584 U.S.ll,
2018 WL 2292444 (May 21, 2018) held
that arbitration clauses in employment
contracts must be enforced by the courts
as written, in essence confirming the
right of private parties to sign contracts
that compel arbitration and waive class
action rights. Institutions may benefit
from arbitration in that it is a faster and
less expensive way to resolve disputes,
while reducing reputational effects;
however, they may incur costs resulting
from an increased use of arbitration
under the proposed regulations.
Students may also benefit from
arbitration, which is easier and less
costly to navigate. On the other hand,
students will have reduced access to a
judicial forum, which would decrease
the ability of a borrower to hold the
institution publicly accountable.
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6. Institutional Disclosures
Some institutions will incur costs
under the proposed disclosure
requirements. Institutions that include
mandatory pre-dispute arbitration
clauses or class action waivers in their
enrollment agreements would be
required to make certain disclosures. As
further explained in the Paperwork
Reduction Act of 1995 section, the
Department estimates the burden for
making these disclosures would affect
944 proprietary institutions for a total of
4,720 hours annually. Using an hourly
rate of $44.41,24 we estimate the costs
incurred by this regulatory change
would be $209,615. Also as discussed in
the Paperwork Reduction Act of 1995
section, we estimate these same
institutions would be required to
include this information to borrowers
during entrance counseling, for a further
burden of 3 hours each annually,
24 Hourly wage data uses the Bureau of Labor
Statistics, available at www.bls.gov/ooh/
management/postsecondary-educationadministrators.thm.
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totaling $125,769 annually
(944*3*44.41). Therefore, we estimate
the total burden for disclosures would
be $335,384 annually ($209,615 +
$125,769).
3. Guaranty Agencies
Guaranty agencies would incur onetime costs as well as annual costs under
the proposed regulations. The one-time
costs would be to update their systems
to identify borrowers now eligible for
closed school discharges for reporting to
lenders and to update their notifications
and establish a process for forwarding
requests for escalated reviews to the
Secretary. As further explained in the
Paperwork Reduction Act of 1995
section, the Department estimates the
burden for making these system changes
would be 336 hours (240+96). Using an
hourly rate of $44.41,25 we estimate
costs incurred by this regulatory change
would be $14,921.76 (336 hours *
$44.41 per hour). Finally, there would
be an ongoing, annual burden on
guaranty agencies to forward a
borrower’s request for escalated review
of a denied closed school discharge to
the Secretary. We estimate this burden
would be 74 hours annually. Using the
same hourly rate, we estimate costs
incurred by this regulatory change
would be $3,286.34 (74 hours * $44.41
per hour). Therefore, the Department
estimates increased costs to guaranty
agencies of $3,286 annually and $14,922
additional one-time costs in the first
year.
The Department does not have data
on interest capitalization and collection
costs for rehabilitated loans to estimate
the impact of the changes in the
proposed regulations. The Department
invites commenters to submit the
following data points: proportion of
rehabilitated loans where collection
costs were charged, mean collection
costs charged under this circumstance
per loan, proportion of rehabilitated
loans where interest is capitalized prior
to sale, and mean interest capitalized
under this circumstance per loan.
3. Federal Government
These proposed regulations would
affect the Federal government’s
administration of the title IV, HEA
programs. The Federal government
would benefit in several ways,
including significant reductions in
student loan discharge transfers,
reduced administrative burden,
increased (or at least steady) public
confidence in the student loan program,
25 Hourly wage data uses the Bureau of Labor
Statistics, available at www.bls.gov/ooh/
management/postsecondary-educationadministrators.thm.
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and increased access to data. The
Federal government would incur costs
to update its IT systems to implement
the proposed changes.
a. Borrower Defenses
Borrower defense to repayment was
described in the 1994 regulations
promulgated by the Department as a
right that a borrower could exercise
once involved in a collections
proceeding. The Department altered this
approach in 2015 by allowing borrowers
to file affirmative borrower defense
claims, meaning claims while loans are
in repayment or forbearance, and the
2016 regulations continued that
approach. The proposed regulations
would return to accepting defensive
claims only, transferring the cost burden
of misrepresentation back to institutions
and the cost of administering consumer
fraud allegations to the appropriate
entities—courts or arbitration. It is more
likely that the cost of misrepresentation
would be incurred by institutions
committing the act or omission than the
taxpayer, because borrowers would be
encouraged first to go to the institution
to litigate claims of misrepresentation
and because the Department would
recoup defense to repayment discharge
transfers from institutions.
In addition, although not quantifiable,
a Federal student loan program that
does not result in additional financial
burden to the taxpayer is likely to be
more stable and viable over the long
term, and therefore more likely to
continue receiving Congressional and
taxpayer support. Therefore, restoring
defense to repayment as a last resort
option rather than a first resort
consumer protection mechanism will
likely ensure that the student loan
program continues to serve borrowers
into the future.
Finally, the Department expects a
marked reduction in administrative
burden as a result of the proposed
changes to the circumstances under
which it would consider a borrower’s
defense to repayment application. While
the proposed regulations would rely
heavily upon existing collection
processes to initiate a defense against
collection actions, the Department has
also requested public comment on how
affirmative claims might be adjudicated
and how sufficient guardrails could be
put in place to minimize the submission
of unjustified claims or those that do not
fall within the scope of a defense to
repayment claim. Thus, until the final
determination is made regarding the
Department’s acceptance of affirmative
claims, defensive claims, or both, it is
unable to provide an estimate of this
reduction in adjudication burden.
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b. Loan Discharges
Under the proposed regulations, the
Department would expect to process
and award fewer closed school and false
certification loan discharges than it
would have under the 2016 regulations.
To the extent defense to repayment,
closed school, and false certification
loan discharges are not reimbursed by
institutions, Federal government
resources that could have been used for
other purposes will be transferred to
affected borrowers. As further detailed
in the Net Budget Impacts section, the
Department estimates that annualized
transfers from the Federal government
to affected borrowers, partially
reimbursed by institutions, would be
reduced by $693.9 million for borrower
defenses and $96.5 million for closed
school discharges with reductions in
reimbursement from institutions of $223
million annually. This is based on the
difference in cashflows associated with
loan discharges when the proposed
regulation is compared to the
President’s Budget 2019 baseline
(PB2019) and discounted at 7 percent.
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c. Financial Responsibility Standards
The Department will benefit from
receiving updated financial statements
consistent with FASB standards. By
receiving information to calculate both
composite scores, the Department
would have data necessary for
developing updated composite score
regulations through future rulemaking.
The financial responsibility disclosures
will enable the Department to receive
information to continue to calculate the
composite score.
The Department would incur onetime costs for modifying eZ-Audit and
other systems to collect the data needed
to calculate composite scores under the
new FASB reporting requirements and
other systems to collect financial
responsibility disclosures. The
Department has not yet conducted the
Independent Government Cost Estimate
(IGCE) to determine the costs for making
these system changes. Further, the
Department expects ongoing, increased
administrative burden because it would
need to compute two composite scores
for each institution under the proposed
regulations. However, the Department
has not yet developed its internal
process for implementing the proposed
regulations, which may necessitate a
software modification or individuallygenerated calculations; consequently, it
is unable to estimate the change in
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administrative burden. Therefore, the
Department is unable to estimate its
burden for implementing the proposed
regulatory changes in the financial
responsibility provisions.
Net Budget Impacts & Accounting
Statement
These proposed regulations are
estimated to have a net Federal budget
impact over the 2019–2028 loan cohorts
of $[¥12.715] billion in the primary
estimate scenario, including $[¥10.487]
billion for changes to the defense to
repayment provisions and $¥2.227
billion for changes related to closed
school discharges. A cohort reflects all
loans originated in a given fiscal year.
Consistent with the requirements of the
Credit Reform Act of 1990, budget cost
estimates for the student loan programs
reflect the estimated net present value of
all future non-administrative Federal
costs associated with a cohort of loans.
The Net Budget Impact is compared to
the 2019 President’s Budget baseline
(PB2019). This baseline assumed that
the borrower defense regulations
published by the Department on
November 1, 2016, would go into effect
in 2019 and utilized the primary
estimate scenario,26 as modified by the
change in the effective date to 2019,
described in the final rule published
February 14, 2018.27
The proposed regulatory provisions
with the greatest impact on the Federal
budget are those related to the discharge
of borrowers’ loans. Borrowers may
pursue closed school, false certification,
or defense to repayment discharges. The
precise allocation across the types of
discharges will depend on the
borrower’s eligibility and ease of
pursuing the different discharges, and
we recognize that some applications
may be fluid in classification between
defense to repayment and the other
discharges. In this analysis, we assign
any estimated effects from defense to
repayment applications to the defense to
repayment estimate and the remaining
effects associated with eligibility and
process changes related to closed school
discharges to the closed school
discharge estimate.
1. Defense to Repayment Discharges
As noted previously, the Department
had to incorporate the changes to the
26 See 81 FR 76057 published November 1, 2016,
available at ifap.ed.gov/fregisters/attachments/
FR110116.pdf.
27 See 83 FR 6468, available at www.gpo.gov/
fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf.
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37297
defense to repayment provisions related
to the 2016 final regulations into its
ongoing budget estimates, and changes
described here are evaluated against that
baseline. In our main estimate, based on
the assumptions described in Table 5,
we present our best estimate of the
impact of the changes to the defense to
repayment provisions in the proposed
regulation.
a. Assumptions and Estimation Process
The net present value of the reduced
stream of cash flows compared to what
the Department would have expected
from a particular cohort, risk group, and
loan type generates the expected cost of
the proposed regulations. We applied an
assumed level of school misconduct,
defensive claims, defense to repayment
applications success, and recoveries
from institutions (respectively labeled
as Conduct Percent, Defensive Claims
Percent, Borrower Percent, and
Recovery Percent in Table 5) to loan
volume estimates to generate the
estimated net number of borrower
defense applications for each cohort,
loan type, and sector. Table 5 presents
the assumptions for the main budget
estimate with the budget estimate for
each scenario presented in Table 6. We
also estimated the impact if the
Department received no recoveries from
institutions, the results of which are
discussed after Table 6.
The model can be described as
follows: To generate gross applications
(gc), loan volumes (lv) by sector were
multiplied by the Conduct Percent (cp),
the Defensive Applications Percent
(dcp) and the Borrower Percent (bp); to
generate net applications (nc) processed
in the Student Loan Model, gross
applications were then multiplied by
the Recovery Percent (rp). That is, gc =
(lv * cp * dcp * bp) and nc = gc¥(gc
* rp). The Conduct Percent represents
the share of loan volume estimated to be
affected by institutional behavior
resulting in a defense to repayment
application. The Borrower Percent
captures the percent of loan volume
associated with approved defense to
repayment applications, and the
Recovery Percent estimates the percent
of net loans eventually discharged. The
numbers in Table 5 are the percentages
applied for the main estimate and
PB2019 baseline scenarios for each
assumption for cohorts 2019–2028.
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TABLE 5—ASSUMPTIONS FOR MAIN BUDGET ESTIMATE COMPARED TO PB2019 BASELINE
PB2019 baseline
NPRM main
Cohort
Pub
Priv
Prop
Pub
Priv
Prop
Conduct Percent
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
..........................................................................................
1.8
1.7
1.5
1.4
1.3
1.2
1.2
1.1
1.1
1.1
2Yr pub/priv
1.8
1.7
1.5
1.4
1.3
1.2
1.2
1.1
1.1
1.1
2Yr prop
12.24
11.6
9.8
8.8
8.4
8
7.8
7.7
7.7
7.7
1.71
1.62
1.43
1.33
1.24
1.14
1.14
1.05
1.05
1.05
4Yr pub/priv
1.71
1.62
1.43
1.33
1.24
1.14
1.14
1.05
1.05
1.05
11.63
11.02
9.31
8.36
7.98
7.6
7.41
7.32
7.32
7.32
........................
........................
4Yr prop
Defensive Applications Percent (not in PB2019 Baseline)
All Cohorts .................................................................................
40
34
16
21
PB2019 baseline
NPRM main
Cohort
Pub
Priv
Prop
Pub
Priv
Prop
Borrower Percent
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
36.8
42.4
46.7
50
50
50
50
50
50
50
36.8
42.4
46.7
50
50
50
50
50
50
50
47.3
54.6
60
63
65
65
65
65
65
65
4
4.4
5
5.5
6
6.4
7
7
7
7
4
4.4
5
5.5
6
6.4
7
7
7
7
6
6.6
7.3
7.9
8.4
9
9.3
10
10
10
24.871
28.8
31.68
33.26
34.93
36.67
37.4
37.4
37.4
37.4
75
75
75
75
75
75
75
75
75
75
16
16
18.5
18.5
21
21
22.5
22.5
25
25
16
16
18.5
18.5
21
21
22.5
22.5
25
25
Recovery Percent
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2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
75
75
75
75
75
75
75
75
75
75
As in previous estimates, the recovery
percentage reflects the fact that public
institutions are not subject to the
changes in the financial responsibility
triggers because of their presumed
backing by their respective States.
Therefore, the PB2019 baseline and
main recovery scenarios are the same for
public institutions and set at a high
level to reflect the Department’s
confidence in recovering amounts from
the expected low number of claims
against public institutions. The decrease
in the recovery percentage assumption
for private and proprietary institutions
compared to the PB2019 baseline
reflects the removal or modification of
some financial responsibility triggers as
described in Table 2. We do not specify
how many institutions are represented
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24.871
28.8
31.68
33.26
34.93
36.67
37.4
37.4
37.4
37.4
in the estimate as the assumptions are
based on loan volumes and the scenario
could represent a substantial number of
institutions engaging in acts giving rise
to defense to repayment applications or
could represent a small number of
institutions with significant loan
volume subject to a large number of
applications. According to Federal
Student Aid data center loan volume
reports, the five largest proprietary
institutions in loan volume received
24.59 percent of Direct Loans disbursed
in the proprietary sector in award year
2016–17 and the 50 largest proprietary
institutions represent 66.6 percent of
Direct Loans disbursed in that same
time period.28 The share of volume
Student Aid, Student Aid Data: Title IV
Program Volume by School Direct Loan Program
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captured in the conduct percentage may
be conservative and estimate a higher
number of defense to repayment
applications than may occur in the
future as we did not want to
underestimate costs associated with
changes to the borrower defense
regulations. Due to the similarities
between the conduct covered by the
standard in the proposed regulations
and the standard in the 2016 final
regulations, as described in the
Discussion segment, the Conduct
Percent did not change from the PB2019
Baseline as much as the Borrower
Percent. As recent loan cohorts progress
further in their repayment cycles if
AY2015–16, Q4, available at studentaid.ed.gov/sa/
about/data-center/student/title-iv accessed August
22, 2016.
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future data indicate that the percent of
volume affected by conduct that meets
the standard that would give rise to
defense to repayment applications
differs from current estimates, that
difference will be reflected in future
baseline re-estimates.
b. Discussion
The Department has some additional
experience with processing defense to
repayment applications and data on the
approximately 138,990 applications
received since 2015, but while this
information has helped inform these
estimates, it does not eliminate the
uncertainty about institutional and
borrower response to the proposed
regulations. As noted earlier, given the
limited number of applications that the
Department has adjudicated, both in
number and sector of institutions that
are represented in this number, our data
may not reflect the final results of the
Department’s review and approval
process.
By itself, the proposed Federal
standard is not expected to significantly
change the percent of loan volume
subject to conduct that might give rise
to a borrower defense claim. The
conduct percent is assumed to be 95
percent of the PB2019 baseline level.
As has been estimated previously, we
are incorporating a deterrent effect of
the borrower defense to repayment
provisions on institutional behavior as
is reflected in the decrease in the
conduct percent in Table 5. We believe
that institutions will not want to suffer
the scrutiny that a significant number of
borrower defense to repayment
applications would invite. As expected,
when regulatory provisions target
specific institutional action or
performance, institutional behavior
changes over several years, resulting in
removal of the worst performers and
adaptation of other institutions’
behavior so that a lower steady state is
established. We still expect a similar
pattern to develop with respect to
borrower defense to repayment, as
reflected in the Conduct Percent in
Table 5. Also, allowing institutions to
present evidence may result in fewer
findings of misrepresentation that lead
to an adjudicated claim. We have not
included the impact of this potential
evidence in our calculations as we have
no basis for determining the impact that
an institutional defense will have on the
adjudication of applications.
Overall, we expect that the changes in
the proposed regulations that will
reduce the anticipated number of
borrower defense applications are
related more to changes in the process
and emphasis on defensive claims, not
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due to changes in the type of conduct
on the part of an institution that would
result in a successful defense, as
demonstrated by the 95 percent overlap
compared to the PB2019 baseline.
The proposed regulations reestablish
a framework in which borrower defense
to repayment applications are submitted
in response to certain collection
activities initiated by the Department,
specifically administrative wage
garnishment, Treasury offset, credit
bureau default reporting, and Federal
salary offset. As has always been the
case, borrowers will be able to seek
relief from their institutions in State or
Federal courts or from State or Federal
agencies, and the inclusion of
mandatory arbitration clauses in
enrollment agreements may increase
financial settlements with students, but
defense to repayment applications
through the Department will be reserved
as a defense to collection efforts. The
Defensive Applications Percent attempts
to quantify the effect of this proposal by
examining estimated lifetime default
rates for loans in standard repayment
plans by SLM risk group. The 2-year not
for profit risk group was used for the 2year or less private and public sectors,
and the 2-year proprietary risk group
was used for the 2-year proprietary
sector. For 4-year institutions, the 4-year
freshman/sophomore risk group rate
was used for 4-year proprietary schools,
and the weighted average of the 4-year
freshman/sophomore and 4-year junior/
senior rates were used for 4-year public
and private nonprofit institutions. The
estimated default rates were used to
estimate the percent of loan volume
associated with borrowers who, over the
life of the loan, might be in a position
to raise a defense to repayment. We
used the higher estimated default rates
associated with the standard repayment
plan so that we did not underestimate
potential future costs of the proposed
defense to repayment regulations. Using
the higher rates also accounts for the
possibility of increased defaults by
borrowers who may decide that the
consequences of default are worth the
risk of a potentially successful defense
to repayment applications. However,
now that institutions have the ability to
present evidence as borrowers’
applications are considered, there may
be a decrease in frivolous and
unsubstantiated defense to repayment
applications that, under current
practice, could be approved.
Several process changes contribute to
the reduction in the Borrower Percent
compared to the PB2019 baseline
assumption. A separate assumption for
the defensive claims provision was
explicitly included so it could be varied
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in sensitivity runs or in response to
comments. Another significant factor is
the emphasis on determinations of
individual applications and the lack of
an explicit process for aggregating like
applications. The Department will be
able to group like applications against
an institution for more efficient
processing, but, even if there is a finding
that covers multiple borrowers, relief
will be determined on an individual
basis and be related to the level of
financial harm proven by the borrower.
Additionally, while there is no statute of
limitations on borrowers’ ability to
submit a defense to repayment
application in response to collection
activities, borrowers will have to inform
the Department of their intent to raise a
defense to repayment within the
timeframe specified for requesting a
hearing in their notice of collection
activity to guarantee their filing will be
reviewed. The timeframes vary from 30
days for consumer reporting and wage
garnishment to 65 days for Federal
salary offset and tax refund offset.
Together, these changes could require
more effort on the part of individual
borrowers to submit a borrower defense
application, which is reflected in the
change in the Borrower Percent
assumption.
The net budget impact of the
emphasis on other avenues for relief is
complicated by the potential for
amounts received in lawsuits,
arbitration, or agency actions to reduce
the amount borrowers would be eligible
to receive through a defense to
repayment filing. While it would be
prudent for borrowers to use any funds
received with respect to the Federal
loans in such proceedings to pay off the
loans, there is no mechanism in the
proposed regulations to require this.
This offset of funds received in other
actions was also a feature in the 2016
final regulations, but the majority of
applications processed did not have
offsetting funds to consider due to the
precipitous closure of two large
institutions. Accordingly, we are not
assuming a budgetary impact resulting
from prepayments attributable to the
possible availability of funds from
judgments or settlement of claims
related to Federal student loans.
Another factor that could affect the
number of defense applications
presented is the role of State Attorneys
General or State agencies in pursuing
actions or settlements with institutions
about which they receive complaints.
The level of attention paid to this area
of consumer protection could alert
borrowers in a position to apply for a
defense to repayment and result in a
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different number of applications than
the Department anticipates. Evidence
developed in such proceedings could be
used by borrowers to support their
individual applications.
The Department has used data
available on defense to repayment
applications, associated loan volumes,
Departmental expertise, the discussions
at negotiated rulemaking, information
about past investigations into the type of
institutional acts or omissions that
would give rise to defense to repayment
applications, and decisions of the
Department to create new sanctions and
apply them to institutions thus
instigating precipitous closures to
develop the main estimate and
sensitivity scenarios that we believe will
capture the range of net budget impacts
associated with the defense to
repayment regulations.
c. Additional Scenarios
The Department recognizes the
uncertainty associated with the factors
contributing to the main budget
assumption presented in Table 5. The
uncertainty in the defense to repayment
estimate, given the unknown level of
future school conduct that could give
rise to claims; institutions’ reaction to
the regulations to eliminate such
activities; the impact of allowing
institutions to present evidence in
response to borrowers’ applications; the
extent of full versus partial relief
granted; and the level of State activity,
is reflected in additional analyses that
demonstrate the effect of changes in the
specific assumption being tested.
The Department designed the
following scenarios to isolate the
assumption being evaluated and adjust
it in the direction that would increase
costs, increasing the Defensive
Applications or Borrower Percent and
decreasing the recovery percent. The
first scenario the Department considered
is that the Defensive Applications
Percent will increase by 15 percent
(Def15). This could occur if economic
conditions or strategic behavior by
borrowers increase defaults. The second
scenario the Department increased the
Borrower Percent by 20 percent (Bor20)
to reflect the possibility that outreach,
model applications, or other efforts by
students may increase the percent of
loan volume associated with successful
defense to repayment applications. As
the gross borrower defense claims are
generated by multiplying the estimated
volumes by the Conduct Percent,
Defensive Claims Percent, and the
Borrower Percent, the scenarios capture
the impact of a 15 percent or 20 percent
change in any one of those assumptions.
The Recovery Percentage is applied to
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the gross claims to generate the net
claims, so the RECS scenario reduces
recoveries by approximately 36 percent
to demonstrate the impact of that
assumption. The Department also
estimated the effect of allowing
affirmative claims by removing the
Defensive Claims Percent (Affirmative
Claims Allowed scenario) which
reduced savings by approximately $960
million when estimated on top of the
other changes in the proposed
regulations. The net budget impacts of
the various additional scenarios
compared to the PB2019 baseline range
from $¥9,528 billion to $¥10,452
billion and are presented in Table 6.
TABLE 6—BUDGET ESTIMATES FOR
ADDITIONAL BORROWER DEFENSE
SCENARIOS
Estimated
costs
for cohorts
2019–2028
(outlays in
$mns)
Scenario
Main Estimate .......................
Def15 ....................................
Bor20 ....................................
Recs ......................................
Affirmative Claims Allowed ...
$¥10,487
¥10,452
¥10,445
¥10,459
¥9,528
The transfers among the Federal
government, affected borrowers, and
institutions associated with each
scenario above are included in Table 7,
with the difference in amounts
transferred to borrowers and received
from institutions generating the budget
impact in Table 6. The amounts in Table
6 assume the Federal Government will
recover from institutions some portion
of amounts discharged. In the absence of
any recovery from institutions,
taxpayers would bear the full cost of
approved defense to repayment
applications. For the primary budget
estimate, the annualized costs with no
recovery are approximately $635.7
million at a 3 percent discount rate and
$693.9 million at a 7 percent discount
rate. This potential increase in costs
demonstrates the effect that recoveries
from institutions have on the net budget
impact of the proposed defense to
repayment regulations.
The Department may revise its model
related to these provisions as more data
become available over time. We
welcome comments on the Defense to
Repayment Discharge model, its
assumptions, and its conclusions; the
Department may incorporate welldocumented comments into this model
as we develop the final regulations.
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2. Closed School Discharges
In addition to the provisions
previously discussed, the proposed
regulations also would make three
changes to the closed school discharge
process that are expected to have an
estimated net budget impact of ¥$2.227
billion, of which ¥$359 million is a
modification to cohorts 2014–2018
related to the elimination of the
automatic 3-year discharge. The
combined effect of the elimination of
the 3-year automatic discharge, the
limitation to students not offered a
teach-out opportunity approved by the
school’s accrediting agency and the
school’s State authorizing agency, and
the expansion of the eligibility window
to 180 days is ¥$1.868 billion for
cohorts 2019–2028. As with the
estimates related to the borrower
defense to repayment provisions, the net
budget impact estimates for the closed
school discharge provisions are
developed from the PB2019 budget
baseline that accounted for the delayed
implementation of the 2016 final
regulations and assumed the 2016 final
regulations would take effect on July 1,
2019.
While the Secretary will retain the
discretion to approve closed school
discharges without applications, the
standard path to such a discharge will
require borrowers to submit an
application. The Department does,
however, plan to be more aggressive in
informing students who are eligible for
closed school discharges of their rights.
In CY2015 to CY2017, closed school
discharges excluding Corinthian and
ITT ranged from 24.2 million to $69.9
million annually. Therefore, the savings
from eliminating the 3-year automatic
closed school discharge provisions
offset the costs of expanding the
eligibility window to 180 days for
cohorts 2019–2028. The precise
interaction between the two effects is
uncertain as outreach and better
information for borrowers about the
closed school discharge process may
increase the rate of borrowers who
submit applications. In estimating the
effect of the 2016 final regulations, the
Department looked at all Direct Loan
borrowers at schools that closed from
2008–2011 to see the percentage loan
volume associated with borrowers that
had not received a closed school
discharge and had no NSLDS record of
title-IV aided enrollment in the three
years following their school’s closure
and found it was approximately double
the amount of those who received a
discharge. This could be because the
students received a teach-out or
transferred credits and completed
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without additional title IV aid, or it
could be that the students did not apply
for the discharge because of a lack of
awareness or other reasons. Whatever
the reason, in estimating the potential
cost of the 3-year automatic discharge
provision in the PB2019 baseline, the
Department applied this increase to the
closed school discharge rate. For these
proposed regulations, we have reversed
the increase attributed to the 3-year
automatic discharge.
The volume of additional discharges
that might result from the expansion of
the window is also difficult to predict.
The Department analyzed borrowers
who were enrolled within 180 days of
the closure date for institutions that
closed between July 1, 2011 and
February 13, 2018 and found that
borrowers who withdrew within the 121
to 180 day time frame would increase
loan volumes eligible for discharge by
approximately nine percent. However, it
is possible that some borrowers who
complete their programs in that window
or the current 120 day window for
eligibility would choose to withdraw
and pursue a closed school discharge
instead of completing if the school
closure is known in advance. The
likelihood of this is unclear as it might
depend on the relative length of the
program, the time the borrower has
remaining in the program, and the
borrower’s perception of the value of the
credential versus the burden of starting
the program over again as compared to
the prospect of debt relief. Further, if
the student knows that the school plans
to close, it is likely because the school
has implemented a teach-out plan,
which would negate the borrower’s
ability to claim a closed school
discharge if the institution fulfilled the
plan. For these reasons, and especially
the potential effect of the teach-out
provision, the Department did not
adjust for this factor in estimating the
impact of the expansion of the eligibility
window, but welcomes comments on
the likelihood of its impacts and will
consider those comments in developing
estimates of the impact of the final
regulations.
While the expansion of the eligibility
window and the elimination of the
three-year automatic discharge
provisions allow for borrower decisions
to affect the number of closed school
discharges, the proposal to add to the
existing limitation on students who
transferred credits and completed the
program at another institution limits the
availability of closed school discharges
to borrowers not offered a reasonable
approved, teach-out opportunity and
places key eligibility factors in the
hands of institutions. This makes closed
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school discharges a form of relief for
borrowers who were enrolled at an
institution that closed precipitously,
decided implementation of a teach-out
plan was not practical or worth the
expense for some or all students, or
failed to implement an approved plan.
The Department’s requirements that
accreditors review and evaluate teachout plans that must be submitted by
institutions under certain circumstances
emphasizes the importance of teach-out
plans in serving the best interests of
students. The Department expects that
this proposed change could further
reduce closed school discharges, but our
data do not provide sufficient
information to know if any of the past
closed school discharges were awarded
to students who were also provided
with a reasonable teach-out opportunity.
Students who took advantage of such
activities would have completed their
program, and therefore would not be
eligible for a closed school discharge,
including under the current regulation.
It could be that the number of closed
school discharges is relatively low (as
compared with the potential pool of
borrowers eligible) because most
institutions provide a teach-out
opportunity that allows the borrower to
complete his or her program. To the
extent many borrowers are currently
completing teach-outs, the cost impact
of the teach-out limitation may be
minimal.
The proposed regulations provide
incentives for institutions to offer teachouts so as to provide students the
opportunity to complete their programs.
To capture this effect, the Department
reduced baseline closed school
discharges by 65 percent. As is
demonstrated by the estimated net
savings from the closed school
discharge changes, the removal of the
three-year automatic discharge
provisions and the change in eligibility
to those offered an approved teach-out
plan are expected to reduce the
anticipated closed school discharge
claims significantly more than the
expansion of the window to 180 days
increases them. In other words, the
proposed regulations provide an
incentive for institutions rather than
students or taxpayers to bear the cost
and burden of a closed school. In some
scenarios, such as the precipitous
closure of large institutions, the
expansion of the window to 180 days
could increase closed school discharges
more than the other provisions reduce
them, but the Department does not
consider such a scenario to be likely.
The Department welcomes comments
on the assumptions used in estimating
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37301
the net budget impact of the closed
school discharge provisions, especially
information on the frequency of teachouts offered.
3. Other Provisions
The proposed regulations will also
make a number of changes that are not
estimated to have a significant net
budget impact including changes to the
financial responsibility standards and
treatment of leases, false certification
discharges, guaranty agency collection
fees and capitalization, and the
calculation of the borrower’s subsidized
usage period process. The false
certification discharge changes update
the regulations to reflect current
practices. The proposed regulations
would also provide that borrowers who
provide a written attestation of high
school completion in place of an
unavailable high school diploma would
be ineligible for a false certification
discharge. In FY2017, false certification
discharges totaled approximately $7
million. As before, we do not expect a
significant change in false certification
discharge claims that would result in a
significant budget impact from this
change in terms or use of an application
that has been available at least ten years
in place of a sworn statement. False
certification discharges may decrease
due to the ineligibility of borrowers who
submit a written attestation in place of
a high school diploma, but given the
low level of false certification
discharges in the baseline, even if a
large share were eliminated, it would
not have a significant net budget impact.
Therefore, we do not expect an increase
in false certification discharge claims or
their associated discharge value.
Some borrowers may be eligible for
additional subsidized loans and no
longer be responsible for accrued
interest on their subsidized loans as a
result of their subsidized usage period
being eliminated or recalculated
because of a closed school, false
certification, unpaid refund, or defense
to repayment discharge. As in the 2016
final regulations, we believe the
institutions primarily affected by the
150 percent subsidized usage regulation
are not those expected to generate many
of the applicable discharges, so this
reflection of current practice is not
expected to have a significant budget
impact.
4. Accounting Statement
As required by OMB Circular A–4 we
have prepared an accounting statement
showing the classification of the
expenditures associated with the
provisions of these regulations (see
Table 7). This table provides our best
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estimate of the changes in annual
monetized transfers as a result of these
proposed regulations. The amounts
presented in the Accounting Statement
are generated by discounting the change
in cashflows related to borrower
discharges for cohorts 2019 to 2028 from
the PB2019 baseline at 7 percent and 3
percent and annualizing them. This is a
different calculation than the one used
to generate the subsidy cost reflected in
the net budget impact, which is focused
on summarizing costs at the cohort
level. As the life of a cohort is estimated
to last 40 years, the discounting does
have a significant effect on the impact
of the difference in cashflows in the
outyears. Expenditures are classified as
transfers from the Federal Government
to affected student loan borrowers.
TABLE 7—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES
(In millions)
Category
Benefits
Disclosure to borrowers about use of mandatory pre-dispute arbitration clauses and potential increase in settlements between
borrowers and institutions.
Reduced administrative burden related to processing defense to repayment applications .............................................................
Not quantified.
Not quantified.
Category
Costs
Cost of compliance with paperwork requirements ............................................................................................................................
7% .....................
1.15 ...................
3%.
1.16.
Changes in Department’s systems to collect relevant information and calculate revised composite score ....................................
Not Quantified.
Category
Transfers
Reduced defense to repayment discharges from the Federal Government to affected borrowers (partially borne by affected institutions, via reimbursements.
Reduced reimbursements of borrower defense claims from affected institutions to affected student borrowers, via the Federal
government.
Reduced closed school discharges from the Federal Government to affected borrowers ..............................................................
Previous Accounting Statements by
the Department, including for the 2016
final regulations, presented a number
that was the average cost for a single
cohort. If calculated in that manner, the
reduced transfers for defense to
repayment from the Federal government
to affected borrowers would be $¥1,448
million, reimbursements would be
reduced $¥414 million, and closed
school discharge transfers would be
reduced $¥233 million at a 7 percent
discount rate.
D. Regulatory Flexibility Act
The U.S. Small Business
Administration (SBA) Size Standards
define proprietary institutions as small
businesses if they are independently
owned and operated, are not dominant
in their field of operation, and have total
annual revenue below $7,000,000.
Nonprofit institutions are defined as
small entities if they are independently
owned and operated and not dominant
in their field of operation. Public
institutions are defined as small
organizations if they are operated by a
government overseeing a population
below 50,000.
The Department’s eZ-Audit data
shows that there were 1,522 Title IV
proprietary schools with revenue less
than $7,000,000 for the 2015–2016
Award Year.29 However, the
Department lacks data to identify which
public and private, nonprofit
institutions qualify as small. Given the
data limitations, the Department
proposes a data-driven definition for
‘‘small institution’’ in each sector and
uses its proposed definition to certify
the RFA impacts of the proposed rule.
1. Proposed Definition
The Department has historically
assumed that all private nonprofit
institutions were small because none
were considered dominant in their field.
However, this approach masks
significant differences in resources
among different segments of these
institutions. The Department proposes
7% .....................
$693.9 ...............
3%.
$635.7.
$223 ..................
$205.
$96.5 .................
$61.9.
to use enrollment data for its definition
of small institutions of postsecondary
education. Prior analyses show that
enrollment and revenue are correlated
for proprietary institutions. Further,
enrollment data are readily available to
the Department for every postsecondary
institution while revenue is not. The
Department analyzed a number of data
elements available in IPEDS, including
Carnegie Size Definitions, IPEDS
institutional size categories, total FTE,
and its own previous research on
proprietary institutions referenced in
ED–2017–OPE–0076i. As a result of this
analysis, the Department proposes to
use this definition to define small
institutions:
• Two-year IHEs, enrollment less
than 500 FTE; and
• Four-year IHEs, enrollment less
than 1,000 FTE.
Table 8 shows the distribution of
small institutions under this proposed
definition using the 2016 IPEDS
institution file.30
TABLE 8—SMALL INSTITUTIONS UNDER PROPOSED DEFINITION
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Level
2-year
2-year
2-year
4-year
4-year
Type
...............................................................................
...............................................................................
...............................................................................
...............................................................................
...............................................................................
29 studentaid.ed.gov/sa/about/data-center/school/
proprietary (extracted from eZ-Audit on June 30,
2017)
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Small
Public ..............................................................................
Private .............................................................................
Proprietary ......................................................................
Public ..............................................................................
Private .............................................................................
30 U.S. Department of Education, National Center
for Education Statistics. Integrated Postsecondary
Education Data System 2016 Institutional
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342
219
2,147
64
799
Total
Percent
1,240
259
2,463
759
1,672
Characteristics: Directory Information survey file
downloaded March 3, 2018. Available at
nces.ed.gov/ipeds/datacenter/DataFiles.aspx.
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TABLE 8—SMALL INSTITUTIONS UNDER PROPOSED DEFINITION—Continued
Level
Type
4-year ...............................................................................
Proprietary ......................................................................
Small
425
Total
558
Percent
76
Total ..........................................................................
.........................................................................................
3,996
6,951
57
population of institutions (2,708/6,951);
whereas, four-year small institutions are
43% of all four-year institutions (1,288/
2,989), 32% of all small institutions
(1,288/3,996), and 19% of the overall
population of institutions (1,288/6,951).
Figure 1 shows a visual representation
of the universe and the percentage that
would be defined as small using the
above proposed definition.
Similarly, small public institutions
are 20 percent of all public institutions
(406/1,999), 10 percent of all small
public institutions (406/3,996), and 6
percent of the overall population of
institutions (406/6,951). Small private
nonprofit institutions are 53 percent of
all private nonprofit institutions (1,018/
1,999), 25 percent of all small
institutions (1,018/3,996), and 15
percent of the overall population of
institutions (1,018/6,951). Finally, small
proprietary institutions are 85 percent of
all proprietary institutions (2,572/
1,999), 64 percent of all small
institutions (2,572/3,996), and 37
percent of the overall population of
institutions (2,572/6,951).
The Department requests comments
on the proposed definition. It will
consider these suggestions in
development of the final rule.
This proposed rule directly affects all
public nonprofit and proprietary
institutions and a small proportion of all
institutions participating in title IV
programs. There are currently 5868 of
these institutions, of which 1799 are
public nonprofit and 1896 are
proprietary. Using its proposed
definition for small institution, below,
the Department estimates that
approximately 51 percent of these
institutions are small entities. Further,
69 percent of the private nonprofit and
proprietary institutions are small
entities. Therefore, the Department has
determined that this proposed rule
would have an impact on a substantial
number of small entities.
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2. Certification
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(RFA) requires the agency to ‘‘prepare
and make available for public comment
an initial regulatory flexibility analysis’’
which will ‘‘describe the impact of the
proposed rule on small entities.’’ (5
U.S.C. 603(a)). Section 605 of the RFA
allows an agency to certify a rule, in lieu
of preparing an analysis, if the proposed
rulemaking is not expected to have a
significant economic impact on a
substantial number of small entities.
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Under the proposed definition, the
two-year small institutions are 68% of
all two-year institutions (2,708/3,962),
68% of all small institutions (2,708/
3,996), and 39% of the overall
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However, the Department has
determined that the impact on entities
affected by the proposed regulations
would not be significant. The effect of
the proposed regulations would be to
update financial statements submitted
to the Department to comply with the
new FASB standards and to reduce
liabilities at some institutions associated
with borrower defense claims. The
Department expects the impact of the
proposed financial responsibility
regulations would be a de minimis
increase in paperwork burden for
private nonprofit and proprietary
institutions. The Department asserts that
the economic impact of the paperwork
burden would be minimal to small
institutions. The Department expects
the impact of the proposed borrower
defense to repayment regulations would
be a benefit of reduced liability for a
small number of small entities, which
represent less than 8 percent of title IVparticipating institutions. The
Department asserts that the economic
impact of the reduced liability, if any,
would be minimal and entirely
beneficial to small institutions.
Accordingly, the Secretary hereby
certifies that these proposed regulations,
if promulgated, would not have a
significant economic impact on a
substantial number of small entities.
The Department invites comment from
members of the public who believe
there will be a significant impact on
institutions.
Paperwork Reduction Act of 1995
As part of its continuing effort to
reduce paperwork and respondent
burden, the Department provides the
general public and Federal agencies
with an opportunity to comment on
proposed and continuing collections of
information in accordance with the
Paperwork Reduction Act of 1995 (PRA)
(44 U.S.C. 3506(c)(2)(A)). This helps
ensure that: The public understands the
Department’s collection instructions,
respondents can provide the requested
data in the desired format, reporting
burden (time and financial resources) is
minimized, collection instruments are
clearly understood, and the Department
can properly assess the impact of
collection requirements on respondents.
Sections 668.41, 668.171, and
668.172, appendix A & B to part 668,
subpart L, and §§ 674.33, 682.402,
685.206, 685.214 685.215, and 685.304
of this proposed rule contain
information collection requirements.
Under the PRA, the Department has or
will at the required time submit a copy
of these sections and an Information
Collections Request to OMB for its
review.
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A Federal agency may not conduct or
sponsor a collection of information
unless OMB approves the collection
under the PRA and the corresponding
information collection instrument
displays a currently valid OMB control
number. Notwithstanding any other
provision of law, no person is required
to comply with, or is subject to penalty
for failure to comply with, a collection
of information if the collection
instrument does not display a currently
valid OMB control number.
In the final regulations, we will
display the control numbers assigned by
OMB to any information collection
requirements proposed in this NPRM
and adopted in the final regulations.
Section 668.41 Reporting and
disclosure of information.
Requirements: Under the proposed
changes in § 668.41(h), an institution
that uses pre-dispute arbitration
agreements and/or class action waivers
would be required to disclose that
information in a plain language
disclosure available to enrolled and
prospective students, and the public on
its website where admissions and
tuition and fees information is made
available.
Burden Calculation: There will be
burden on schools to make additional
disclosures of the institution’s use of a
pre-dispute arbitration agreement and/
or class action waiver to students,
prospective students, and the public
under this proposed regulation. Such
agreements are currently used primarily
by proprietary institutions. Of the 1,888
proprietary institutions participating in
the title IV, HEA programs, we estimate
that 50 percent or 944 would use a predispute arbitration agreement and/or
class action waiver and would provide
the required information electronically.
We anticipate that it will take an
average of 5 hours to develop, program,
and post the required information to the
websites where admission and tuition
and fees information is made available.
The estimated burden would be 4,720
hours (944 x 5 hours) under OMB
Control Number 1845–0004.
Section 668.171 General.
Requirements: Under the proposed
§ 668.171(f), in accordance with
procedures to be established by the
Secretary, an institution would notify
the Secretary of any action or event
described in the specified number of
days after the action or event occurred.
In the notice to the Secretary or in the
institution’s preliminary response, the
institution may show that certain of the
actions or events are not material or that
the actions or events are resolved.
Burden Calculation: There will be
burden on institutions to provide the
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notice to the Secretary when one of the
actions or events occurs. We estimate
that an institution will take two hours
per action to prepare the appropriate
notice and to provide it to the Secretary.
We estimate that 180 private institutions
may have two events annually to report
for a total burden of 720 hours (180
institutions × 2 events × 2 hours). We
estimate that 379 proprietary
institutions may have three events
annually to report for a total burden of
2,274 hours (379 institutions × 3 events
× 2 hours). This total burden of 2,994
hours will be assessed under OMB
Control Number 1845–0022.
Section 668.172 Financial Ratios.
Requirements: Under § 668.172(d),
institutions can ask the Secretary to
compute a second composite score
excluding operating leases and have the
higher of the two composite scores used
to determine, in part, if the institution
meets the financial responsibility
requirements to participate in title IV
financial aid programs.
Burden Calculation: There will be
burden on institutions to request that
the Secretary perform the second
composite scoring calculation. We
estimate that it will take a school .25
hours (15 minutes) to request the
recalculation. We further estimate that
25% of the private institutions 450
(1,799 × .25) will request the
recalculation for 113 hours (450
institutions × .25 hours). We estimate
that 25% of the proprietary institutions
474 (1,896 × .25) will request the
recalculation for 119 hours (474
institutions × .25 hours). This total
burden of 232 hours (113 + 119) will be
assessed under the OMB Control
Number 1845–0022.
Appendix A and B for Section 668—
Subpart L—Financial Responsibility
Requirements: Under proposed
Section 2 for appendix A and B,
proprietary and private schools would
be required to submit a Supplemental
Schedule as part of their audited
financial statements. With the update
from the FASB, some elements needed
to calculate the composite score would
no longer be readily available in the
audited financial statements,
particularly for private institutions.
With the proposed updates to the
Supplemental Schedule to reference the
financial statements, this issue would be
addressed in a convenient and
transparent manner for both the schools
and the Department by showing how the
composite score is calculated.
Burden Calculation: There will be
burden on schools to provide the
Supplemental Schedule to the
Department. In development of this
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proposal, the members of the negotiated
rulemaking subcommittee indicated that
they believed that as the information
would be readily available upon
completion of the required audit the
burden would be minimal. We estimate
that it will take each proprietary and
private institution one hour to prepare
the Supplemental Schedule and have it
made available for posting along with
the annual audit. We estimate that 1,799
private schools will require 1 hour of
burden to prepare the Supplemental
Schedule and have it made available for
posting along with the annual audit for
a total burden of 1,799 hours (1,799
institutions × 1 hour). We estimate that
1,896 proprietary schools will require 1
hour of burden to prepare the
Supplemental Schedule and have it
made available for posting along with
the annual audit for a total burden of
1,896 hours (1,896 institutions × 1
hour). This total burden of 3,695 hours
will be assessed under OMB Control
Number 1845–0022.
The total additional burden under
OMB Control Number 1845–0022 would
be 6,921 hours.
Section 674.33 Repayment.
Section 682.402 Death, disability,
closed school, false certification, unpaid
refunds, and bankruptcy payments.
Section 685.214 Closed school
discharge.
Requirements: Under the proposed
language in §§ 674.33(g), 682.402(d),
and 685.214(c), the number of days that
a borrower must have withdrawn from
a closed school to qualify for a closed
school discharge would be extended
from 120 days to 180 days. Additionally
if a closed school provided a borrower
an opportunity to complete his or her
academic program through a teach-out
plan approved by the school’s
accrediting agency and, if applicable,
the school’s State authorizing agency,
the borrower would not qualify for a
closed school discharge. The proposed
regulations further provide that the
Secretary may extend that proposed 180
days further if there is a determination
that exceptional circumstances justify
an extension.
Burden Calculation: The proposed
extension from 120 days to 180 days for
withdrawal prior to the closing of the
school would require an update to the
current closed school discharge
application form with OMB Control
Number 1845–0058. We do not believe
that the language update will change the
amount of time currently assessed for
the borrower to complete the form from
those which has already been approved.
The form update would be completed
and made available for comment
through a full public clearance package
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before being made available for use by
the effective date of the regulations is
finalized.
Section 682.402 Death, disability,
closed school, false certification, unpaid
refunds, and bankruptcy payments.
Requirements: Under proposed
regulations in § 682.402 a second level
of Departmental review for denied
closed school discharge claim in the
FFEL Program would be provided. The
proposed regulations would require a
guaranty agency that denies a closed
school discharge application to inform
the borrower of the opportunity for a
review of the guaranty agency’s decision
by the Secretary, and an explanation of
how the borrower may request such a
review.
Burden Calculation: We believe there
would be burden on the guaranty
agencies to update their systems to
identify borrowers who were enrolled or
withdrew no more than 120 days to 180
days before an institution’s closure for
reporting to lenders. We estimate that it
will take the 13 public guaranty
agencies 10 hours for programming and
testing to update their systems with this
change for 130 hour burden increase (13
guaranty agencies × 10 hours = 130). We
estimate that it will take the 11 nonprofit guaranty agencies 10 hours for
programming and testing to update their
systems with this change for 110 hour
burden increase (11 guaranty agencies ×
10 hours = 110). There would be a total
increase in burden of 240 hours under
OMB Control Number 1845–0020.
There would also be burden on
guaranty agencies to provide
information to borrowers denied closed
school discharges regarding the
opportunity for further review of the
discharge request by the Secretary. We
estimate that it will take the 13 public
guaranty agencies 4 hours totaling 52
hours (13 guaranty agencies × 4 hours =
52) to update their notifications and
establish a process for forwarding any
requests for escalated reviews to the
Secretary. We further estimate that it
will take the 11 non-profit guaranty
agencies 4 hours totaling 44 hours (11
guaranty agencies × 4 hours = 44) to
update their notifications and establish
a process for forwarding any requests for
escalated reviews to the Secretary.
There would be a total increase in
burden of 96 hours under OMB Control
Number 1845–0020.
There would be burden on guaranty
agencies, upon receipt of the request for
escalated review from the borrower, to
forward to the Secretary the discharge
form and any relevant documents. For
calendar year 2017 29,171 closed school
discharge applications were received. It
is estimated that 5 percent, or 1,459, of
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37305
those borrowers would have their
applications denied. We further
estimate that 10 percent, or 146, of those
borrowers whose applications were
denied will request a review by the
Secretary. We estimate that the process
to forward the discharge to the Secretary
will take 30 minutes per request. There
would be an estimated burden of 40
hours for the 13 public guaranty
agencies based on an estimated 79
requests (79 × .5 hours = 40 hours).
There would be an estimated burden of
34 hours for the 11 non-profit guaranty
agencies based on an estimated 67
requests (67 × .5 = 34 hours). There will
be an increase in burden of 74 hours
under OMB Control Number 1845–0020.
There will be a total increase in
burden of 410 hours based on the
proposed changes to section 682.402
under OMB Control Number 1845–0020.
Section 685.206 Borrower
responsibilities and defenses.
Requirements: Under proposed
§ 685.206(d), a defense to repayment
discharge claim on a Direct Loan
disbursed after July 1, 2019 would be
evaluated under the proposed Federal
standard. Under proposed § 685.206(d),
a defense to repayment must be
submitted within three years from the
date the student is no longer enrolled at
the institution.
Burden Calculation: We believe that
the burden will be associated with the
new form that the borrower receives that
accompanies the notice of action from
the Department. The new form would be
completed and made available for
comment through a full public clearance
package before being made available for
use.
Section 685.215 Discharge for false
certification of student eligibility or
unauthorized payment.
Requirements: Under proposed
§ 685.215, the application requirements
for false certification discharges would
be amended to reflect the current
practice of requiring a borrower to apply
for the discharge using a Federal
application form instead of a sworn
statement. The proposed regulations
also would remove the term ‘‘ability to
benefit’’ to reflect changes to the HEA.
Under the proposed regulatory changes,
a Direct Loan borrower would not
qualify for a false certification discharge
based on not having a high school
diploma in cases when the borrower did
not obtain an official transcript or
diploma from the high school, and the
borrower provided an attestation to the
institution that the borrower was a high
school graduate.
Burden Calculation: The proposed
clarification to require the submission of
a Federal application to receive a
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discharge and updating of the form to
remove ‘‘ability to benefit’’ language
will require an update to the current
false certification application form with
OMB Control Number 1845–0058. We
do not believe that the language update
will change the amount of time
currently assessed for the borrower to
complete the form, nor an increase in
the number of borrowers who may
qualify, to complete the form from those
that have already been approved. The
form update would be completed and
made available for comment through a
full public clearance package before
being made available for use by the
effective date of the regulations.
Section 685.304 Counseling
Borrowers.
Requirements: Under proposed
§ 685.304 there are changes to the
requirements to counsel Federal student
loan borrowers prior to making the first
disbursement of a Federal student loan
(entrance counseling). Schools that use
pre-dispute arbitration agreements and/
or class action waivers will have to
include in the required entrance
counseling information on the school’s
internal dispute resolution process and
who the borrower may contact regarding
a dispute related to educational services
for which the loan was made. Schools
that require borrowers to accept a predispute arbitration agreement and/or
class action waiver would be required to
provide information in writing to the
student borrower about the plain
language meaning of the agreement,
when it would apply, how to enter into
the process, and who to contact with
questions.
Burden Calculation: We believe there
will be burden on the schools to create
any school specific pre-dispute
arbitration agreement and/or class
action waivers and provide that
information in addition to complying
with the current entrance counseling
requirements. Of the 1,888 participating
proprietary institutions, we estimate
that 50 percent or 944 institutions
would need to create additional
entrance counseling information
regarding the use of the pre-dispute
arbitration agreement and/or class
action waivers to provide to their
student borrowers. We anticipate that it
would take an average of 3 hours to
adapt the information provided in
proposed § 668.41 as a part of the
required entrance counseling, to
identify staff who would be able to
answer additional questions, and to
obtain evidence indicating the provision
of the material for a total of 2,832 hours
(944 × 3 hours).
Additionally, we believe that there
will be minimum additional burden for
borrowers to review the information
when completing the required entrance
counseling and provide the required
evidence that the borrowers received the
information. In calendar year 2017,
684,813 Direct Loan borrower
completed entrance counseling using
the Department’s on-line entrance
counseling. Assuming the same 50
percent of borrowers attend a school
that uses pre-dispute arbitration
agreements and/or class action waivers
would require five minutes to review
the material and provide evidence of
receipt of the information, we estimate
a total of 27,393 hours of additional
burden (342,407 borrowers time .08 (5
minutes) = 27,393 hours). There would
be a total increase in burden of 30,225
hours under OMB Control Number
1845–0021.
Consistent with the discussions
above, the following chart describes the
sections of the proposed regulations
involving information collections, the
information being collected and the
collections that the Department will
submit to OMB for approval and public
comment under the PRA, and the
estimated costs associated with the
information collections. The monetized
net cost of the increased burden for
institutions, lenders, guaranty agencies
and students, using wage data
developed using Bureau of Labor
Statistics data, available at https://
www.bls.gov/ooh/management/
postsecondary-educationadministrators.htm is $1,107,460 as
shown in the chart below. This cost is
based on an estimated hourly rate of
$44.41 for institutions, lenders, and
guaranty agencies and $16.30 for
students.
COLLECTION OF INFORMATION
OMB control No. and estimated burden
(change in burden)
Regulatory section
Information collection
§ 668.41 ..............................
Under the proposed regulatory language in 668.41(h) institutions that use predispute arbitration agreements and/or class action waivers would be required to disclose that information in a plain language disclosure available
to enrolled and prospective students, and the public on its website where
admissions and tuition and fees information is made available.
Under the proposed regulatory language in 668.171(f) in accordance with procedures to be established by the Secretary, a school would notify the Secretary of any action or event described in the specified number of days after
the action or event occurs. In the notice to the Secretary or in the school’s
response, the school may show that certain of the actions or events are not
material or that the actions or events are resolved.
Under the proposed regulatory language in 668.172(d) institutions must request a second calculation of the composite score from the Secretary to exclude operating leases.
Under proposed Section 2 for appendix A and B, proprietary and private
schools would be required to submit a Supplemental Schedule as part of
their audited financial statements. With the update from the Financial Standards Accounting Board (FASB) some elements needed to calculate the
composite score would no longer be readily available in the audited financial statements, particularly for private institutions. With the proposed updates to the Supplemental Schedule to reference the financial statements,
this issue would be addressed in a convenient and transparent manner for
both the schools and the Department by showing how the composite score
is calculated.
§ 668.171 ............................
§ 668.172 ............................
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Appendix A & B of 668 subpart L.
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Estimated costs
1845–0004; + 4,720
hours.
$209,615.
1845–0022; + 2,994
hours.
132,964.
1845–0022; + 232 hours
10,303.
1845–0022; + 3,695
hours.
164,095.
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COLLECTION OF INFORMATION—Continued
Regulatory section
§ 674.33, § 682.402,
§ 685.2142.
§ 682.402 ............................
§ 685.206 ............................
§ 685.215 ............................
§ 685.304 ............................
Under the proposed regulations, the number of days that a borrower may
have withdrawn from a closed school to qualify for a closed school discharge would extend from 120 days to 180 days, and if a closed school
provided a borrower an opportunity to complete their academic program
through a teach-out plan approved by the school’s accrediting agency and,
if applicable, the school’s State authorizing agency, the borrower would not
qualify for a closed school discharge. The proposed language further allows
that the Secretary may extend that proposed 180 days further if there is a
determination that exceptional circumstances justify an extension.
Under proposed regulations in § 682.402 a second level of Departmental review for denied closed school discharge claim in the FFEL Program would
be provided. The proposed regulations would require a guaranty agency
that denies a closed school discharge request to inform the borrower of the
opportunity for a review of the guaranty agency’s decision by the Secretary,
and an explanation of how the borrower may request such a review.
Under proposed § 685.206(d), a borrower defense claim related to a direct
loan disbursed after July 1, 2019 would be evaluated under the proposed
Federal standard. Under proposed § 685.206(d), a borrower defense must
be submitted within three years from the date the borrower is no longer enrolled at the institution.
Under the proposed regulatory language in § 685.215, the application requirements for false certification discharges are amended to reflect the current
practice of requiring a borrower to apply for the discharge using a completed application form instead of a sworn statement. The proposed regulatory language proposed removing the use of term ‘‘ability to benefit’’ to
bring the definition in line with the current HEA language. Under proposed
regulatory language, a Direct Loan borrower will not qualify for a false certification discharge based on not having a high school diploma provide that
in cases when they did not obtain an official transcript or diploma from the
high school, and the borrower provided an attestation to the institution that
the borrower was a high school graduate. The attestation would have to be
provided under penalty of perjury.
Under proposed § 685.304 there are changes to the requirements to counsel
Federal student loan borrowers prior to making the first disbursement of a
Federal student loan. Schools that use pre-dispute arbitration agreements
and/or class action waivers include in the required entrance counseling information on the school’s internal dispute resolution process and who the
borrower may contact regarding a dispute related to educational services for
which the loan was made. Schools that require a pre-dispute arbitration
agreement and/or class action waiver would be required to review with the
student borrower the agreement and when it would apply, how to enter into
the process and who to contact with questions.
The chart below does not include the
burden generated by 2016 final
regulations because that regulatory
package is not effective.
The total burden hours and change in
burden hours associated with each OMB
Control number affected by the
proposed regulations follows:
Control No.
Total
proposed
burden
hours
Proposed
change in
burden
hours
......................
......................
......................
......................
23,390
8,248,092
739,746
2,222,891
+ 4,720
+ 410
+ 30,225
+ 6,921
Total .........................
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1845–0004
1845–0020
1845–0021
1845–0022
11,234,119
+ 42,276
We have prepared Information
Collection Requests for these
information collection requirements. If
you wish to review and comment on the
Information Collection Requests, please
follow the instructions in the ADDRESSES
section of this notification.
Note: The Office of Information and
Regulatory Affairs in OMB and the
VerDate Sep<11>2014
OMB control No. and estimated burden
(change in burden)
Information collection
21:07 Jul 30, 2018
Jkt 244001
Department review all comments posted
at www.regulations.gov.
In preparing your comments, you may
want to review the Information
Collection Requests, including the
supporting materials, in
www.regulations.gov by using the
Docket ID number specified in this
notification. These proposed collections
are identified as proposed collections
1845–0004, 1845–0020, 1845–0021,
1845–0022.
We consider your comments on these
proposed collections of information in—
• Deciding whether the proposed
collections are necessary for the proper
performance of our functions, including
whether the information will have
practical use;
• Evaluating the accuracy of our
estimate of the burden of the proposed
collections, including the validity of our
methodology and assumptions;
• Enhancing the quality, usefulness,
and clarity of the information we
collect; and
• Minimizing the burden on those
who must respond. This includes
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Estimated costs
1845–0058; + 0 hours .....
0.
1845–0020; + 410 ...........
18,208.
A new collection will be
filed closer to the implementation of this requirement; + 0 hours.
0.
1845–0058; + 0 hours .....
0.
1845–0021; + 30,225
hours (2,832 institutions
+ 27,393 individual
hours).
Inst. 125,769; Indiv.
446,506, TOTAL
$572,275.
exploring the use of appropriate
automated, electronic, mechanical, or
other technological collection
techniques.
Between 30 and 60 days after
publication of this document in the
Federal Register, OMB is required to
make a decision concerning the
collections of information contained in
these proposed regulations. Therefore,
to ensure that OMB gives your
comments full consideration, it is
important that OMB receives your
comments on these Information
Collection Requests by August 30, 2018.
This does not affect the deadline for
your comments to us on the proposed
regulations.
If your comments relate to the
Information Collection Requests for
these proposed regulations, please
specify the Docket ID number and
indicate ‘‘Information Collection
Comments’’ on the top of your
comments.
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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
Dated: July 19, 2018.
Betsy DeVos,
Secretary of Education.
Intergovernmental Review
These programs are not subject to
Executive Order 12372 and the
regulations in 34 CFR part 79.
Assessment of Educational Impact
In accordance with section 411 of the
General Education Provisions Act, 20
U.S.C. 1221e–4, the Secretary
particularly requests comments on
whether these proposed regulations
would require transmission of
information that any other agency or
authority of the United States gathers or
makes available.
Accessible Format: Individuals with
disabilities can obtain this document in
an accessible format (e.g., Braille, large
print, audiotape, or compact disc) on
request to one of the persons listed
under FOR FURTHER INFORMATION
CONTACT.
Electronic Access to This Document:
The official version of this document is
the document published in the Federal
Register. You may access to the official
edition of the Federal Register and the
Code of Federal Regulations via the
Federal Digital System at: www.gpo.gov/
fdsys. At this site you can view this
document, as well as all other
documents of this Department
published in the Federal Register, in
text or Adobe Portable Document
Format (PDF). To use PDF you must
have Adobe Acrobat Reader, which is
available free at the site.
You may also access documents of the
Department published in the Federal
Register by using the article search
feature at: www.federalregister.gov.
Specifically, through the advanced
search feature at this site, you can limit
your search to documents published by
the Department.
(Catalog of Federal Domestic Assistance
Number does not apply.)
List of Subjects
34 CFR Part 668
Administrative practice and
procedure, Colleges and universities,
Consumer protection, Grant programs—
education, Loan programs-education,
Reporting and recordkeeping
requirements, Selective Service System,
Student aid, Vocational education.
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34 CFR Part 674
Loan programs—education, Reporting
and recordkeeping, Student aid.
34 CFR Parts 682 and 685
Administrative practice and
procedure, Colleges and universities,
Loan programs—education, Reporting
and recordkeeping requirements,
Student aid, Vocational education.
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21:07 Jul 30, 2018
Jkt 244001
For the reasons discussed in the
preamble, the Secretary of Education
proposes to amend parts 668, 674, 682,
and 685, of title 34 of the Code of
Federal Regulations, as if the delayed
amendments from the 2016 final
regulations were never published, as
follows:
PART 668—STUDENT ASSISTANCE
GENERAL PROVISIONS
1. The authority citation for part 668
is revised to read as follows:
■
Authority: 20 U.S.C. 1001–1003, 1070g,
1085, 1088, 1091, 1092, 1094, 1099c, 1099c–
1, 1221–3, and 1231a, unless otherwise
noted.
2. Section 668.41 is amended by:
a. In paragraph (a), in the definition of
‘‘Undergraduate students’’, adding the
words ‘‘at or’’ before ‘‘below’’ and
adding the word ‘‘level’’ after
‘‘baccalaureate’’.
■ b. In paragraph (c)(2) introductory
text, removing the phrase ‘‘or (g)’’ and
adding the phrase ‘‘(g), or (h)’’ in its
place.
■ c. Adding paragraph (h).
The addition reads as follows:
■
■
§ 668.41 Reporting and disclosure of
information.
*
*
*
*
*
(h) Enrolled students, prospective
students, and the public—disclosure of
an institution’s use of pre-dispute
arbitration agreements and/or class
action waivers as a condition of
enrollment for students receiving Title
IV Federal student aid.
(1) An institution of higher education
that requires students receiving Title IV
Federal student aid to accept or agree to
a pre-dispute arbitration agreement and/
or a class action waiver as a condition
of enrollment must make available to
enrolled students, prospective students,
and the public, a written (electronic)
plain language disclosure of those
conditions of enrollment on its website
where information regarding admissions
and tuition and fees is presented. The
institution may not rely solely on an
intranet website for the purpose of
providing this notice to prospective
students or the public.
(2) For the purposes of this paragraph
(h), the following definitions apply:
(i) Class action means a lawsuit or an
arbitration proceeding in which one or
more parties seeks class treatment
pursuant to Federal Rule of Civil
Procedure 23 or any State process
analogous to Federal Rule of Civil
Procedure 23.
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(ii) Class action waiver means any
agreement or part of an agreement,
regardless of its form or structure,
between a school, or a party acting on
behalf of a school, and a student that
relates to the making of a Direct Loan or
the provision of educational services for
which the student received title IV
funding and prevents an individual
from filing or participating in a class
action that pertains to those services.
(iii) Pre-dispute arbitration agreement
means any agreement or part of an
agreement, regardless of its form or
structure, between a school, or a party
acting on behalf of a school, and a
student requiring arbitration of any
future dispute between the parties
relating to the making of a Direct Loan
or provision of educational services for
which the student received title IV
funding.
*
*
*
*
*
■ 3. Section 668.91 is amended by
revising paragraphs (a)(3)(i) through (v)
to read as follows:
§ 668.91
Initial and final decisions.
(a) * * *
(3) * * *
(i) If, in a termination action against
an institution, the hearing official finds
that the institution has violated the
provisions of § 668.14(b)(18), the
hearing official also finds that
termination of the institution’s
participation is warranted;
(ii) If, in a termination action against
a third-party servicer, the hearing
official finds that the servicer has
violated the provisions of § 668.82(d)(1),
the hearing official also finds that
termination of the institution’s
participation or servicer’s eligibility, as
applicable, is warranted;
(iii) In an action brought against an
institution or third-party servicer that
involves its failure to provide a letter of
credit, or other financial protection
under § 668.175(h), for a condition or
event under § 668.15 or § 668.171(b), (c)
or (d), the hearing official finds that the
amount of the letter of credit or other
financial protection established by the
Secretary under § 668.175(c), (d), or (f)
is appropriate, unless the institution
demonstrates that the amount was not
warranted because—
(A) The condition or event no longer
exists or has been resolved;
(B) The condition or event does not
and will not have a material adverse
effect on the financial condition,
business, or results of operations of the
institution; or
(C) The institution has insurance that
will cover the liabilities that arise from
that condition or event;
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(iv) In a termination action taken
against an institution or third-party
servicer based on the grounds that the
institution or servicer failed to comply
with the requirements of § 668.23(c)(3),
if the hearing official finds that the
institution or servicer failed to meet
those requirements, the hearing official
finds that the termination is warranted;
(v)(A) In a termination action against
an institution based on the grounds that
the institution is not financially
responsible under § 668.15(c)(1), the
hearing official finds that the
termination is warranted unless the
institution demonstrates that all
applicable conditions described in
§ 668.15(d)(4) have been met; and
(B) In a termination or limitation
action against an institution based on
the grounds that the institution is not
financially responsible—
(1) Upon proof of the conditions in
§ 668.174(a), the hearing official finds
that the limitation or termination is
warranted unless the institution
demonstrates that all the conditions in
§ 668.175(f) have been met; and
(2) Upon proof of the conditions in
§ 668.174(b)(1), the hearing official finds
that the limitation or termination is
warranted unless the institution
demonstrates that all applicable
conditions described in § 668.174(b)(2)
have been met; and
*
*
*
*
*
■ 4. Section 668.94 is amended by:
■ a. Redesignating paragraphs (h) and (i)
as paragraphs (i) and (j), respectively.
■ b. Adding a new paragraph (h).
The addition reads as follows:
§ 668.94
Limitation.
*
*
*
*
*
(h) A change in the participation
status of the institution from fully
certified to participate to provisionally
certified to participate under
§ 668.13(c);
*
*
*
*
*
■ 5. Section 668.171 is revised to read
as follows:
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§ 668.171
General.
(a) Purpose. To begin and to continue
to participate in any title IV, HEA
program, an institution must
demonstrate to the Secretary that it is
financially responsible under the
standards established in this subpart. As
provided under section 498(c)(1) of the
HEA, the Secretary determines whether
an institution is financially responsible
based on the institution’s ability to—
(1) Provide the services described in
its official publications and statements;
(2) Meet all of its financial
obligations; and
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21:07 Jul 30, 2018
Jkt 244001
(3) Provide the administrative
resources necessary to comply with title
IV, HEA program requirements.
(b) General standards of financial
responsibility. Except as provided under
paragraphs (c), (d), and (h) of this
section, the Secretary considers an
institution to be financially responsible
if the Secretary determines that—
(1) The institution’s Equity, Primary
Reserve, and Net Income ratios yield a
composite score of at least 1.5, as
provided under § 668.172 and
appendices A and B to this subpart;
(2) The institution has sufficient cash
reserves to make required returns of
unearned title IV, HEA program funds,
as provided under § 668.173;
(3) The institution is able to meet all
of its financial obligations and provide
the administrative resources necessary
to comply with title IV, HEA program
requirements. An institution is not be
able to meet its financial or
administrative obligations if—
(i) It fails to make refunds under its
refund policy or return title IV, HEA
program funds for which it is
responsible under § 668.22;
(ii) It fails to make repayments to the
Secretary for debts and liabilities arising
from the institution’s participation in
the title IV, HEA programs; or
(iii) It is subject to an action or event
described in paragraph (c) of this
section (mandatory triggering events), or
an action or event under paragraph (d)
of this section (discretionary triggering
events) that the Secretary determines is
likely to have a material adverse effect
on the financial condition of the
institution. The Secretary considers a
triggering event under these paragraphs
only if it occurs on or after July 1, 2019;
and
(4) The institution or persons
affiliated with the institution are not
subject to a condition of past
performance under § 668.174(a) or (b).
(c) Mandatory triggering events. An
institution is not able to meet its
financial or administrative obligations
under paragraph (b)(3)(iii) of this
section if—
(1) After the end of the fiscal year for
which the Secretary has most recently
calculated an institution’s composite
score—
(i)(A) The institution incurs a liability
arising from defense to repayment
discharges adjudicated by the Secretary;
(B) The institution incurs a liability
from a final judgment or determination
arising from an administrative or
judicial action or proceeding; or
(C) For a proprietary institution
whose composite score is less than 1.5,
there is a withdrawal of owner’s equity
from the institution by any means,
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37309
including by declaring a dividend,
unless the withdrawal is a transfer to an
entity included in the affiliated entity
group on whose basis the institution’s
composite score was calculated; and
(ii) As a result of that liability or
withdrawal, the institution’s
recalculated composite score is less than
1.0, as determined by the Secretary
under paragraph (e) of this section.
(2) For a publicly traded institution—
(i) The U.S. Securities and Exchange
Commission (SEC) issues an order
suspending or revoking the registration
of the institution’s securities pursuant to
Section 12(j) of the Securities and
Exchange Act of 1934 (the ‘‘Exchange
Act’’) or suspends trading of the
institution’s securities on any national
securities exchange pursuant to Section
12(k) of the Exchange Act;
(ii) The national securities exchange
on which the institution’s securities are
traded notifies the institution that it is
not in compliance with the exchange’s
listing requirements and, as a result, the
institution’s securities are delisted,
either voluntarily or involuntarily,
pursuant to the rules of the relevant
national securities exchange; or
(iii) The U.S. SEC is not in timely
receipt of a required report and did not
issue an extension to file the report.
(d) Discretionary triggering events.
The Secretary may determine that an
institution is not able to meet its
financial or administrative obligations
under paragraph (b)(3)(iii) of this
section if—
(1) The institution is issued a showcause order that, if not satisfied, would
result in the withdrawal, revocation or
suspension of its institutional
accreditation, by its institutional
accrediting agency for failing to meet
one or more of the agency’s standards;
(2)(i) The institution violated a
provision or requirement in a security or
loan agreement with a creditor; and
(ii) As provided under the terms of
that security or loan agreement, a
monetary or nonmonetary default or
delinquency event occurs, or other
events occur, that trigger, or enable the
creditor to require or impose on the
institution, an increase in collateral, a
change in contractual obligations, an
increase in interest rates or payments, or
other sanctions, penalties, or fees;
(3) The institution violated a State
licensing or authorizing agency and was
notified that its licensure or
authorization will be withdrawn or
terminated if the institution does not
take the steps necessary to come into
compliance with those requirements;
(4) For its most recently completed
fiscal year, a proprietary institution did
not receive at least 10 percent of its
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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
revenue from sources other than title IV,
HEA program funds, as provided under
§ 668.28(c); or
(5) The institution’s two most recent
official cohort default rates are 30
percent or greater, as determined under
subpart N of this part, unless—
(i) The institution files a challenge,
request for adjustment, or appeal under
that subpart with respect to its rates for
one or both of those fiscal years; and
(ii) That challenge, request, or appeal
remains pending, results in reducing
below 30 percent the official cohort
default rate for either or both of those
years, or precludes the rates from either
or both years from resulting in a loss of
eligibility or provisional certification.
(e) Recalculating the composite score.
The Secretary recalculates an
institution’s most recent composite
score by recognizing the actual amount
of the liability incurred by an institution
under paragraph (c)(1) of this section as
an expense or accounting for the actual
withdrawal of owner’s equity under
paragraph (c)(1)(i)(C) of this section as a
reduction in equity. For purposes of this
paragraph (e), the Secretary uses the
audited financial statements from which
the institution’s composite score was
calculated and the additional
information from which the alternative
composite score was calculated under
§ 668.172(d) and accounts for that
expense by—
(1) For liabilities incurred by a
proprietary institution—
(i) For the primary reserve ratio,
increasing expenses and decreasing
adjusted equity by that amount;
(ii) For the equity ratio, decreasing
modified equity by that amount; and
(iii) For the net income ratio,
decreasing income before taxes by that
amount;
(2) For liabilities incurred by a nonprofit institution—
(i) For the primary reserve ratio,
increasing expenses and decreasing
expendable net assets by that amount;
(ii) For the equity ratio, decreasing
modified net assets by that amount; and
(iii) For the net income ratio,
decreasing change in net assets without
donor restrictions by that amount; and
(3) For the amount of owner’s equity
withdrawn from a proprietary
institution—
(i) For the primary reserve ratio,
decreasing adjusted equity by that
amount; and
(ii) For the equity ratio, decreasing
modified equity by that amount.
(f) Reporting requirements. (1) In
accordance with procedures established
by the Secretary, an institution must
notify the Secretary of the following
actions or events—
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(i) For a liability incurred from a final
judgment or determination under
paragraph (c)(1)(ii) of this section, no
later than 10 days after the date that the
institution is notified of that judgment
or determination;
(ii) For a withdrawal of owner’s
equity described in paragraph (c)(1)(iii)
of this section, no later than 10 days
after the date that the withdrawal is
made;
(iii) For the provisions relating to a
publicly traded institution under
paragraph (c)(4) of this section, no later
than 10 days after the date that:
(A) The SEC issues an order
suspending or revoking the registration
of the institution’s securities pursuant to
Section 12(j) of the Exchange Act or
suspends trading of the institution’s
securities on any national securities
exchange pursuant to Section 12(k) of
the Exchange Act; or
(B) The national securities exchange
on which the institution’s securities are
traded delists, either voluntarily or
involuntarily, the institution’s securities
pursuant to the rules of the relevant
national securities exchange;
(iv) For a probation or show cause
action under paragraph (d)(1) of this
section, 10 days after the institution is
notified by its accrediting agency of that
action;
(v) For the loan agreement provisions
in paragraph (d)(2) of this section, 10
days after a loan violation occurs, the
creditor waives the violation, or the
creditor imposes sanctions or penalties
in exchange or as a result of granting the
waiver;
(vi) For a State or agency notice
relating to terminating an institution’s
licensure or authorization under
paragraph (d)(3) of this section, 10 days
after the institution receives that notice;
and
(vii) For the non-title IV revenue
provision in paragraph (d)(4) of this
section, no later than 45 days after the
end of the institution’s fiscal year, as
provided in § 668.28(c)(3).
(2) The Secretary may take an
administrative action under paragraph
(h) of this section against an institution
if it fails to provide timely notice to the
Secretary under this paragraph (f).
(3)(i) In its notice to the Secretary
under this paragraph (f), or in its
response to a preliminary determination
by the Secretary that the institution is
not financially responsible because of a
triggering event under paragraph (c) or
(d) of this section, in accordance with
procedures established by the Secretary,
the institution may—
(A) Demonstrate that the reported
withdrawal of owner’s equity under
paragraph (c)(1)(iii) of this section was
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used exclusively to meet tax liabilities
of the institution or its owners for
income derived from the institution;
(B) Show that the creditor waived a
violation of a loan agreement under
paragraph (d)(2) of this section.
However, if the creditor imposes
additional constraints or requirements
as a condition of waiving the violation,
or imposes penalties or requirements
under paragraph (d)(2)(ii) of this
section, the institution must identify
and describe those penalties,
constraints, or requirements and
demonstrate that complying with those
actions will not adversely affect the
institution’s ability to meet its financial
obligations;
(C) Show that the triggering event has
been resolved, or demonstrate that the
institution has insurance that will cover
all or part of the liabilities that arise
from defense to repayment discharges or
final judgments or determinations under
paragraph (c)(1) of this section; or
(D) Explain or provide information
about the conditions or circumstances
that precipitated that triggering event
that demonstrate that it has not or will
not have a material adverse effect on the
institution.
(ii) The Secretary will consider the
information provided by the institution
in determining whether to issue a final
determination that the institution is not
financially responsible.
(g) Public institutions. (1) The
Secretary considers a domestic public
institution to be financially responsible
if the institution—
(i)(A) Notifies the Secretary that it is
designated as a public institution by the
State, local, or municipal government
entity, tribal authority, or other
government entity that has the legal
authority to make that designation; and
(B) Provides a letter from an official
of that State or other government entity
confirming that the institution is a
public institution; and
(ii) Is not subject to a condition of past
performance under § 668.174.
(2) The Secretary considers a foreign
public institution to be financially
responsible if the institution—
(i)(A) Notifies the Secretary that it is
designated as a public institution by the
country or other government entity that
has the legal authority to make that
designation; and
(B) Provides documentation from an
official of that country or other
government entity confirming that the
institution is a public institution and is
backed by the full faith and credit of the
country or other government entity; and
(ii) Is not subject to a condition of past
performance under § 668.174.
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(h) Audit opinions. Even if an
institution satisfies all of the general
standards of financial responsibility
under paragraph (b) of this section, the
Secretary does not consider the
institution to be financially responsible
if, in the institution’s audited financial
statements, the opinion expressed by
the auditor was an adverse, qualified, or
disclaimed opinion, or the auditor
expressed doubt about the continued
existence of the institution as a going
concern, unless the Secretary
determines that a qualified or
disclaimed opinion does not have a
significant bearing on the institution’s
financial condition.
(i) Administrative actions. If the
Secretary determines that an institution
is not financially responsible under the
standards and provisions of this section
or under an alternative standard in
§ 668.175, or the institution does not
submit its financial and compliance
audits by the date and in the manner
required under § 668.23, the Secretary
may—
(1) Initiate an action under subpart G
of this part to fine the institution, or
limit, suspend, or terminate the
institution’s participation in the title IV,
HEA programs; or
(2) For an institution that is
provisionally certified, take an action
against the institution under the
procedures established in § 668.13(d).
■ 6. Section 668.172 is amended by
adding paragraph (d) to read as follows:
§ 668.172
Financial ratios.
*
*
*
*
(d) Accounting for operating leases.
The Secretary calculates a composite
score in accordance with ASU 2016–02,
ASC 842 (Leases), but upon request by
an institution the Secretary will also
compute a second composite score
using supplemental information
provided by the institution that enables
the composite score to be calculated
excluding operating leases, and uses the
higher of those two composite scores to
determine, in part, whether the
institution is financially responsible.
*
*
*
*
*
■ 7. Section 668.175 is amended by
revising paragraphs (a) through (d) and
(f) and adding paragraph (h) to read as
follows:
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*
§ 668.175 Alternative standards and
requirements.
(a) General. An institution that is not
financially responsible under the
general standards and provisions in
§ 668.171, may begin or continue to
participate in the title IV, HEA programs
by qualifying under an alternate
standard set forth in this section.
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(b) Letter of credit or surety
alternative for new institutions. A new
institution that is not financially
responsible solely because the Secretary
determines that its composite score is
less than 1.5, qualifies as a financially
responsible institution by submitting an
irrevocable letter of credit that is
acceptable and payable to the Secretary,
or providing other surety described
under paragraph (h)(1)(i) of this section,
for an amount equal to at least one-half
of the amount of title IV, HEA program
funds that the Secretary determines the
institution will receive during its initial
year of participation. A new institution
is an institution that seeks to participate
for the first time in the title IV, HEA
programs.
(c) Financial protection alternative for
participating institutions. A
participating institution that is not
financially responsible either because it
does not satisfy one or more of the
standards of financial responsibility
under § 668.171(b), (c) or (d), or because
of an audit opinion described under
§ 668.171(h), qualifies as a financially
responsible institution by submitting an
irrevocable letter of credit that is
acceptable and payable to the Secretary,
or providing other financial protection
described under paragraph (h) of this
section, for an amount determined by
the Secretary that is not less than onehalf of the title IV, HEA program funds
received by the institution during its
most recently completed fiscal year,
except that this requirement does not
apply to a public institution.
(d) Zone alternative. (1) A
participating institution that is not
financially responsible solely because
the Secretary determines that its
composite score under § 668.172 is less
than 1.5 may participate in the title IV,
HEA programs as a financially
responsible institution for no more than
three consecutive years, beginning with
the year in which the Secretary
determines that the institution qualifies
under this alternative.
(i)(A) An institution qualifies initially
under this alternative if, based on the
institution’s audited financial statement
for its most recently completed fiscal
year, the Secretary determines that its
composite score is in the range from 1.0
to 1.4; and
(B) An institution continues to qualify
under this alternative if, based on the
institution’s audited financial statement
for each of its subsequent two fiscal
years, the Secretary determines that the
institution’s composite score is in the
range from 1.0 to 1.4.
(ii) An institution that qualified under
this alternative for three consecutive
years, or for one of those years, may not
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37311
seek to qualify again under this
alternative until the year after the
institution achieves a composite score of
at least 1.5, as determined by the
Secretary.
(2) Under the zone alternative, the
Secretary—
(i) Requires the institution to make
disbursements to eligible students and
parents under either the heightened
cash monitoring or reimbursement
payment method described in § 668.162;
(ii) Requires the institution to provide
timely information regarding any of the
following oversight and financial
events—
(A) Any adverse action, including a
probation or similar action, taken
against the institution by its accrediting
agency;
(B) Any event that causes the
institution, or related entity as defined
in Accounting Standards Codification
(ASC) 850, to realize any liability that
was noted as a contingent liability in the
institution’s or related entity’s most
recent audited financial statement;
(C) Any violation by the institution of
any loan agreement;
(D) Any failure of the institution to
make a payment in accordance with its
debt obligations that results in a creditor
filing suit to recover funds under those
obligations; or
(E) Any losses that are unusual in
nature or infrequently occur, or both, as
defined in accordance with Accounting
Standards Update (ASU) No. 2015–01
and ASC 225;
(iii) May require the institution to
submit its financial statement and
compliance audits earlier than the time
specified under § 668.23(a)(4); and
(iv) May require the institution to
provide information about its current
operations and future plans.
(3) Under the zone alternative, the
institution must—
(i) For any oversight or financial event
described under paragraph (d)(2)(ii) of
this section, in accordance with
established procedures, notify the
Secretary no later than 10 days after that
event occurs; and
(ii) As part of its compliance audit,
require its auditor to express an opinion
on the institution’s compliance with the
requirements under the zone alternative,
including the institution’s
administration of the payment method
under which the institution received
and disbursed title IV, HEA program
funds.
(4) If an institution fails to comply
with the requirements under paragraph
(d)(2) or (3) of this section, the Secretary
may determine that the institution no
longer qualifies under this alternative.
*
*
*
*
*
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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
(f) Provisional certification
alternative. (1) The Secretary may
permit an institution that is not
financially responsible to participate in
the title IV, HEA programs under a
provisional certification for no more
than three consecutive years if—
(i) The institution is not financially
responsible because it does not satisfy
the general standards under
§ 668.171(b), its recalculated composite
score under § 668.171(e) is less than 1.0,
it is subject to an action or event under
§ 668.171(c) or (d) that has an adverse
material effect on the institution as
determined by the Secretary, or because
of an audit opinion described in
§ 668.171(h); or
(ii) The institution is not financially
responsible because of a condition of
past performance, as provided under
§ 668.174(a), and the institution
demonstrates to the Secretary that it has
satisfied or resolved that condition; and
(2) Under this alternative, the
institution must—
(i) Submit to the Secretary an
irrevocable letter of credit that is
acceptable and payable to the Secretary,
or provide other financial protection
described under paragraph (h) of this
section, for an amount determined by
the Secretary that is not less than 10
percent of the title IV, HEA program
funds received by the institution during
its most recently completed fiscal year,
except that this requirement does not
apply to a public institution;
(ii) Demonstrate that it was current on
its debt payments and has met all of its
financial obligations, as required under
§ 668.171(b)(3), for its two most recent
fiscal years; and
(iii) Comply with the provisions
under the zone alternative, as provided
under paragraphs (d)(2) and (3) of this
section.
(3) If at the end of the period for
which the Secretary provisionally
certified the institution, the institution
is still not financially responsible, the
Secretary may again permit the
institution to participate under a
provisional certification but the
Secretary—
(i) May require the institution, or one
or more persons or entities that exercise
substantial control over the institution,
as determined under § 668.174(b)(1) and
(c), or both, to provide to the Secretary
financial guarantees for an amount
determined by the Secretary to be
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21:07 Jul 30, 2018
Jkt 244001
sufficient to satisfy any potential
liabilities that may arise from the
institution’s participation in the title IV,
HEA programs; and
(ii) May require one or more of the
persons or entities that exercise
substantial control over the institution,
as determined under § 668.174(b)(1) and
(c), to be jointly or severally liable for
any liabilities that may arise from the
institution’s participation in the title IV,
HEA programs.
*
*
*
*
*
(h) Financial protection. In lieu of
submitting a letter of credit for the
amount required by the Secretary under
this section, the Secretary may permit
an institution to—
(1) Provide the amount required in the
form of other surety or financial
protection that the Secretary specifies in
a notice published in the Federal
Register;
(2) Provide cash for the amount
required; or
(3) Enter into an arrangement under
which the Secretary offsets the amount
of title IV, HEA program funds that an
institution has earned in a manner that
ensures that, no later than the end of a
six to twelve-month period selected by
the Secretary, the amount offset equals
the amount of financial protection the
institution is required to provide. The
Secretary uses the funds to satisfy the
debts and liabilities owed to the
Secretary that are not otherwise paid
directly by the institution, and provides
to the institution any funds not used for
this purpose during the period covered
by the agreement, or provides the
institution any remaining funds if the
institution subsequently submits other
financial protection for the amount
originally required.
*
*
*
*
*
■ 8. Appendix A to subpart L is revised
to read as follows:
Appendix A to Subpart L of Part 668—
Ratio Methodology for Propriety
Institutions
Section 1: Ratio and Ratio Terms
Primary Reserve Ratio Adjusted Equity
Total Expenses and Losses
Equity Ratio Modified Equity
Modified Assets
Net Income Ratio Income Before Taxes
Total Revenue and Gains
Total Expenses and Losses excludes
income tax, discontinued operations not
classified as an operating expense or change
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Fmt 4701
Sfmt 4702
in accounting principle and any losses on
investments, post-employment and defined
benefit pension plans and annuities. Any
losses on investments would be the net loss
for the investments. Total Expenses and
Losses includes the nonservice component of
net periodic pension and other postemployment plan expenses.
Modified Equity = (total owner’s equity) ¥
(intangible assets) ¥ (unsecured relatedparty receivables)
Modified Assets = (total assets) ¥ (intangible
assets) ¥ (unsecured related-party
receivables)
Income Before Taxes includes all revenues,
gains, expenses and losses incurred by the
school during the accounting period. Income
before taxes does not include income taxes,
discontinued operations not classified as an
operating expense or changes in accounting
principle.
Total Revenues and Gains does not include
positive income tax amounts, discontinued
operations not classified as an operating gain,
or change in accounting principle
(investment gains should be recorded net of
investment losses.
* Unsecured related party receivables as
required at 34 CFR 668.23(d)
** The value of property, plant and
equipment includes construction in progress
and lease right-of-use assets, and is net of
accumulated depreciation/amortization.
*** All debt obtained for long-term
purposes, not to exceed total net property,
plant and equipment includes lease liabilities
for lease right-of-use assets and the shortterm portion of the debt, up to the amount
of net property, plant and equipment. If an
institution wishes to include the debt,
including debt obtained through long-term
lines of credit in total debt obtained for longterm purposes, the institution must include
a disclosure in the financial statements that
the debt, including lines of credit exceeds
twelve months and was used to fund
capitalized assets (i.e. property, plant and
equipment or capitalized expenditures per
Generally Accepted Accounting Principles
(GAAP)). The disclosures that must be
presented for any debt to be used in adjusted
equity include the issue date, term, nature of
capitalized amounts and amounts
capitalized. Institutions that do not include
debt in total debt obtained for long-term
purposes, including long-term lines of credit,
do not need to provide any additional
disclosures other than those required by
GAAP. The debt obtained for long-term
purposes will be limited to only those
amounts disclosed in the financial statements
that were used to fund capitalized assets.
Any debt amount including long-term lines
of credit used to fund operations must be
excluded from debt obtained for long-term
purposes.
BILLING CODE 4000–01–P
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SECTION 2: Financial Responsibility Supplemental Schedule Requirement and Example
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Priman: Reserve Ratio:
Adiusted Eauitv
Line
31
Sfmt 4725
E:\FR\FM\31JYP3.SGM
31JYP3
Balance Sheet - Property, Plant and Equipment, net*
9
Balance Sheet- Lease right-of-use asset*
Lease right-ofuse asset
2,500,000
II
Balance Sheet - Goodwill*
80,000
27
Balance Sheet- Post-employment and pension liability*
Intangible assets
Post-employment and defined pension plan
liabilities
300,000
20,24
Long-term debt- for long-term purposes
5,400,000
Lease right-of-use asset liability
2,100,000
Line of credit- for long-term purposes
575,000
40, 42, 44,
45
Balance Sheet- Notes payable (both current and long-term)*
Balance Sheet- Lease right-of-use assets liability (both current and
long-term)*
Balance Sheet- Line of Credit-for Long-Term Purposes (both current
and long-term) and Line of credit note*
Statement of (Loss) Income - Total Operating Expenses, Interest
Expense, Loss on Impairment of Assets and Loss on Disposal of
Assets*
Total Expenses and Losses:
Egui!Y Ratio:
Modified Eauitv
5,900,000
Balance Sheet- Total Equity
Total equity
3,035,000
II
Fmt 4701
8
Total equity
Unsecured related party receivables and/or
other related party assets
Property, plant and equipment, net including construction in progress
31
Frm 00073
4, 10
Balance Sheet- Total Equity
Balance Sheet - Related party receivable, net and Receivable from
affiliate, net and Related party note*
Balance Sheet - Goodwill*
Balance Sheet - Related party receivable, net and Receivable from
affiliate, net and Related party note*
Intangible assets
Unsecured related party receivables and/or
other related party assets
Modified Assets:
80,000
17,25
19,23
4, 10
3,035,000
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
A Supplemental Schedule must be submitted as part of the required audited financial statements submission. The Supplemental Schedule contains all of the financial
elements required to compute the composite score. Each item in the Supplemental Schedule must have a reference to the Balance Sheet, Statement of (Loss) Income, or
Notes to the Financial Statements. The amount entered in the Supplemental Schedules should tie directly to a line item, be part of a line item, tie directly to a note, or be
part of a note in the financial statements. When an amount is zero, the institution would identify the source of the amount as NA (Not Applicable) and enter zero as the
amount in the Supplemental Schedule. The audit opinion letter must contain a paragraph that references the auditor's additional analysis of the financial responsibility
Supplemental Schedule.
"Financial Responsibility Supplemental Schedule"
Example location of number in the financial statements and/or notes - the number reference to sample numbers; however, could be more lines based on financial
statements and/or notes.
1,130,000
7,000,000
1,130,000
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14,210,000
11
Balance Sheet - Goodwill*
Balance Sheet - Related party receivable, net and Receivable from
affiliate, net and Related party note*
Intangible assets
Unsecured related party receivables and/or
other related party assets
Net Income Ratio:
80,000
Statement of (Loss) Income- Net Income Before Income Taxes
Statement of (Loss) Income - Total Revenue, Interest income and Other
miscellaneous income*
Income Before Taxes
4,10
Sfmt 4725
Total assets
Fmt 4701
Balance Sheet - Total Assets
48
E:\FR\FM\31JYP3.SGM
31JYP3
EP31JY18.008
35,43,46
Total Revenues and Gains
Lease right-of-use assets, net in place as of711/2019 included in Financial Statements as a result of ASU 2016-2
Related Lease right-of-use assets liability for the above lease right-ofuse-assets as a result of ASU 2016-2
* In the example the number came from the actual financial statements; however, the number could come from the notes.
1,130,000
1,070,000
6,970,000
1,500,000
1,250,000
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
13
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BALANCE SHEET
Line
Line
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1
2
3
4
5
6
7
8
9
10
11
12
13
Sfmt 4725
E:\FR\FM\31JYP3.SGM
31JYP3
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Current Assets
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Related party receivable
Related party receivable, secured
Student loans receivable, net
Total Current Assets
Property, plant and equipment, net
Lease right-of-use assets, net
Receivable from affiliate, net
Goodwill
Deposits
Total Assets
Current Liabilities
Accounts payable
Accrued expenses
Deferred revenue
Leases right-of-use assets liability
Line of credit- operating
Line of credit - for long term purposes
Note payable
Total Current Liabilities
Line of credit- operating
Line of credit - for long term purposes
Notes payable
Lease right-of-use asset liabilities
Other liabilities
Post-employment and pension liability
Total Liabilities
Equity
Common stock
Retained earnings
Total Equity
Total Liabilities and Equity
790,000
1,010,000
150,000
130,000
200,000
1,330,000
3,610,000
7,000,000
2,500,000
1,000,000
80,000
20,000
14,210,000
350,000
500,000
650,000
100,000
100,000
75,000
400,000
2,175,000
200,000
500,000
5,000,000
2,000,000
1,000,000
300,000
11,175,000
500,000
2,535,000
3,035,000
14,210,000
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Revenue
Tuition and fees, net
Clinic revenue
Total Revenue
Operating Expenses
Education expense
General expense
Occupancy expense
Depreciation and Amortization
Total Operating Expenses
Operating Income (Loss)
Other Income (expense)
Interest expense
Interest income
Loss on impairment of assets
Loss on disposal of assets
Other miscellaneous income
Total Other Income (Expense)
Net Income Before Income Taxes
Income taxes
Net Income (Loss)
6,400,000
300,000
6,700,000
2,000,000
1,400,000
500,000
350,000
4,250,000
2,450,000
(750,000)
20,000
(400,000)
(500,000)
250,000
(1,380,000)
1,070,000
267,000
803,000
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21:07 Jul 30, 2018
SECTION 3: Example Financial Statement and Composite Score Calculation
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700,000
I Total Expenses and Losses
40 +42 +44 +45
5,900,000
Equity Ratio = Modified Equity
31 -(4 +10) -11
1,825,000
I Modified assets
13 -(4 +10) -11
13,000,000
Net Income Ratio = Income Before Taxes
48
1,070,000
/Total Revenues and Gains
35 +43 +46
6,970,000
Frm 00076
Step 1: Calculate the strength factor score for each ratio by using the following algorithms:
Primary Reserve strength factor score = 20 x the primary reserve ratio result
Fmt 4701
Equity strength factor score = 6 x the equity ratio result
Net Income strength factor score= 1 + (33.3 x net income ratio result)
Sfmt 4725
If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for that ratio is 3.
E:\FR\FM\31JYP3.SGM
Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three weighted scores
If the strength factor score for any ratio is less than or equal to -1, the strength factor score for that ratio is -1
Primary Reserve weighted score = 30% x the primary reserve strength factor score
Equity weighted score = 40% x the equity strength factor score
Net Income weighted score= 30% x the net income strength factor score
Composite Score = the sum of all weighted scores
31JYP3
Round the composite score to one digit after the decimal point to determine the final score
RATIO
Primary Reserve Ratio
Equity Ratio
Net Income Ratio
TOTAL Composite Score- Rounded
EP31JY18.010
Ratio
0.1186
0.1404
0.1535
Strength
Factor
2.3729
0.8423
3.0000
Weight
30%
40%
30%
Composite Scores
0.7119
0.3369
0.9000
1.9488
1.9
0.1186
0.1404
0.1535
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
Primary Reserve Ratio = Adjusted Equity
Lines
31-11-(4+ 10)-(8+9)+27+(17+ 19+
20+23+24+25)
Calculating the Composite Score
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
BILLING CODE 4000–01–C
9. Appendix B to subpart L is revised
to read as follows:
■
Appendix B Subpart L of Part 668—
Ratio Methodology for Private NonProfit Institutions
Section 1: Ratio and Ratio Terms
Primary Reserve Ratio Expendable Net
Assets
Total Expenses without Donor Restrictions
and Losses without Donor Restrictions
Equity Ratio Modified Net Assets
Modified Assets
Net Income Ratio Change in Net Assets
without Donor Restrictions
Total Revenue without Donor Restrictions
and Gains without Donor Restrictions
Definitions
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Expendable Net Assets = (net assets without
donor restrictions) + (net assets with
donor restrictions) ¥ (net assets with
donor restrictions: restricted in
perpetuity) * ¥ (annuities, term
endowments and life income funds with
donor restrictions) ** ¥ (intangible
assets) ¥ (net property, plant and
equipment) *** + (post-employment and
defined benefit pension plan liabilities)
+ (all long-term debt obtained for longterm purposes, not to exceed total net
property, plant and equipment) **** ¥
(unsecured related party
transactions) *****
Total Expenses without Donor Restrictions
and Losses without Donor Restrictions = All
expenses and losses without donor
restrictions from the Statement of Activities
less any losses without donor restrictions on
investments, post-employment and defined
benefit pension plans and annuities. (For
institutions that have defined benefit pension
and other post-employment plans, total
expenses include the nonservice component
of net periodic pension and other postemployment plan expenses, and these
expenses will be classified as non-operating.
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Consequently such expenses will be labeled
non-operating or included with ‘‘other
changes—nonoperating changes—in net
assets without donor restrictions’’ when the
Statement of Activities includes an operating
measure).
Modified Net Assets = (net assets without
donor restrictions) + (net assets with
donor restrictions) ¥ (intangible assets)
¥ (unsecured related party receivables)
Modified Assets = (total assets) ¥ (intangible
assets) ¥ (unsecured related party
receivables)
Change in net assets without donor
restrictions is taken directly from the audited
financial statements.
Total Revenue without Donor Restriction
and Gains without Donor Restrictions = total
revenue (including amounts released from
restriction) plus total gains. With regard to
gains, investment returns are reported as a
net amount (interest, dividends, unrealized
and realized gains and losses net of external
and direct internal investment expense).
Institutions that separately report investment
spending as operating revenue (e.g., spending
from funds functioning as endowment) and
remaining net investment return as a nonoperating item, will need to aggregate these
two amounts to determine if there is a net
investment gain or a net investment loss (net
investment gains are included with total
gains).
* Net assets with donor restrictions:
Restricted in perpetuity is subtracted from
total net assets. The amount of net assets
with donor restrictions: Restricted in
perpetuity is disclosed as a line item, part of
line item, in a note, or part of a note in the
financial statements.
** Annuities, term endowments and life
income funds with donor restrictions is
subtracted from total net assets. The amount
of annuities, term endowments and life
income funds with donor restrictions is
disclosed in as a line item, part of line item,
in a note, or part of a note in the financial
statements.
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37317
*** The value of property, plant and
equipment includes construction in progress
and lease right-of-use assets, and is net of
accumulated depreciation/amortization.
**** All Debt obtained for long-term
purposes, not to exceed total net property,
plant and equipment includes lease liabilities
for lease right-of-use assets and the shortterm portion of the debt, up to the amount
of net property, plant and equipment. All
Debt obtained for long-term purposes, not to
exceed total net property, plant and
equipment includes lease liabilities for lease
right-of-use assets and the short-term portion
of the debt, up to the amount of net property,
plant and equipment. If an institution wishes
to include the debt, including debt obtained
through long-term lines of credit in total debt
obtained for long-term purposes, the
institution must include a disclosure in the
financial statements that the debt, including
lines of credit exceeds twelve months and
was used to fund capitalized assets (i.e.,
property, plant and equipment or capitalized
expenditures per Generally Accepted
Accounting Principles (GAAP)). The
disclosures that must be presented for any
debt to be included in expendable net assets
include the issue date, term, nature of
capitalized amounts and amounts
capitalized. Institutions that do not include
debt in total debt obtained for long-term
purposes, including long-term lines of credit,
do not need to provide any additional
disclosures other than those required by
GAAP. The debt obtained for long-term
purposes will be limited to only those
amounts disclosed in the financial statements
that were used to fund capitalized assets.
Any debt amount including long-term lines
of credit used to fund operations must be
excluded from debt obtained for long-term
purposes.
***** Unsecured related party receivables
as required at 34 CFR 668.23(d).
BILLING CODE 4000–01–P
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. lR,
SECTION 2: F"
------------ ----
"bilitv
-----
S --
--------
tal Schedule R, -
dE
t ------ -------- --
---- --------
Jkt 244001
PO 00000
Primacy Reserve Ratio:
Expendable Net Assets:
E:\FR\FM\31JYP3.SGM
31JYP3
8
Statement of Financial Position - Property, plant and equipment, net
Property, plant and equipment, net
40,000,000
9
Statement of Financial Position- Lease right-of-use assets, net
Lease right-of-use asset, net
10,000,000
10
Statement of Financial Position -Goodwill
Intangible assets
17
Statement of Financial Position- Post-employment and pension liabilities
Post-employment and pension liabilities
20
Statement of Financial Position- Note Payable*
Long-term debt
24,000,000
21
Statement of Financial Position- Lease right-of-use of asset liability
Lease right-of-use asset liability
10,000,000
22
Statement of Financial Position -Line of credit- for long-term purposes*
Line of credit- for long-term purposes
25
Statement of Financial Position- Annuities**
Annuities with donor restrictions
Statement of Financial Position- Term Endowments**
Term endowments with donor restrictions
Statement of Financial Position-s-Life Income Funds**
29
Sfmt 4725
Unsecured related party receivable
Related party contribution receivable, net- only
with significant relationship
27
Fmt 4701
Statement of Financial Position- Total Net Assets
Statement of Financial Position- Related party receivable and Related party note
disclosure
Statement of Financial Position -Contribution receivable, net and Related party
note disclosure**
26
Frm 00078
31
Statement of Financial Position --Perpetual Funds**
Life income funds with donor restrictions
Net assets with donor restrictions: restricted in
perpetuity
4
NA
Total net assets
Total Expenses and Losses:
EP31JY18.011
26,990,000
100,000
0
500,000
6,600,000
2,000,000
300,000
50,000
150,000
8,800,000
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
A Supplemental Schedule must be submitted as part of the required audited financial statements submission. The Supplemental Schedule contains all of the financial
elements required to compute the composite score. Each item in the Supplemental Schedule must have a reference to the Statement of Financial Position, Statement of
Activities, Schedule of Natural to Functional Expenses, or Notes to the Financial Statements. The amount entered in the Supplemental Schedule should tie directly to a
line item, be part of a line item, tie directly to a note, or be part of a note in the financial statements. When an amount is zero, the institution would identify the source of
the amount as NA (Not Applicable) and enter zero as the amount in the Supplemental Schedule. The audit opinion letter must contain a paragraph that references the
auditor's additional analysis of the financial responsibility Supplemental Schedule.
"Financial Responsibility Supplemental Schedule"
Example location of number in the financial statements and/or notes- the number reference to sample numbers; however, could be more lines based on financial
statements and/or notes
daltland on DSKBBV9HB2PROD with PROPOSALS3
VerDate Sep<11>2014
(35), 45
Total expenses without donor restrictions
Statement of Activities - (Investment return appropriated for spending) and
Investments, net of annual spending, gain (loss)*
Net investment losses
Jkt 244001
48
Statement of Activities- Change in value of split-interest agreements
47
Statement of Activities- Pension-related changes other than periodic pension*
Change in value of split-interest agreements
Pension -related changes other than net periodic
costs
52,980,000
400,000
80,000
350,000
Equity Ratio:
Modified Net Assets:
24
Statement of Financial Position - Net Assets without Donor Restrictions
Net assets without donor restrictions
15,190,000
30
Statement of Financial Position- Total Net Assets with Donor Restriction
Net assets with donor restrictions
11,800,000
10
Statement of Financial Position -Goodwill
Statement of Financial Position -Related party receivable and Related party note
disclosure
Statement of Financial Position -Contribution receivable, net and Related party
note disclosure**
Intangible assets
500,000
Unsecured related party receivables
Related party contribution receivable, net- only
with significant relationship
100,000
PO 00000
-
Frm 00079
Fmt 4701
4
Sfmt 4725
NA
0
Modified Assets:
E:\FR\FM\31JYP3.SGM
31JYP3
12
Statement of Financial Position- Total assets
Total assets
10
Statement of Financial Position- Goodwill
Statement of Financial Position- Related party receivables and Related party note
disclosure
Statement of Financial Position -Contribution receivable, net and Related party
note disclosure**
Intangible assets
500,000
Unsecured related party receivables
Related party contribution receivable, net- only
with significant relationship
100,000
Statement of Activities- Change in Net Assets Without Donor Restrictions
Net Income Ratio:
Change in Net Assets Without Donor
Restrictions
Statement of Activities- (Net assets released from restriction), Total Operating
Revenue and Other Additions and Sale of Fixed Assets, gains (losses)
Total Revenues and Gains
4
NA
51
38, (35), 50
76,240,000
0
(80,000)
52,900,000
EP31JY18.012
8,000,0C
Related Lease right-of-use liability for the above Lease right-ofuse assets as a result of ASU 2016-02
*In the example the number came from the actual financial statements; however, the number could come from the notes of the financial
statements.
8,000,0C
37319
Lease right-of-use assets, net in place as of711/2019 included in Financial Statements as a result of ASU 2016-02
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
(35), 43,
45, 46, 47,
48,49
Statement of Activities- (Investment return appropriated for spending), Total
Operating Expenses, Investments, net of annual spending gain (loss), Other
components of net periodic pension costs, Pension-related changes other than net
periodic pension, Change in value of split-interest agreements and Other gains
(loss)*
daltland on DSKBBV9HB2PROD with PROPOSALS3
37320
VerDate Sep<11>2014
· 1 - ------------SECTION3: ----------- F------------ Stat,
E
le
t
-------
Jkt 244001
PO 00000
Frm 00080
Fmt 4701
8
9
10
11
12
Sfmt 4725
13
14
15
16
E:\FR\FM\31JYP3.SGM
17
18
19
20
21
31JYP3
22
23
24
25
26
27
28
EP31JY18.013
Calculaf
- ---- ----------
I I
STATEMENT OF FINANCIAL POSITION
Lin
e
1
2
3
4
5
6
7
te S
STATEMENT OF ACTIVITIES
Lin
e
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Related party receivable
Contributions receivable, net
Student loans receivable, net
Investments
Property, plant and
equipment, net
Lease right-of-use asset, net
Goodwill
Deposits
Total Assets
Line of credit - short term
Accounts payable
Accrued expenses
Deferred revenue
Post-employment and pension
liability
Line of credit - operating
Other liabilities
Notes payable
Lease right-of-use asset liability
Line of credit for long term
purposes
Total Liabilities
Net Assets without Donor
Restrictions
Net Assets with Donor
Restrictions
Annuities
Term endowments
Life income funds
Other restricted by purpose and time
1,720,000
6,000,000
1,900,000
100,000
2,000,000
8,000,000
6,000,000
40,000,000
10,000,000
500,000
20,000
76,240,000
300,000
1,000,000
3,500,000
650,000
Changes in Net Assets Without Donor Restrictions
Operating Revenue and Other Additions:
33
Tuition and fees, net
34
Contributions
35
Investment return appropriated for spending
36
Auxiliary enterprises
37
Net assets released from restriction
Total Operating Revenue and Other Additions
38
43,200,000
1,200,000
200,000
7,000,000
500,000
52,100,000
Operating Expenses and Other Deductions:
39
Education and research expenses
40
Depreciation and Amortization
5,000,000
41
Interest expense
2,880,000
42
Auxiliary enterprises
5,200,000
43
Total Operating Expenses
44
Change in Net Assets from Operations
Non-Operating Changes
1,020,000
2,000,000
49,250,000
45
Investments, net of annual spending, gain (loss)
(600,000)
15,190,000
46
47
Other components of net periodic pension costs
Pension-related changes other than net periodic pension
costs
48
Change in value of split-interest agreements
(80,000)
49
Other gains (losses)
(70,000)
6,600,000
200,000
1,000,000
24,000,000
10,000,000
300,000
50,000
150,000
2,500,000
38,000,000
51,080,000
(1,000,000)
(350,000)
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
I
dC
------ - ----- - ---- - - ---
daltland on DSKBBV9HB2PROD with PROPOSALS3
VerDate Sep<11>2014
29
31
Total Net Assets with Donor Restrictions
Total Net Assets
8,800,000
11,800,00
0
26,990,00
0
76,240,00
0
50
Sale of fixed assets, gains (losses)
Total Non-Operating Changes
(1,100,000)
400,000
Net assets released from restriction
(500,000)
Change in Net Assets With Donor Restrictions
(100,000)
55
PO 00000
Contributions
54
Jkt 244001
(80,000)
53
Total Liabilities and Net Assets
Change in Net Assets Without Donor Restrictions
Change in Net Assets With Donor Restrictions
52
32
51
Change in Net Assets
(180,000)
Frm 00081
56
31
Fmt 4701
Calculating the Composite Score
I Net Assets, Beginning of Year
I
27,170,000
26,990,000
Net Assets, End of Year
Sfmt 4725
E:\FR\FM\31JYP3.SGM
31JYP3
Primary ReseiVe Ratio = Adjusted Equity
Lines
31-11-(4+ 10)-(8+9)+27+(17+ 19+
20+23+24+25)
700,000
I Total Expenses and Losses
40 +42 +44 +45
5,900,000
Equity Ratio = Modified Equity
31 -(4 +10) -11
1,825,000
I Modified assets
13 -(4+10)-11
13,000,000
Net Income Ratio = Income Before Taxes
48
1,070,000
Total Revenues and Gains
35 +43 +46
6,970,000
Step 1: Calculate the strength factor score for each ratio by using the following algorithms:
Primary ReseiVe strength factor score = 10 x the primary reseiVe ratio result
Equity strength factor score = 6 x the equity ratio result
Negative net income ratio result: Net Income strength factor= 1 + (25 x net income ratio result)
Positive net income ratio result: Net income strength factor= 1 +(50 x net income ratio result)
Zero result for net income ratio: Net income strength factor= 1
0.1186
0.1404
0.1535
37321
If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for the ratio is 3.
EP31JY18.014
1,000,000
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
30
Restricted in perpetuity
daltland on DSKBBV9HB2PROD with PROPOSALS3
37322
Jkt 244001
PO 00000
Frm 00082
Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three weighted scores
Primary Reserve weighted score = 40% x the primary reserve strength factor score
Fmt 4701
Equity weighted score = 40% x the equity strength factor score
Net income weighted score
Composite Score
=
=
20% x the net income strength factor score
the sum of all weighted scores
Sfmt 4702
E:\FR\FM\31JYP3.SGM
Round the composite score to one digit after the decimal point to determine the final score
RATIO
Ratio
Stren~h Factor
0.1855
1.8553
PrimaryReserveRatio
Equity Ratio
0.3489
2.0933
NetlncomeRatio
(0.0015)
0.9622
TOTAL Composite Score- Rounded
Wei~ht
40%
40%
20%
Composite Scores
0.7421
0.8373
0.1924
1.7719
1.8
31JYP3
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
21:07 Jul 30, 2018
BILLING CODE 4000–01–C
VerDate Sep<11>2014
EP31JY18.015
If the strength factor score for any ratio is less than or equal to -1, the strength factor score for the ratio is -1.
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
PART 674—FEDERAL PERKINS LOAN
PROGRAM
PART 682—FEDERAL FAMILY
EDUCATION LOAN (FFEL) PROGRAM
■
10. The authority citation for part 674
continues to read as follows:
■
Authority: 20 U.S.C. 1070g, 1087aa–
1087hh; Pub. L. 111–256, 124 Stat. 2643;
unless otherwise noted.
Authority: 20 U.S.C. 1071–1087–4, unless
otherwise noted.
11. Section 674.33 is amended by:
a. Revising paragraph (g)(4).
b. In paragraph (g)(8)(i), removing the
number ‘‘120’’ and adding, in its place,
the number ‘‘180’’.
The revision reads as follows:
■
■
■
§ 674.33
Repayment.
daltland on DSKBBV9HB2PROD with PROPOSALS3
*
*
*
*
*
(g) * * *
(4) Borrower qualification for
discharge. Except as provided in
paragraph (g)(3) of this section, in order
to qualify for discharge of an NDSL or
Federal Perkins Loan, a borrower must
submit to the holder of the loan a
completed discharge application on a
form approved by the Secretary, and the
factual assertions in the application
must be true and made by the borrower
under penalty of perjury. The
application explains the procedures and
eligibility criteria for obtaining a
discharge and requires the borrower
to—
(i) Certify that—
(A) The borrower received the
proceeds of a loan to attend a school;
(B) The borrower did not complete the
program of study at that school because
the school closed while the student was
enrolled, or the student withdrew from
the school not more than 180 days
before the school closed. The Secretary
may extend the 180-day period if the
Secretary determines that exceptional
circumstances related to the school’s
closing justify an extension. Exceptional
circumstances for this purpose may
include, but are not limited to:
Revocation or withdrawal by an
accrediting agency of the school’s
institutional accreditation; or the State’s
revocation or withdrawal of the school’s
license to operate or to award academic
credentials in the State;
(C) The borrower did not complete
and is not in the process of completing
the program of study by transferring
academic credit earned at the closed
school to another school, or by any
other comparable means; and
(D) The school did not provide the
borrower an opportunity to complete
the program of study in which the
borrower was enrolled through a teachout plan approved by the school’s
accrediting agency and, if applicable,
the school’s State authorizing agency.
(ii) [Reserved]
*
*
*
*
*
VerDate Sep<11>2014
21:07 Jul 30, 2018
Jkt 244001
12. The authority citation for part 682
continues to read as follows:
§ 682.202
[Amended]
13. Section 682.202 is amended in
paragraph (b)(1) by removing the word
‘‘A’’ before ‘‘lender’’ and adding in in
place ‘‘Except as provided in
§ 682.405(b)(4), a’’.
■ 14. Section 682.402 is amended by:
■ a. Revising paragraph (d)(1)(i).
■ b. Revising paragraphs (d)(3)
introductory text through (d)(3)(ii)(C).
■ c. Redesignating paragraphs (d)(3)(iii)
and (iv) as paragraphs (d)(3)(iv) and (v).
■ d. Adding a new paragraph (d)(3)(iii).
■ e. Revising paragraph (d)(6)(ii)(B).
■ f. Revising the introductory text of
paragraph (d)(6)(ii)(F).
■ g. In paragraph (d)(6)(ii)(F)(3),
removing the number ‘‘120’’ and adding,
in its place, the number ‘‘180’’.
■ h. In paragraph (d)(6)(ii)(F)(5),
removing the words ‘‘and sworn
statement’’.
■ i. Revising paragraphs (d)(6)(ii)(G) and
(H).
■ j. Adding paragraph (d)(6)(ii)(J).
The revisions and additions read as
follows:
■
§ 682.402 Death, disability, closed school,
false certification, unpaid refunds, and
bankruptcy payments.
*
*
*
*
*
(d) Closed school—(1) General. (i) The
Secretary reimburses the holder of a
loan received by a borrower on or after
January 1, 1986, and discharges the
borrower’s obligation with respect to the
loan in accordance with the provisions
of paragraph (d) of this section, if the
borrower (or the student for whom a
parent received a PLUS loan) could not
complete the program of study for
which the loan was intended because
the school at which the borrower (or
student) was enrolled closed, or the
borrower (or student) withdrew from the
school not more than 180 days prior to
the date the school closed. The
Secretary may extend the 180-day
period if the Secretary determines that
exceptional circumstances related to a
school’s closing justify an extension.
Exceptional circumstances for this
purpose may include, but are not
limited to: Revocation or withdrawal by
an accrediting agency of the school’s
institutional accreditation, or revocation
or withdrawal of the school’s license to
operate or to award academic
credentials in the State.
*
*
*
*
*
PO 00000
Frm 00083
Fmt 4701
Sfmt 4702
37323
(3) Borrower qualification for
discharge. Except as provided in
paragraph (d)(8) of this section, in order
to qualify for discharge of a loan under
paragraph (d) of this section a borrower
must submit to the holder of the loan a
completed application on a form
approved by the Secretary, and the
factual assertions in the application
must be true and made by the borrower
under penalty of perjury. The
application explains the procedures and
eligibility criteria for obtaining a
discharge and requires the borrower to
state—
(i) Whether the borrower has made a
claim with respect to the school’s
closing with any third party, such as the
holder of a performance bond or a
tuition recovery program, and if so, the
amount of any payment received by the
borrower (or student) or credited to the
borrower’s loan obligation;
(ii) That the borrower (or the student
for whom a parent received a PLUS
loan)—
(A) Received, on or after January 1,
1986, the proceeds of any disbursement
of a loan disbursed, in whole or in part,
on or after January 1, 1986 to attend a
school;
(B) Did not complete the educational
program at that school because the
school closed while the student was
enrolled or on an approved leave of
absence in accordance with § 668.22(d),
or the student withdrew from the school
not more than 180 days before the
school closed; and
(C) Did not complete the program of
study by transferring academic credits
or hours earned at the closed school to
another school or by any other
comparable means;
(iii) The school did not provide the
borrower an opportunity to complete
the program of study through a teachout plan approved by the school’s
accrediting agency and, if applicable,
the school’s State authorizing agency;
*
*
*
*
*
(6) * * *
(ii) * * *
(B) If the guaranty agency determines
that a school appears to have closed, it
must, within 30 days of making that
determination, notify all lenders
participating in its program to suspend
collection efforts against individuals
with respect to loans made for
attendance at the closed school, if the
student to whom (or on whose behalf)
a loan was made, appears to have been
enrolled at the school on the closing
date, or withdrew not more than 180
days prior to the date the school appears
to have closed. Within 30 days after
receiving confirmation of the date of a
E:\FR\FM\31JYP3.SGM
31JYP3
daltland on DSKBBV9HB2PROD with PROPOSALS3
37324
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules
school’s closure from the Secretary, the
agency must—
(1) Notify all lenders participating in
its program to mail a discharge
application approved by the Secretary to
all borrowers who may be eligible for a
closed school discharge; and
(2) Review the records of loans that it
holds, identify the loans made to any
borrower (or student) who appears to
have been enrolled at the school on the
school closure date or who withdrew
not more than 180 days prior to the
closure date, and mail a discharge
application to the borrower. The
application informs the borrower of the
procedures and eligibility criteria for
obtaining a discharge.
*
*
*
*
*
(F) If the guaranty agency determines
that a borrower identified in paragraph
(d)(6)(ii)(C) or (D) of this section does
not qualify for a discharge, the agency
must notify the borrower in writing of
that determination, the reasons for the
decision, and how the borrower may ask
the Secretary to review the decision
within 30 days after the date the
agency—
*
*
*
*
*
(G) Upon receipt of a closed school
discharge claim filed by a lender, the
agency must review the borrower’s
completed application in light of the
information available from the records
of the agency and from other sources,
including other guaranty agencies, state
authorities, and cognizant accrediting
associations, and must take the
following actions—
(1) If the agency determines that the
borrower satisfies the requirements for
discharge under paragraph (d) of this
section, it must pay the claim in
accordance with § 682.402(h) not later
than 90 days after the agency received
the claim; or
(2) If the agency determines that the
borrower does not qualify for a
discharge, the agency must, not later
than 90 days after the agency received
the claim, return the claim to the lender
with an explanation of the reasons for
its determination.
(H) If a borrower fails to submit the
completed application described in
paragraph (d)(3) of this section within
60 days of being notified of that option,
the lender or guaranty agency must
resume collection and must be deemed
to have exercised forbearance of
payment of principal and interest from
the date it suspended collection activity.
The lender or guaranty agency may
capitalize, in accordance with
§ 682.202(b), any interest accrued and
not paid during that period.
*
*
*
*
*
VerDate Sep<11>2014
21:07 Jul 30, 2018
Jkt 244001
(J)(1) Within 30 days after receiving
the borrower’s request for review of its
decision that the borrower did not
qualify for a discharge under paragraph
(d)(6)(ii)(F) of this section, the agency
must forward the borrower’s discharge
request and all relevant documentation
to the Secretary.
(2) After reviewing the documents
provided by the agency, the Secretary
notifies the agency and the borrower of
the decision on the borrower’s
application for a discharge. If the
Secretary determines that the borrower
is not eligible for a discharge under
paragraph (d) of this section, within 30
days after being informed of the
Secretary’s decision, the agency must
take the actions described in paragraph
(d)(6)(ii)(H) of this section, as
applicable.
(3) If the Secretary determines that the
borrower meets the requirements for a
discharge under paragraph (d) of this
section, the agency must, within 30 days
after being informed of the Secretary’s
decision, take the actions required
under paragraphs (d)(6)(ii)(E) and
(d)(6)(ii)(G)(1) of this section and the
lender must take the actions described
in paragraph (d)(7)(iv) of this section, as
applicable.
*
*
*
*
*
■ 15. Section 682.405 is amended by
adding paragraph (b)(4)(ii) to read as
follows:
§ 682.405
Loan rehabilitation agreement.
*
*
*
*
*
(b) * * *
(4) * * *
(ii) The purchase of a rehabilitated
loan is not considered a borrower’s
entry into repayment or resumption of
repayment for the purposes of interest
capitalization under § 682.202(b).
*
*
*
*
*
■ 16. Section 682.410 is amended by
revising paragraphs (b)(2) and (4) to read
as follows:
§ 682.410 Fiscal, administrative, and
enforcement requirements.
*
*
*
*
*
(b) * * *
(2) Collection charges. (i) Whether or
not provided for in the borrower’s
promissory note and subject to any
limitation on the amount of those costs
in that note, the guaranty agency may
charge a borrower an amount equal to
the reasonable costs incurred by the
agency in collecting a loan on which the
agency has paid a default or bankruptcy
claim unless, within the 60-day period
following the initial notice described in
paragraph (b)(6)(ii) of this section, the
borrower enters into an acceptable
repayment agreement, including a
PO 00000
Frm 00084
Fmt 4701
Sfmt 4702
rehabilitation agreement, and honors
that agreement, in which case the
guaranty agency must not charge a
borrower any collection costs.
(ii) An acceptable repayment
agreement may include an agreement
described in § 682.200(b) (Satisfactory
repayment arrangement), § 682.405, or
paragraph (b)(5)(ii)(D) of this section.
An acceptable repayment agreement
constitutes a repayment arrangement or
agreement on repayment terms
satisfactory to the guaranty agency,
under this section.
(iii) The costs under this paragraph
(b)(2) include, but are not limited to, all
attorneys’ fees, collection agency
charges, and court costs. Except as
provided in §§ 682.401(b)(18)(i) and
682.405(b)(1)(vi)(B), the amount charged
a borrower must equal the lesser of—
(A) The amount the same borrower
would be charged for the cost of
collection under the formula in 34 CFR
30.60; or
(B) The amount the same borrower
would be charged for the cost of
collection if the loan was held by the
U.S. Department of Education.
*
*
*
*
*
(4) Capitalization of unpaid interest.
The guaranty agency must capitalize
any unpaid interest due on the loan at
the time the agency pays a default claim
to the lender, but must not capitalize
any unpaid interest thereafter.
*
*
*
*
*
PART 685—WILLIAM D. FORD
FEDERAL DIRECT LOAN PROGRAM
17. The authority citation for part 685
continues to read as follows:
■
Authority: 20 U.S.C. 1070g, 1087a, et seq.,
unless otherwise noted.
18. Section 685.200 is amended by
adding paragraphs (f)(3)(v) and (f)(4)(iii)
to read as follows:
■
§ 685.200
Borrower eligibility.
*
*
*
*
*
(f) * * *
(3) * * *
(v) A borrower who receives a closed
school, false certification, unpaid
refund, or defense to repayment
discharge that results in a remaining
eligibility period greater than zero is not
responsible for the interest that accrues
on a Direct Subsidized Loan or on the
portion of a Direct Consolidation Loan
that repaid a Direct Subsidized Loan
unless the borrower once again becomes
responsible for the interest that accrues
on a previously received Direct
Subsidized Loan or on the portion of a
Direct Consolidation Loan that repaid a
Direct Subsidized Loan, for the life of
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the loan, as described in paragraph
(f)(3)(i) of this section.
(4) * * *
(iii) For a first-time borrower who
receives a closed school, false
certification, unpaid refund, or borrower
defense discharge on a Direct
Subsidized Loan or a portion of a Direct
Consolidation Loan that is attributable
to a Direct Subsidized Loan, the
Subsidized Usage Period is reduced. If
the Direct Subsidized Loan or a portion
of a Direct Consolidation Loan that is
attributable to a Direct Subsidized Loan
is discharged in full, the Subsidized
Usage Period of those loans is zero
years. If the Direct Subsidized Loan or
a portion of a Direct Consolidation Loan
that is attributable to a Direct
Subsidized Loan is discharged in part,
the Subsidized Usage Period may be
reduced if the discharge results in the
inapplicability of paragraph (f)(4)(i) of
this section.
*
*
*
*
*
■ 19. Section 685.206 is amended by
revising paragraph (c) and adding
paragraph (d) to read as follows:
§ 685.206 Borrower responsibilities and
defenses.
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*
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(c)(1) In any proceeding to collect on
a Direct Loan first disbursed prior to
July 1, 2019, the borrower may assert as
a borrower defense to repayment, any
act or omission of the school attended
by the student that would give rise to a
cause of action against the school under
applicable State law. These proceedings
include, but are not limited to, the
following:
(i) Tax refund offset proceedings
under 26 U.S.C. 6402(d), 31 U.S.C. 3716
and 3720A.
(ii) Wage garnishment proceedings
under section 488A of the Act or under
31 U.S.C. 3720D and 34 CFR part 34.
(iii) Salary offset proceedings for
Federal employees under 34 CFR part
31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
(iv) Consumer reporting proceedings
under 31 U.S.C. 3711(e).
(2) If a defense to repayment
discharge is approved, the Secretary
determines the amount of financial
relief to be provided and notifies the
borrower that the borrower is relieved of
the obligation to repay all or part of the
loan and associated costs and fees that
the borrower would otherwise be
obligated to pay. The Secretary affords
the borrower such further relief as the
Secretary determines is appropriate
under the circumstances. Further relief
may include, but is not limited to, the
following:
(i) Reimbursing the borrower for
amounts paid toward the loan
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voluntarily or through enforced
collection.
(ii) Determining that the borrower is
not in default on the loan and is eligible
to receive assistance under title IV of the
Act.
(iii) Updating reports to consumer
reporting agencies to which the
Secretary previously made adverse
credit reports with regard to the
borrower’s Direct Loan.
(3) The Secretary may initiate an
appropriate proceeding to require the
school whose act or omission resulted
in an approved defense to repayment
discharge on a Direct Loan to pay to the
Secretary the amount of the loan to
which the defense applies. The
Secretary will not initiate such a
proceeding more than three years after
the last award year in which the student
attended the school, unless the school
received actual notice of the defense to
repayment during that period.
(d)(1) For purposes of this paragraph
(d):
(i) The term ‘‘borrower’’ includes the
student who attended the institution or
the student on whose behalf a parent
borrowed.
(ii) A borrower defense to repayment
includes—
(A) A defense to repayment of
amounts owed to the Secretary on a
Direct Loan; and
(B) Any accompanying request for
reimbursement of payments previously
made to the Secretary on a Direct Loan.
(iii) The term ‘‘provision of
educational services’’ refers to the
educational resources provided by the
institution that are required by an
accreditation agency or a State licensing
or authorizing agency for the
completion of the student’s educational
program.
(iv) The terms ‘‘school’’ and
‘‘institution’’ may be used
interchangeably and include an eligible
institution or school, its officers,
directors, employees, representatives,
and agents, or any institution or school,
organization, or person with whom the
eligible school or institution has an
agreement to provide educational
programs, marketing, advertising,
recruiting, or admissions services.
Alternative A for Paragraph
(d)(2)(Defensive)
(2) In any proceeding to collect on a
Direct Loan first disbursed on or after
July 1, 2019, the borrower may assert a
claim under this section. These
proceedings include the following:
(i) Tax refund offset proceedings
under 26 U.S.C. 6402(d), 31 U.S.C. 3716
and 3720A.
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(ii) Wage garnishment proceedings
under section 488A of the Act or under
31 U.S.C. 3720D and 34 CFR part 34.
(iii) Salary offset proceedings for
Federal employees under 34 CFR part
31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
(iv) Consumer reporting agency
reporting proceedings under 31 U.S.C.
3711(e).
Alternative B for Paragraph (d)(2)
(Defensive and Affirmative)
(2)(i) For loans first disbursed on or
after July 1, 2019, a borrower may assert
a claim under this section if the
borrower establishes by a
preponderance of the evidence that—
(A) The institution at which the
borrower enrolled acted with an intent
to deceive, knowledge of the falsity of
a misrepresentation, or a reckless
disregard for the truth in making a
misrepresentation of material fact,
opinion, intention, or law upon which
the borrower reasonably relied in
deciding to obtain a Direct Loan to
enroll or continue enrollment in a
program at the institution; and
(B) The borrower was financially
harmed by the misrepresentation.
(ii) In any proceeding to collect on a
Direct Loan first disbursed on or after
July 1, 2019, the borrower may assert a
claim under this section. These
proceedings include the following:
(A) Tax refund offset proceedings
under 26 U.S.C. 6402(d), 31 U.S.C. 3716
and 3720A.
(B) Wage garnishment proceedings
under section 488A of the Act or under
31 U.S.C. 3720D and 34 CFR part 34.
(C) Salary offset proceedings for
Federal employees under 34 CFR part
31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
(D) Consumer reporting agency
reporting proceedings under 31 U.S.C.
3711(e).
(3) To assert a borrower defense to
repayment under this paragraph (d), a
borrower must submit an application
under penalty of perjury on a form
approved by the Secretary and sign a
waiver permitting the institution to
provide the Department with items from
the borrower’s education record relevant
to the defense to repayment claim. The
application must—
(i) Certify that the borrower received
the proceeds of a loan, in whole or in
part, to attend the named school;
(ii) Provide evidence that supports the
borrower defense to repayment
application;
(iii) State whether the borrower has
made a claim with any other third party,
such as the holder of a performance
bond, a public fund, or a tuition
recovery program, based on the same act
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or omission of the school on which the
borrower defense to repayment is based;
(iv) State the amount of any payment
received by the borrower or credited to
the borrower’s loan obligation through
the third party, in connection with a
claim described in paragraph (d)(3)(iii)
of this section;
(v) State the amount of harm that the
borrower alleges to have been caused by
the school’s action and supply any
information relevant to assessing this
allegation of harm, including
information about whether the borrower
failed to actively pursue employment in
the field if the borrower is a recent
graduate; whether the borrower was
terminated or removed for performance
reasons from a position in the field for
which the borrower’s education
prepared the borrower, or a related field;
and whether the borrower failed to meet
other requirements of or qualifications
for a job in such field for reasons
unrelated to the school’s action
underlying the borrower defense, such
as the borrower’s ability to pass a drug
test, satisfy criminal history or driving
record requirements, and meet any
health qualifications; and
(vi) State that the borrower
understands that in the event that the
borrower receives a 100 percent
discharge of the loan for which the
defense to repayment application has
been submitted, the institution may
refuse to verify, or to provide an official
transcript that verifies the borrower’s
completion of credits or a credential
associated with the discharged loan.
(4) In the case of a Direct
Consolidation Loan first disbursed on or
after July 1, 2019, a borrower may assert
a borrower defense under the standards
in this paragraph (d) with respect to a
loan that was repaid by the Direct
Consolidation Loan.
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Alternative A for Paragraphs (d)(5)
Introductory Text and (d)(5)(i) and (ii)
(Defensive)
(5) The Secretary will approve the
borrower’s defense to repayment claim
submitted under this paragraph (d) if
the borrower in a collections
proceeding, in the applicable
timeframes for the proceeding,
establishes by a preponderance of the
evidence that—
(i) The institution at which the
student enrolled made a
misrepresentation, upon which the
borrower reasonably relied under the
circumstances in deciding to obtain a
Direct Loan, or a loan repaid by a Direct
Consolidation Loan, for the student to
enroll or continue enrollment in a
program at the institution; and
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(ii) The borrower suffered financial
harm as a result of the
misrepresentation by the school.
Alternative B for Paragraphs (d)(5)
Introductory Text and (d)(5)(i) and (ii)
(Affirmative and Defensive)
(5) The Secretary will approve the
borrower’s defense to repayment claim
submitted under this paragraph (d) if—
(i) In the case of an affirmative claim
made by a borrower in repayment under
paragraph (d)(2)(ii) of this section—
(A) The borrower submits the claim to
the Department within three years from
the date the student is no longer
enrolled at the institution; and
(B) The Secretary finds that a
preponderance of the evidence supports
the approval of a borrower defense to
repayment; or
(ii) In the case of a defensive claim
submitted by a borrower under
paragraph (d)(2)(ii) of this section, the
borrower in a collections proceeding, in
the applicable timeframes for the
proceeding, establishes by a
preponderance of the evidence that—
(A) The institution at which the
student enrolled made a
misrepresentation, upon which the
borrower reasonably relied under the
circumstances in deciding to obtain a
Direct Loan, or a loan repaid by a Direct
Consolidation Loan, for the student to
enroll or continue enrollment in a
program at the institution; and
(B) The borrower suffered financial
harm as a result of the
misrepresentation by the school.
(iii) The Secretary may also consider
evidence otherwise in the possession of
the Secretary, including from the
Department’s internal records or other
relevant evidence obtained by the
Secretary, provided that the Secretary
permits the institution to review and
respond to this evidence and to submit
additional evidence.
(iv) A ‘‘misrepresentation’’ is a
statement, act, or omission by an
eligible school to a borrower that is
false, misleading, or deceptive; that was
made with knowledge of its false,
misleading, or deceptive nature or with
a reckless disregard for the truth; and
that directly and clearly relates to the
making of a Direct Loan, or a loan
repaid by a Direct Consolidation Loan,
for enrollment at the school or to the
provision of educational services for
which the loan was made. Evidence that
a misrepresentation described in
paragraph (d)(5) of this section may
have occurred includes:
(A) Actual licensure passage rates
materially different from those included
in the institution’s marketing materials,
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website, or other communications made
to the student;
(B) Actual employment rates
materially different from those included
in the institution’s marketing materials,
website, or other communications made
to the student;
(C) Actual institutional selectivity
rates or rankings, student admission
profiles, or institutional rankings that
are materially different from those
included in the institution’s marketing
materials, website, or other
communications made to the student;
(D) The inclusion in the institution’s
marketing materials, website, or other
communication made to the student of
specialized, programmatic, or
institutional certifications,
accreditation, or approvals not actually
obtained, or the failure to remove within
a reasonable period of time such
certifications or approvals from
marketing materials, website, or other
communication when revoked or
withdrawn;
(E) The inclusion in the institution’s
marketing materials, website, or other
communication made to the student of
representations regarding the
widespread or general transferability of
credits that are only transferrable to
limited types of programs or institutions
or the transferability of credits to a
specific program or institution when no
reciprocal agreement exists with another
institution or such agreement is
materially different than what was
represented;
(F) A representation regarding the
employability or specific earnings of
graduates without an agreement
between the institution and another
entity for such employment or sufficient
evidence of past employment or
earnings to justify such a representation
or without citing appropriate national
data for earnings in the same field as
provided by an appropriate Federal
agency that provides such data;
(G) A representation regarding the
availability, amount, or nature of any
financial assistance available to students
from the institution or any other entity
to pay the costs of attendance at the
institution that the school does not
fulfill following the enrollment of the
borrower;
(H) A representation regarding the
amount of tuition and fees that the
student would be charged for the
program that is materially different in
amount, method, or timing of payment
from the actual tuition and fees charged
to the student;
(I) A representation that the
institution, its courses, or programs are
endorsed by vocational counselors, high
schools, colleges, educational
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organizations, employment agencies,
members of a particular industry,
students, former students, governmental
officials, the United States armed forces,
or other individuals or entities when the
institution has no permission or is not
otherwise authorized to use such an
endorsement;
(J) A representation regarding the
educational resources provided by the
institution that are required for the
completion of the student’s educational
program that are materially different
from the institution’s actual
circumstances at the time the
representation is made, such as
representations regarding the
institution’s size, location, facilities,
training equipment, or the number,
availability, or qualifications of its
personnel; and
(K) A representation regarding the
nature or extent of prerequisites for
enrollment in a course or program
offered by the institution that are that
are materially different from the
institution’s actual circumstances at the
time the representation is made, or that
the institution knows will be materially
different during the student’s
anticipated enrollment at the
institution.
(v) Financial harm to the borrower has
occurred when the borrower suffers
monetary loss as a consequence of a
misrepresentation described in
paragraph (d)(5) of this section and
defined in paragraph (d)(5)(iv) of this
section. Financial harm does not
include damages for nonmonetary loss,
such as personal injury, inconvenience,
aggravation, emotional distress, pain
and suffering, punitive damages, or
opportunity costs. The Department does
not consider the act of taking out a
Direct Loan as evidence of financial
harm to the borrower. Financial harm is
such monetary loss that is not
predominantly due to intervening local,
regional, or national economic or labor
market conditions as demonstrated by
evidence before the Secretary or
provided to the Secretary by the
borrower or the school. Financial harm
cannot arise from the borrower’s
voluntary decision to pursue less than
full-time work or not to work, or result
from a voluntary change in occupation.
Evidence of financial harm includes the
following circumstances:
(A) Extended periods of
unemployment upon graduating from
the school’s programs that are unrelated
to national or local economic downturns
or recessions;
(B) A significant difference between
the amount or nature of the tuition and
fees that the institution represented to
the borrower that the institution would
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charge or was charging and the actual
amount or nature of the tuition and fees
charged by the institution for which the
Direct Loan was disbursed;
(C) The borrower’s inability to secure
employment in the field of study for
which the institution expressly
guaranteed employment; and
(D) The borrower’s inability to
complete the program because the
institution no longer offers a
requirement necessary for completion of
the program in which the borrower
enrolled and the institution did not
provide for an acceptable alternative
requirement to enable completion of the
program.
(6) The Secretary will not accept the
following as a basis for a borrower
defense to repayment—
(i) A violation by the institution of a
requirement of the Act or the
Department’s regulations for a borrower
defense to repayment under paragraph
(c) or (d) of this section, unless the
violation would otherwise constitute the
basis for a successful borrower defense;
or
(ii) A claim that is not directly and
clearly related to the making of the loan
or the provision of educational services
by the school including, but not limited
to—
(A) Personal injury;
(B) Sexual harassment;
(C) A violation of civil rights;
(D) Slander or defamation;
(E) Property damage;
(F) The general quality of the
student’s education or the
reasonableness of an educator’s conduct
in providing educational services;
(G) Informal communication from
other students;
(H) Academic disputes and
disciplinary matters; and
(I) Breach of contract unless the
school’s act or omission would
otherwise constitute the basis for a
successful defense to repayment under
this section.
(7) Upon receipt of a borrower’s
request for relief based on defense to
repayment, the Department will notify
the school of the pending request,
provide a copy of the borrower’s request
and any supporting documents to the
school, provide a waiver signed by the
student permitting the institution to
provide the Department with items from
the student’s education record relevant
to the defense to repayment claim, and
invite the school to respond and to
submit evidence within the specified
timeframe included in the notice. The
borrower will receive a copy of the
school’s response and related evidence.
(8)(i) The Secretary will provide the
school the information that will be
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37327
considered when determining whether
to grant the borrower defense to
repayment discharge and allow a
reasonable opportunity to respond and
submit additional evidence. This
information may include—
(A) The Department’s internal
records;
(B) The borrower defense to
repayment application and any
supporting evidence submitted by the
borrower;
(C) The response and any supporting
evidence submitted by the school; and
(D) Any other relevant evidence
obtained by the Secretary.
(ii) After considering the borrower’s
application and evidence and any
information or evidence provided by the
school, the Secretary issues a written
decision—
(A) Notifying the borrower and the
school of the decision on the borrower
defense to repayment;
(B) Providing the reasons for the
decision; and
(C) Informing the borrower and the
school of the relief, if any, that the
borrower will receive, consistent with
paragraph (d)(9) of this section.
(9)(i) If the Secretary grants the
borrower’s request for relief based on
defense to repayment, the Secretary
notifies the borrower and the school that
the borrower is relieved of the
obligation to repay all or part of the loan
and associated costs and fees that the
borrower would otherwise be obligated
to pay. In awarding relief, the Secretary
shall consider any payments reported by
the borrower pursuant to paragraph
(d)(3)(iv) of this section.
(ii) The Secretary affords the borrower
such further relief as the Secretary
determines is appropriate under the
circumstances. Further relief includes, if
applicable:
(A) Reimbursing the borrower for
amounts paid toward the loan
voluntarily or through enforced
collection;
(B) Determining that the borrower is
not in default on the loan and is eligible
to receive assistance under title IV of the
Act;
(C) Eliminating or recalculating the
subsidized usage period that is
associated with the loan or loans
discharged; and
(D) Updating reports to consumer
reporting agencies to which the
Secretary previously made adverse
credit reports with regard to the
borrower’s Direct Loan.
(10) The determination of a
borrower’s defense to repayment by the
Department included in the written
decision referenced in paragraph (d)(9)
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of this section is the final decision of the
Department and is not subject to appeal.
(11) The Secretary may revoke any
relief granted to a borrower under this
section who refuses to cooperate with
the Secretary in any proceeding under
paragraph (c) or (d) of this section or
under subpart G of this part. Such
cooperation includes, but is not limited
to—
(i) Providing testimony regarding any
representation made by the borrower to
support a successful borrower defense
to repayment; and
(ii) Producing, within timeframes
established by the Secretary, any
documentation reasonably available to
the borrower with respect to those
representations and any sworn
statement required by the Secretary with
respect to those representations and
documents.
(12)(i) Upon the grant of any relief
under paragraph (c) or (d) of this
section, the borrower is deemed to have
assigned to, and relinquished in favor
of, the Secretary any right to a loan
refund (up to the amount discharged)
that the borrower may have by contract
or applicable law with respect to the
loan or the provision of educational
services for which the loan was
received, against the school, its
principals, its affiliates and their
successors, or its sureties, and any
private fund, including the portion of a
public fund that represents funds
received from a private party. If the
borrower asserts a claim to, and recovers
from, a public fund, the Secretary may
reinstate the borrower’s obligation to
repay on the loan an amount based on
the amount recovered from the public
fund, if the Secretary determines that
the borrower’s recovery from the public
fund was based on the same borrower
defense and for the same loan for which
the discharge was granted under this
section.
(ii) The provisions of this paragraph
(d)(12) apply notwithstanding any
provision of State law that would
otherwise restrict transfer of those rights
by the borrower, limit or prevent a
transferee from exercising those rights,
or establish procedures or a scheme of
distribution that would prejudice the
Secretary’s ability to recover on those
rights.
(iii) Nothing in this paragraph (d)(12)
limits or forecloses the borrower’s right
to pursue legal and equitable relief
arising under applicable law against a
party described in this paragraph (d)(12)
for recovery of any portion of a claim
exceeding that assigned to the Secretary
or any other claims arising from matters
unrelated to the claim on which the
loan is discharged.
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(13)(i) The Secretary may initiate an
appropriate proceeding to require the
school whose misrepresentation
resulted in the borrower’s successful
borrower defense to pay to the Secretary
the amount of the loan to which the
defense applies in accordance with 34
CFR part 668, subpart G. This paragraph
(d)(13) would also be applicable for
provisionally certified institutions.
(ii) The Secretary will not initiate
such a proceeding more than five years
after the date of the final determination
included in the written decision
referenced in paragraph (d)(9) of this
section. The Department will notify the
school of the defense to repayment
application.
(iii) The school must repay the
Secretary the amount of the loan which
has been discharged and amounts
refunded to a borrower for payments
made by the borrower to the Secretary,
unless the school demonstrates that the
Secretary’s decision to approve the
defense to repayment application was
clearly erroneous.
*
*
*
*
*
■ 20. Section 685.212 is amended by
adding paragraph (k) to read as follows:
§ 685.212
Discharge of loan obligation.
*
*
*
*
*
(k) Borrower defenses. (1) If a
borrower’s application for a discharge of
a loan based on a borrower defense is
approved under § 685.206(c) or (d), the
Secretary discharges the obligation of
the borrower, in whole or in part, in
accordance with the procedures
described in § 685.206(c) or (d),
respectively.
(2) [Reserved]
*
*
*
*
*
■ 21. Section 685.214 is amended by:
■ a. Revising paragraphs (c)(1)
introductory text through (c)(1)(i)(C).
■ b. Redesignating paragraphs (c)(1)(ii)
and (iii) as paragraphs (c)(1)(iii) and (iv).
■ c. Adding a new paragraph (c)(1)(ii).
■ d. In paragraph (f)(1), removing the
number ‘‘120’’ and adding, in its place,
the number ‘‘180’’.
■ e. In paragraph (f)(4), removing the
words ‘‘the written request and sworn
statement’’ and adding, in their place,
the words ‘‘a completed application’’.
The revisions and addition read as
follows:
§ 685.214
Closed school discharge.
*
*
*
*
*
(c) Borrower qualifications for
discharge. (1) In order to qualify for
discharge of a loan under this section,
a borrower must submit to the Secretary
a completed application, and the factual
assertions in the application must be
true and made by the borrower under
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penalty of perjury. The application
explains the procedures and eligibility
criteria for obtaining a discharge and
requires the borrower to—
(i) Certify that the borrower (or the
student on whose behalf a parent
borrowed)—
(A) Received the proceeds of a loan,
in whole or in part, on or after January
1, 1986 to attend a school;
(B) Did not complete the program of
study at that school because the school
closed while the student was enrolled,
or the student withdrew from the school
not more than 180 days before the
school closed. The Secretary may
extend the 180-day period if the
Secretary determines that exceptional
circumstances related to a school’s
closing justify an extension. Exceptional
circumstances for this purpose may
include, but are not limited to: The
revocation or withdrawal by an
accrediting agency of the school’s
institutional accreditation, or revocation
or withdrawal of the school’s license to
operate or to award academic
credentials in the State; and
(C) Did not complete the program of
study by transferring academic credits
or hours earned at the closed school to
another school;
(ii) Certify that the school did not
provide the borrower an opportunity to
complete the program of study in which
the borrower was enrolled through a
teach-out plan approved by the school’s
accrediting agency and, if applicable the
school’s State authorizing agency;
*
*
*
*
*
■ 22. Section 685.215 is amended by:
■ a. Revising paragraph (a)(1)(i).
■ b. Revising paragraphs (c)
introductory text through (c)(1)(ii).
■ c. Revising paragraphs (d)(1) through
(3).
The revisions read as follows:
§ 685.215 Discharge for false certification
of student eligibility or unauthorized
payment.
(a) * * *
(1) * * *
(i) Certified eligibility for a Direct
Loan for a student who did not have a
high school diploma or its recognized
equivalent and did not meet the
alternative eligibility requirements
described in 34 CFR part 668 and
section 484(d) of the Act applicable at
the time of disbursement.
*
*
*
*
*
(c) Borrower qualification for
discharge. In order to qualify for
discharge under this section, the
borrower must submit to the Secretary
an application for discharge on a form
approved by the Secretary, and the
factual assertions in the application
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must be true and made under penalty of
perjury. In the application, the borrower
must demonstrate to the satisfaction of
the Secretary that the requirements in
paragraphs (c)(1) through (6) of this
section have been met.
(1) High school diploma or equivalent.
(i) In the case of a borrower requesting
a discharge based on not having had a
high school diploma and not having met
the alternative eligibility requirements,
the borrower must certify that the
borrower (or the student on whose
behalf a parent borrowed)—
(A) Received a disbursement of a loan,
in whole or in part, on or after January
1, 1986, to attend a school; and
(B) Received a Direct Loan at that
school and did not have a high school
diploma or its recognized equivalent,
and did not meet the alternative to
graduation from high school eligibility
requirements described in 34 CFR part
668 and section 484(d) of the Act
applicable at the time of disbursement.
(ii) A borrower does not qualify for a
false certification discharge under
§ 685.215(c)(1) if—
(A) The borrower was unable to
provide the school with an official
transcript or an official copy of the
borrower’s high school diploma or the
borrower was home schooled and has
no official transcript or high school
diploma; and
(B) As an alternative to an official
transcript or official copy of the
borrower’s high school diploma, the
borrower submitted to the school a
written attestation, under penalty of
perjury, that the borrower had a high
school diploma.
*
*
*
*
*
(d) Discharge procedures. (1) If the
Secretary determines that a borrower’s
Direct Loan may be eligible for a
discharge under this section, the
Secretary provides the borrower the
application described in paragraph (c) of
this section, which explains the
qualifications and procedures for
obtaining a discharge. The Secretary
also promptly suspends any efforts to
collect from the borrower on any
affected loan. The Secretary may
continue to receive borrower payments.
(2) If the borrower fails to submit a
completed application within 60 days of
the date the Secretary suspended
collection efforts, the Secretary resumes
collection and grants forbearance of
principal and interest for the period in
which collection activity was
suspended. The Secretary may
capitalize any interest accrued and not
paid during that period.
(3) If the borrower submits a
completed application the Secretary
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determines whether to grant a request
for discharge under this section by
reviewing the application in light of
information available from the
Secretary’s records and from other
sources, including, but not limited to,
the school, guaranty agencies, State
authorities, and relevant accrediting
associations.
*
*
*
*
*
■ 23. Section 685.300 is amended by:
■ a. Revising paragraph (b)(8).
■ b. Removing the word ‘‘and’’ at the
end of paragraph (b)(10).
■ c. Redesignating paragraph (b)(11) as
paragraph (b)(12).
■ d. Adding a new paragraph (b)(11).
The revision and addition read as
follows:
§ 685.300 Agreements between an eligible
school and the Secretary for participation in
the Direct Loan Program.
*
*
*
*
*
(b) * * *
(8) Accept responsibility and financial
liability stemming from its failure to
perform its functions pursuant to the
agreement;
*
*
*
*
*
(11) Accept responsibility and
financial liability stemming from losses
incurred by the Secretary for repayment
of amounts discharged by the Secretary
pursuant to §§ 685.206, 685.214,
685.215, and 685.216; and
*
*
*
*
*
■ 24. Section 685.304 is amended by:
■ a. Revising paragraphs (a)(3)(iii) and
(a)(5).
■ b. Removing the word ‘‘and’’ at the
end of paragraph (a)(6)(xii).
■ c. Redesignating paragraph (a)(6)(xiii)
as paragraph (a)(6)(xvi) and adding
paragraphs (a)(6)(xiii), (xiv), and (xv).
The revision and additions read as
follows:
§ 685.304
Counseling borrowers.
(a) * * *
(3) * * *
(iii)(A) Online or by interactive
electronic means, with the borrower
acknowledging receipt of the
information.
(B) If a standardized interactive
electronic tool is used to provide
entrance counseling to the borrower, the
school must provide to the borrower any
elements of the required information
that are not addressed through the
electronic tool:
(1) In person; or
(2) On a separate written or electronic
document provided to the borrower.
*
*
*
*
*
(5) A school must ensure that an
individual with expertise in the title IV
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programs is reasonably available shortly
after the counseling to answer the
student borrower’s questions. As an
alternative, in the case of a student
borrower enrolled in a correspondence,
distance education, or study-abroad
program approved for credit at the home
institution, the student borrower may be
provided with written counseling
materials before the loan proceeds are
disbursed.
(6) * * *
(xiii) If the school requires borrowers
to enter into a pre-dispute arbitration
agreement, as defined in
§ 668.41(h)(2)(iii) of this chapter, or to
sign a class action waiver, as defined in
§ 668.41(h)(2)(i) and (ii) of this chapter,
the school must provide a written
description of the school’s dispute
resolution process that the borrower has
agreed to pursue as a condition of
enrollment, including the name and
contact information for the individual or
office at the school that the borrower
may contact if the borrower has a
dispute relating to the borrower’s
Federal student loans or to the
educational services for which the loans
were provided;
(xiv) If the school requires borrowers
to enter into a pre-dispute arbitration
agreement, as defined in
§ 668.41(h)(2)(iii) of this chapter, to
enroll in the institution, provides a
written description of how and when
the agreement applies, how the
borrower enters into the arbitration
process, and who to contact if the
borrower has any questions;
(xv) If the school requires borrowers
to sign a class-action waiver, as defined
in § 668.41(2)(h)(i) and (ii) of this
chapter, to enroll in the institution,
explain how and when the waiver
applies, alternative processes the
borrower may pursue to seek redress,
and who to contact if the borrower has
any questions; and
*
*
*
*
*
■ 25. Section 685.308 is amended by
revising paragraph (a) to read as follows:
§ 685.308
Remedial actions.
(a) The Secretary may require the
repayment of funds and the purchase of
loans by the school if the Secretary
determines that the school is liable as a
result of—
(1) The school’s violation of a Federal
statute or regulation;
(2) The school’s negligent or willful
false certification under § 685.215; or
(3) The school’s actions that gave rise
to a successful claim for which the
Secretary discharged a loan, in whole or
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in part, pursuant to §§ 685.206, 685.214,
and 685.216.
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Agencies
[Federal Register Volume 83, Number 147 (Tuesday, July 31, 2018)]
[Proposed Rules]
[Pages 37242-37330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15823]
[[Page 37241]]
Vol. 83
Tuesday,
No. 147
July 31, 2018
Part III
Department of Education
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34 CFR Parts 668, 674, 682, et al.
Student Assistance General Provisions, Federal Perkins Loan Program,
Federal Family Education Loan Program, and William D. Ford Federal
Direct Loan Program; Proposed Rule
Federal Register / Vol. 83 , No. 147 / Tuesday, July 31, 2018 /
Proposed Rules
[[Page 37242]]
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DEPARTMENT OF EDUCATION
34 CFR Parts 668, 674, 682, and 685
RIN 1840-AD26
[Docket ID ED-2018-OPE-0027]
Student Assistance General Provisions, Federal Perkins Loan
Program, Federal Family Education Loan Program, and William D. Ford
Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Secretary proposes to create Institutional Accountability
regulations that would amend the regulations governing the William D.
Ford Federal Direct Loan (Direct Loan) Program to establish a Federal
standard for evaluating and a process for adjudicating borrower
defenses to repayment for loans first disbursed on or after July 1,
2019, and provide for actions the Secretary may take to collect from
schools financial losses due to successful borrower defense to
repayment discharges. The Secretary also proposes to withdraw (i.e.
rescind) certain amendments to the regulations already published but
not yet effective.
DATES: We must receive your comments on or before August 30, 2018.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments submitted by fax or by email or those submitted after
the comment period. To ensure that we do not receive duplicate copies,
please submit your comments only once. In addition, please include the
Docket ID at the top of your comments.
If you are submitting comments electronically, we strongly
encourage you to submit any comments or attachments in Microsoft Word
format. If you must submit a comment in Adobe Portable Document Format
(PDF), we strongly encourage you to convert the PDF to print-to-PDF
format or to use some other commonly used searchable text format.
Please do not submit the PDF in a scanned format. Using a print-to-PDF
format allows the Department to electronically search and copy certain
portions of your submissions.
Federal eRulemaking Portal: Go to www.regulations.gov to
submit your comments electronically. Information on using
Regulations.gov, including instructions for accessing agency documents,
submitting comments, and viewing the docket, is available on the site
under ``Help.''
Postal Mail, Commercial Delivery, or Hand Delivery: The
Department strongly encourages commenters to submit their comments
electronically. However, if you mail or deliver your comments about the
proposed regulations, address them to Jean-Didier Gaina, U.S.
Department of Education, 400 Maryland Ave. SW, Mail Stop 294-20,
Washington, DC 20202.
Privacy Note: The Department's policy is to make comments received
from members of the public available for public viewing on the Federal
eRulemaking Portal at www.regulations.gov. Therefore, commenters should
be careful to include in their comments only information that they wish
to make publicly available.
FOR FURTHER INFORMATION CONTACT: For further information related to
Borrower Defenses to Repayment, Pre-dispute Arbitration Agreements,
Internal Dispute Processes, and Guaranty Agency Fees, Barbara
Hoblitzell at (202) 453-7583 or by email at: [email protected]
or Annmarie Weisman at (202) 453-6712 or by email at:
[email protected]. For information related to False Certification
Loan Discharge, and Closed School Loan Discharge, Brian Smith at (202)
453-7440 or by email at: [email protected]. For information regarding
Financial Responsibility and Institutional Accountability, John Kolotos
at (202) 453-7646 or by email at: [email protected]. For information
regarding Recalculation of Subsidized Usage Periods and Interest
Accrual, Ian Foss at (202) 377-3681 or by email at: [email protected].
If you use a telecommunications device for the deaf (TDD) or a text
telephone (TTY), call the Federal Relay Service (FRS), toll free, at
(800) 877-8339.
SUPPLEMENTARY INFORMATION:
Executive Summary
Purpose of This Regulatory Action:
Section 455(h) of the Higher Education Act of 1965, as amended
(HEA), authorizes the Secretary to specify in regulation which acts or
omissions of an institution of higher education a borrower may assert
as a defense to repayment of a Direct Loan. Current regulations in 34
CFR 685.206(c) governing defenses to repayment have been in effect
since 1995 but, until recently, were rarely used. Those regulations
specify that a borrower may assert as a defense to repayment ``any act
or omission of the school attended by the student that would give rise
to a cause of action against the school under applicable State law.''
On November 1, 2016, the Department published final regulations (81
FR 75926) (the 2016 final regulations) on the topic of borrower
defenses to repayment. The 2016 final regulations were developed
following negotiated rulemaking and after receiving and considering
public comments on a notice of proposed rulemaking. Certain provisions
of the 2016 final regulations have been delayed until July 1, 2019 (83
FR 6458).
These proposed regulations are designed to:
Provide students with a balanced, meaningful process that
relies on a single, Federal standard rather than 50 State standards to
ensure that borrower defense to repayment discharges are handled
swiftly, carefully, and fairly;
Encourage students to seek remedies from institutions that
have committed acts or omissions that constitute misrepresentation and
cause harm to the student;
Ensure that institutions rather than taxpayers bear the
burden of billions of dollars \1\ in losses from approvals of borrower
defense to repayment discharges;
---------------------------------------------------------------------------
\1\ The Department estimated that borrower defense activity
under the 2016 final regulation would have an estimated $14.9
billion net budget impact for the 2017 to 2026 loan cohorts. 71 FR
76055.
---------------------------------------------------------------------------
Enable institutions to respond to borrower defense to
repayment claims and provide evidence to support their response;
Discourage institutions from committing fraud or other
acts or omissions that constitute misrepresentation or from closing
precipitously;
Enable the Department to properly evaluate institutional
financial risk in order to protect students and taxpayers;
Provide students with additional time to qualify for a
closed school loan discharge;
Address the concerns expressed by negotiators, as well as
in a suit filed by an association against the Department, that large
financial liabilities resulting from the unclear borrower defense
standard in the 2016 final regulations could cripple or force the
closure of colleges and universities, even as they produce positive
outcomes for students and provide students with accurate and complete
information relating to enrollment;
Reduce uncertainty about the future of the Federal
financial aid system itself due to the strain on the government of
large numbers of borrower defense to repayment discharges; and
[[Page 37243]]
Most of all, to ensure that millions of American students
and borrowers are provided with accurate information to inform their
enrollment decisions and to ensure that students are not subjected to
narrowed educational options as a result of unwarranted school
closures.
The goal of the Department is to enable students to make informed
decisions on the front end of college enrollment, rather than to grant
them financial remedies after-the-fact when lost time cannot be
recouped and new educational opportunities may be sparse. Postsecondary
students are adults who can be reasonably expected to make informed
decisions and who must take personal accountability for the decisions
they make. Institutions are prohibited from misleading students by
providing false or incomplete information, and remedies should be
provided to a student when misrepresentation on the part of an
institution causes financial harm to that student. Regardless, students
have a responsibility when enrolling at an institution or taking
student loans to be sure they have explored their options carefully and
weighed the available information to make an informed choice. The
Department has an obligation to enforce the Master Promissory Note,
which makes clear that students are not relieved of their repayment
obligations if later they regret the choices they made.
Through these proposed regulations, the Department is considering
whether to reaffirm the Department's original interpretation of the
statute, which persisted for 20 years and provided borrowers an
opportunity to raise defenses to the repayment of Direct Loans only in
response to collection actions by the Department, or to continue with
the Department's 2015 interpretation, which allowed borrowers to raise
defenses to repayment in affirmative claims. The Department adopted
that interpretation in response to advocacy efforts on behalf of
student borrowers who had attended institutions owned by Corinthian
Colleges, Inc., but without negotiated rulemaking.
This new interpretation to allow affirmative claims was codified in
the Department's 2016 final regulations. The 2015 reinterpretation was
designed to expand loan forgiveness for borrowers who had attended
Corinthian institutions, which, following a sequence of events, closed
precipitously after the Department placed the institutions on HCM1
status and added a delay in title IV reimbursement that is typically
not associated with HCM1. The Department's closed school loan discharge
regulations provide that a student who was attending a school at the
time of its closure, who did not complete his or her program of study
prior to the school's closure, and who meets other criteria may receive
a discharge of Federal student loans obtained for the student's
enrollment at the institution. 34 CFR 674.33, 682.402, and 685.214. But
the Department wished to extend loan forgiveness to borrowers who may
not have qualified for this closed school loan discharge, so it created
new policies for accepting affirmative claims.
The Department's experience with these affirmative claims has
informed this NPRM. That experience has led the Department to realize
that a clear Federal standard is required in order to adjudicate
borrower defense claims in a fair and equitable manner. The Department
has also heard concerns during the process about the Department's
statutory authority to adjudicate these claims in an affirmative
posture and about whether the process for adjudicating these claims
appropriately balances the competing interests of borrowers,
institutions, and taxpayers.
Among other issues enumerated throughout this document, the
Department is concerned that a process that allows for borrowers to
submit affirmative claims, where there are minimal consequences for
submitting an unjustified claim, could potentially create improper
incentives for borrowers with unsubstantiated allegations against
schools to seek loan discharges. For example, a borrower may attempt to
seek loan forgiveness simply because he or she is dissatisfied with the
education received or with his or her ability to get a particular job,
rather than as a result of a misrepresentation by the institution. This
situation could easily increase the burden on the Department of
identifying legitimate claims among those that do not meet the defense
to repayment standard. And with nothing to lose by submitting a claim,
a borrower could be tempted to submit a claim whether or not he or she
has been harmed. The Department does not have sufficient information to
determine the extent of this potential incentive effect. As of January
2018, it had received 138,989 claims, of which 23 percent had been
processed, and only 2 percent of the processed claims were associated
with schools other than Corinthian and ITT, but that targeted rather
than random sample is insufficiently representative to support
conclusions on the issue at this point.
In any case, an influx of affirmative claims could itself cause
harm to borrowers. For example, even if the Department can accurately
distinguish between genuine and frivolous claims, the time it takes to
do so may prolong the time it takes to provide relief to deserving
borrowers. And borrowers not entitled to relief may find themselves
worse off if they receive a forbearance while the claim was being
processed, because interest would accrue and increase the amount the
borrower would be required to repay when the loan reenters repayment.
In addition, the Department is concerned that several features of
the 2016 final regulations might have put the Department in the
untenable position of forgiving billions of dollars of Federal student
loans based on potentially unfounded accusations. Specifically, those
regulations would allow the Department to afford relief to borrowers
without providing an opportunity for institutions to adequately tell
their side of the story. And they would allow the Department to afford
relief to entire groups of borrowers, including those who did not apply
for relief or who were potentially not harmed by the institution.
However, despite these concerns, the Department is considering the
continuation of its current practice of accepting affirmative claims
from borrowers not in a collections status. A policy that limits
borrower defense eligibility to defensive claims may have the
unintended effect of treating borrowers harmed by a misrepresentation
who default on their loans better than other defrauded borrowers who
stay out of default by responsibly enrolling in income-driven repayment
plans and making payments on their loan.
In addition, lessons learned from the recent mortgage crisis raise
concerns that limiting borrower defense eligibility to defensive claims
could lead some relief-seeking borrowers to strategically default.
Researchers observed similar strategic behavior by homeowners in
response to a 2008 mortgage modification program offered by a large
financial institution to borrowers who were at least sixty days
delinquent.\2\ The study found that the program's structure, which
relied on the borrower's repayment status, yielded a thirteen percent
increase in the probability of that financial institution's borrowers
rolling over from current to delinquent status--evidence of strategic
behavior by borrowers aiming to take advantage of mortgage
modifications. A
[[Page 37244]]
similar behavioral response from relief-seeking borrowers choosing to
enter default could result in a range of troubling unintended
consequences, including damage to borrower credit scores, increased
default collection costs for taxpayers, and increases to institutional
cohort default rates.
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\2\ https://www.nber.org/papers/w17065.pdf.
---------------------------------------------------------------------------
The Department is trying very carefully to balance relief for
borrowers who have been harmed by acts of institutional wrongdoing,
with its obligation to the taxpayer to provide reliable stewardship of
Federal dollars. With more than a trillion dollars in outstanding
student loans, the Department must uphold its fiduciary
responsibilities and exercise caution in forgiving student loans to
ensure that it does not create an existential threat to a program that
lacks typical credit and underwriting standards.
With so much at stake for all parties, it seems reasonable that
consumer complaints should continue to be adjudicated through existing
legal channels that put experienced judges or arbitrators in the
position of weighing the evidence and rendering an impartial decision.
Significant reputational damage could be done to an institution from an
affirmative borrower defense claim long before an institution is given
an opportunity to contest that claim in a recoupment proceeding. Such
damage could weaken or even force institutions to close, regardless of
the truth, extent, or other circumstances surrounding the unverified
claims. And if the institution prevails in a recoupment proceeding, it
is the taxpayer who is left responsible for the claims the Department
approved in error.
These concerns have led the Department to reconsider and seek
public comment on whether it should reaffirm the Department's original
interpretation of the statute, which provided borrowers an opportunity
to raise defenses to the repayment of Direct Loans only in response to
collection actions by the Department. The Department is interested in
comments about its statutory authority to consider defenses to the
repayment of Direct Loans in an affirmative posture, and about the
risks and benefits of doing so.
However, the Department is also considering continuing to accept
affirmative claims from borrowers not in a collections action. In
either case, the Department would need to implement provisions that
would protect institutions and taxpayers against frivolous claims. Our
initial review of pending claims suggests that some borrowers may
believe that the process allows for a discharge based on a borrower's
dissatisfaction with the education he or she received or the outcomes
he or she realized following enrollment, even in the absence of a
misrepresentation on the part of the institution. That is not the case.
As stated in the Master Promissory Note the borrower signs when
initiating their first loan, the borrower is expected to repay the loan
even if the borrower fails to complete the program or is dissatisfied
with the institution or his or her outcomes. The Department seeks
comments from the public regarding what types of provisions or
requirements could be used to reduce frivolous claims while still
ensuring a borrower a fair and meaningful opportunity to seek relief in
the event of fraud.
The Department is also proposing to change its approach to a
possible group adjudication of borrower defense claims. The 2016 final
regulations would enable the Department to initiate affirmative claims
on behalf of entire groups of borrowers, if the Secretary determines
that there are common facts and claims that apply to the group.
However, in this NPRM, the Department is proposing a uniform standard
based on a misrepresentation made with knowledge of its false,
misleading, or deceptive nature or with a reckless disregard for the
truth. As this proposed standard is dependent upon a fact-specific
inquiry, the Department does not believe that the group process is
appropriate to include in these proposed regulations. Further, a group
discharge process could place an extraordinary burden on both the
Department and the taxpayer, and the Department has reconsidered
whether such a process appropriately balances the need to reduce burden
on borrowers and the Department with the obligation to protect taxpayer
funds. Because an institution can refuse to provide an official
transcript for a borrower whose loan has been forgiven, group
discharges could render some borrowers unable to verify their
credentials or work in the field for which they trained and have
enjoyed employment.
Moreover, the Department believes that a review of claims on an
individual basis is necessary to ensure that it affords appropriate
relief to borrowers who suffered harm from an alleged
misrepresentation. Since publication of the 2016 final regulations, the
Department has conducted further analyses of the tens of thousands of
defense to repayment applications for Corinthian students that the
Department has received to date. Those analyses have demonstrated that
students enrolled at Corinthian who submitted defense to repayment
applications may not all have been harmed to the same extent. An
individual process would offer all borrowers fair and equal access to
defense to repayment relief. And these proposed regulations would not
eliminate the opportunity for Corinthian or other students with loans
first disbursed prior to July 1, 2019, to seek debt relief under the
2015 interpretation of the regulation.
The Department proposes a new Federal standard to govern claims on
loans made after July 1, 2019 based on an alleged misrepresentation.
Under that standard, a borrower may assert as a defense to repayment an
eligible institution's misrepresentation--that is, a statement, act, or
omission by the school to the borrower that is (i) false, misleading,
or deceptive, (ii) made with knowledge of its false, misleading, or
deceptive nature or with a reckless disregard for the truth, and (iii)
directly and clearly related to the making of a Direct Loan for
enrollment at the school or the provision of educational services for
which the loan was made. To relate to the ``provision of educational
services,'' a misrepresentation must relate to the borrower's program
of study. Such misrepresentations can relate, for example, to the
educational resources provided by the institution that are required by
an accreditation agency or a State licensing or authorizing agency for
the completion of the student's educational program.
The proposed standard for a borrower defense discharge differs from
the standard selected in the 2016 final regulations, which was based on
the Department's authority during enforcement actions. The 2016 final
regulations adopted the misrepresentation standard at 34 CFR 668.71,
and provided that defenses to repayment may additionally be based upon
breaches of contract and certain types of judgments. The proposed
standard would not provide for a defense to repayment based on such
breaches of contract or other judgments. Instead, such breaches or
judgments may be considered as evidence of a misrepresentation, to the
extent they bear on an act or omission related to the educational
services provided. The Department believes this approach will assist it
to quickly and fairly review each and every application and provide
equitable relief to borrowers who were harmed.
The Department's proposed standard also does not distinguish
between the types of institutions that committed the misrepresentation.
Appendix A of the 2016 final regulations, by contrast, took the
position that a student who attended a selective, non-profit
institution would
[[Page 37245]]
not receive debt relief even if the institution committed an act that
would otherwise entitle the borrower a defense to repayment because, in
the opinion of the Department, the education received was valuable
despite the misrepresentation. We cannot adequately support assumptions
about the inherent quality of any institution, including a selective
non-profit institution. The Department accordingly does not propose to
maintain this position.
The Department does propose to maintain the standard of evidence or
proof required to make a successful claim that was included in the 2016
final regulations--a preponderance of the evidence. The Department
believes that this standard will allow claims to be asserted and
handled in a manner that is genuinely fair to students, taxpayers, and
institutions, especially since a borrower in collections could have
left the institution many years prior to making a claim, which would
make it exceedingly difficult to meet a higher evidentiary standards.
However, if the Department chooses to continue to accept affirmative
claims, where barriers to submitting such claims are very low and there
are no penalties for a borrower who submits an unjustified claim, the
Department believes that a higher evidentiary standard may be
appropriate. The Department seeks comments from the public about
whether or not a clear and convincing evidence standard would be
appropriate if the Department chooses to continue to accept affirmative
claims and, if so, whether that clear and convincing standard should
apply solely to affirmative claims or to both affirmative and defensive
claims.
Finally, the Department proposes to limit the period of time during
which the Secretary may recoup funds discharged under these
regulations. Specifically, for loans disbursed on or after July 1,
2019, the Secretary would have five years from the date of the final
determination on a borrower's defense to repayment application to
initiate a proceeding to recover from the school the amount of the
losses incurred by the Secretary on the discharged loans.
In addition to the changes to the borrower defense regulations
discussed above, we seek in this NPRM to strengthen the Department's
ability to protect the Federal taxpayer from the consequences of a
school's precipitous closure by amending the Department's financial
responsibility regulations. The proposed regulations identify actions
or events that the Secretary may consider in determining whether a
school is financially responsible, provide that the Secretary may
accept other types of surety or financial protection in lieu of letters
of credit, clarify that the Department may impose a limitation on a
school by changing a school's participation status from ``fully
certified'' to ``provisionally certified'', and update the Department's
regulations as to initial and final decisions that may be made by a
hearing official in a fine, limitation, suspension, or termination
proceeding to incorporate the proposed alternate means of financial
protection to the Department. These proposed regulations balance the
need for consumer protection, regulatory enforcement, and fairness to
schools. They seek to hold schools accountable, provide prospective and
continuing students with information necessary to make informed
choices, and mitigate actions that pose an existential threat to
institutions. A school's precipitous closure--as opposed to a well-
planned, accreditor approved teach-out--puts students, borrowers, and
taxpayers at unnecessary risk.
Further, through these proposed regulations, the Department seeks
to encourage schools that are closing to go through an orderly closure,
which includes offering appropriate teach-outs to their students. Since
2015, precipitous closures have led to large numbers of defense to
repayment and closed school discharge applications. We believe that
closing schools should be encouraged to offer accreditor-approved and,
if applicable, State authorizer-approved teach-out plans. Such plans
allow students the reasonable opportunity to complete their academic
programs, either at another location after the school has closed or
through an orderly wind-down process before the school officially
closes.
We also propose changes to the Department's current false
certification regulations. The Department believes that in cases when
the borrower is unable to obtain an official transcript or diploma from
the high school, postsecondary institutions should be able to rely on
an attestation from a borrower that the borrower earned a high school
diploma since the Department relies on a similar attestation in
processing a student's Free Application for Federal Student Aid
(FAFSA). This policy change provides assurances to students that they
will have a reasonable opportunity to pursue postsecondary education
when they cannot obtain an official transcript or diploma, and to
institutions that they will not face significant liabilities years
later if a student's status cannot be verified. Therefore, we are
proposing regulatory language that when a borrower provides an
institution an attestation of his or her high school graduation status
for purposes of admission to the institution, the borrower may not
subsequently qualify for a false certification discharge based on not
having a high school diploma.
We do not propose to adopt the changes relating to pre-dispute
arbitration agreements and class action waivers that are in the 2016
final regulations. In those regulations, the Department took the
position that the HEA gives the Department broad authority to impose
conditions on schools that wish to participate in a Federal benefit
program and that regulation of the use of pre-dispute arbitration
agreements and class action waivers was necessary to ``protect the
interests of the United States and promote the purposes'' of the Direct
Loan Program under Section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6).
We continue to recognize, as explained in the preamble to the 2016
final regulations, that pre-dispute arbitration agreements and class
action waivers, in some circumstances, may not be well understood by
consumers and may not facilitate the Department's awareness of
potential issues faced by students at a school. However, in re-weighing
all applicable factors, including the current legal landscape, we have
determined that the Department should take a position more in line with
the benefits of arbitration and the strong Federal policy favoring it.
Several potential benefits of arbitration are relevant here.
Arbitration is often a more efficient and less adversarial means of
dispute resolution than time-consuming and expensive litigation that
may result in borrowers waiting years to obtain a fair hearing and any
relief. Arbitration may also allow borrowers to obtain greater relief
than they would in a consumer class action case where attorneys often
benefit most. Moreover, arbitration may reduce the expense of
litigation that a university would otherwise pass on to students in the
form of higher tuition and fees. Arbitration also eases burdens on the
overtaxed U.S. court system.
For all of these reasons, the Department has decided that the 2016
final regulations' provisions on class action waivers and pre-dispute
arbitration should not be included in these proposed regulations. As
stated above, we believe that borrower defense to repayment should be a
last resort for borrowers. Arbitration is one means of dispute
resolution through which borrowers may be able to obtain relief without
filing a defense to repayment
[[Page 37246]]
with the Department. The Department does not propose to prevent that
means. But because pre-dispute arbitration agreements or class-action
waivers may limit the availability of certain alternative means of
dispute resolution, we propose changes that would provide borrowers
with a better understanding of the dispute resolution processes
available to them when they enroll at a school.
The proposed regulations also update the appendices to subpart L of
34 CFR part 668 to account for changes in accounting standards and
terminology.
Incorporation by Reference
In proposed Sec. 668.175(d) with respect to the zone alternative,
we reference the following accounting standards: FASB ASC 850,
Accounting Standards Update (ASU) 2015-01, and ASC 225. FASB ASC 850
addresses disclosures of transactions between related parties. These
disclosures are considered to be related party transactions even though
they may not be given accounting recognition. While not providing
accounting or measurement guidance for such transactions, FASB ASC 850
requires their disclosure nonetheless.
Accounting Standards Update (ASU) No. 2015-01 addresses
extraordinary and unusual items, to simplify income statement
classification by removing the concept of extraordinary items from
United States generally accepted accounting principles (U.S. GAAP).
ASC 225 provides general income statement guidance. Specifically,
it addresses the classification and resulting presentation and
disclosure of extraordinary events and transactions. It also addresses
the presentation and disclosure of unusual and infrequently occurring
items that do not meet the extraordinary criteria, and speaks to
business interruption insurance. The types of costs and losses covered
by business interruption insurance typically include items such as
gross margin that was lost or not earned due to the suspension of
normal operations.
These items are accessible to the public on the Financial
Accounting Standards Board (FASB) website, www.fasb.org.
Summary of the Major Provisions of This Regulatory Action:
For the Direct Loan Program, we propose new regulations governing
borrower defenses that would--
Establish a new Federal standard for borrower defenses to
repayment submitted by borrowers with loans first disbursed on or after
July 1, 2019;
Establish a process for the assertion and resolution of
borrower defenses to repayment for loans first disbursed on or after
July 1, 2019;
Provide schools and borrowers with opportunities to
provide evidence and arguments when a defense to repayment application
has been filed and to provide an opportunity for each to respond to the
other's submitted evidence;
Require a borrower to sign an attestation to ensure that
financial harm is not the result of the borrower's workplace
performance, disqualification for a job for reasons unrelated to the
education received, a personal decision to work less than full-time or
not at all, or the borrower's decision to change careers.
Establish a time limit for the Secretary to initiate an
action to collect from the responsible school the amount of any loans
first disbursed on or after July 1, 2019, that are subject to a
successful borrower defense to repayment discharge for which the school
is liable;
Provide for remedial actions the Secretary may take to
collect from the responsible school the amount of any loans subject to
a successful borrower defense to repayment discharge for which the
school is liable; and
Establish institutional responsibility and financial
liability for losses incurred by the Secretary for repayment of loan
amounts discharged by the Secretary on the basis of a borrower defense
to repayment discharge.
The proposed regulations would also revise the Student Assistance
General Provisions regulations to--
Provide for schools that require Federal student loan
borrowers to sign pre-dispute arbitration agreements or class action
waivers as a condition of enrollment to make a plain language
disclosure of those requirements to prospective and enrolled students
and place that disclosure on its website where information regarding
admissions and tuition and fees is presented; and
Provide for schools that require Federal student loan
borrowers to sign pre-dispute arbitration agreements or class action
waivers as a condition of enrollment to include information in the
borrower's entrance counseling regarding the school's internal dispute
and arbitration processes.
Amend the financial responsibility provisions to establish
the conditions or events that have or may have an adverse material
effect on an institution's financial condition and which warrant
financial protection for the Department, update the definitions of
terms used to calculate an institution's composite score to conform
with changes in accounting standards but provide a six year phase-in to
enable the Department adequate time to update the Composite Score
regulations accordingly through future negotiated rulemaking, and
expand the types of financial protection acceptable to the Secretary.
The proposed regulations would also--
Revise the Perkins Loan, FFEL, and Direct Loan programs'
closed school discharge regulations to extend the window for a borrower
to qualify for a closed school discharge to 180 days;
Revise the Perkins Loan, FFEL, and Direct Loan programs'
closed school discharge regulations to specify that if a closing school
provides an opportunity to complete the program of study approved by
the school's accrediting agency and, if applicable, the school's State
authorizing agency, the borrower would not qualify for a closed school
discharge;
Modify the conditions under which a Direct Loan borrower
may qualify for a false certification discharge by specifying that, in
cases when the borrower could not reasonably provide the school an
official transcript or diploma from the borrower's high school, but
provided an attestation to the school that the borrower was a high
school graduate, the borrower would not qualify for a false
certification discharge based on not having a high school diploma;
Prohibit guaranty agencies from charging collection costs
to a defaulted borrower who enters into a repayment agreement with the
guaranty agency within 60 days of receiving notice of default from the
agency;
Prohibit guaranty agencies from capitalizing interest on a
loan that is sold following the completion of loan rehabilitation;
Reflect the Department's policy regarding the impact that
a discharge of a Direct Subsidized Loan has on the 150 Percent Direct
Subsidized Loan Limit; and
Update composite score calculations to reflect recent
changes in FASB accounting standards and provide for a six year phase-
in process to provide the Department sufficient time to update the
Composite Score regulations accordingly through negotiated rulemaking.
In addition, for the reasons set forth below, we propose to
withdraw (i.e., rescind) specified provisions of the final regulations
we published on November 1, 2016 (81 FR 75926) (the 2016 final
regulations) that were delayed until July 1, 2019, pertaining to
borrower defenses to repayment and related issues.
[[Page 37247]]
Please refer to the Summary of Proposed Changes section of this
notice of proposed rulemaking (NPRM) for more details on the major
provisions contained in this NPRM.
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 defense to repayment applications; (2)
improved financial protections for the Federal government and taxpayers
by requiring institutions to incur the losses associated with a
successful defense to repayment application and reducing the likelihood
of taxpayers incurring costs related to paying claims submitted by
students who were not harmed; (3) additional information to help
students, prospective students, and their families make educated
decisions based on information about a school's mandatory arbitration
or class action waiver requirements and to effectively use arbitration
when necessary; (4) an extended window for a borrower to qualify for a
closed school discharge and revisions incentivizing completion of
educational programs; (5) revised conditions under which a Direct Loan
borrower may qualify for a false certification discharge to ensure that
students who are unable to obtain a high school transcript have an
opportunity to participate in postsecondary education and that a
student's intentional misrepresentation of his or her high school
graduation status cannot then be used to justify a false certification
discharge; (6) restrictions on guaranty agencies from charging
collection costs to a defaulted borrower who enters into a repayment
agreement with the guaranty agency within 60 days of receiving notice
of default from the agency, and from capitalizing interest on a loan
that is sold following the completion of loan rehabilitation; (7)
recalculating subsidized usage periods, as appropriate, when a borrower
has received a loan discharge; and (8) updating the calculation of
composite scores to reflect changes in FASB standards, but also
providing a six-year phase in to provide time for the Department to
update its composite score regulations through future negotiated
rulemaking.
Costs include the paperwork burden associated with the required
reporting and disclosures to ensure compliance with the proposed
regulations, the cost to affected schools of providing financial
protection, and the cost to taxpayers of borrower defense claims that
are not reimbursed by schools. There may also be costs to borrowers who
may be reluctant to go into default, even if they have a claim that
would result in loan relief or partial loan relief, and therefore do
not benefit from that loan relief. There may also be costs to borrowers
who use the legal system to seek damages from an institution rather
than relying on the government to adjudicate consumer complaints.
Invitation to Comment: We invite you to submit comments regarding
these proposed regulations.
To ensure that your comments have maximum effect in developing the
final regulations, we urge you to identify clearly the specific section
or sections of the proposed regulations that each of your comments
addresses, and provide relevant information and data whenever possible,
even when there is no specific solicitation of data and other
supporting materials in the request for comment. We also urge you to
arrange your comments in the same order as the proposed regulations.
Please do not submit comments that are outside the scope of the
specific proposals in this NPRM, as we are not required to respond to
such comments.
We invite you to assist us in complying with the specific
requirements of Executive Orders 12866 and 13563 and their overall
requirement of reducing regulatory burden that might result from these
proposed regulations. Please let us know of any further ways we could
reduce potential costs or increase potential benefits while preserving
the effective and efficient administration of the Department's programs
and activities.
During and after the comment period, you may inspect all public
comments about the proposed regulations by accessing Regulations.gov.
You may also inspect the comments in person at 400 Maryland Ave. SW,
Washington, DC, between 8:30 a.m. and 4:00 p.m., Eastern Time, Monday
through Friday of each week except Federal holidays. To schedule a time
to inspect comments, please contact one of the persons listed under FOR
FURTHER INFORMATION CONTACT.
Assistance to Individuals with Disabilities in Reviewing the
Rulemaking Record: On request, we will provide an appropriate
accommodation or auxiliary aid to an individual with a disability who
needs assistance to review the comments or other documents in the
public rulemaking record for the proposed regulations. To schedule an
appointment for this type of accommodation or auxiliary aid, please
contact one of the persons listed under FOR FURTHER INFORMATION
CONTACT.
Background
The Secretary proposes to amend parts 668, 674, 682, and 685 of
title 34 of the Code of Federal Regulations (CFR). The regulations in
34 CFR part 668 pertain to Student Assistance General Provisions. The
regulations in 34 CFR part 674 pertain to the Perkins Loan Program. The
regulations in 34 CFR part 682 pertain to the FFEL Program. The
regulations in 34 CFR part 685 pertain to the Direct Loan Program.
We are proposing these amendments to: (1) Specify that the standard
used to identify an act or omission of a school that provides the basis
for a borrower defense to repayment discharge will depend on when the
Direct Loan was first disbursed; (2) establish a new Federal standard
that the Department will use to determine whether a school's act or
omission constitutes a basis for a borrower defense to repayment
discharge for loans disbursed on or after July 1, 2019; (3) provide an
opportunity for an institution to know that a defense to repayment
application has been lodged against it and to respond to claims made in
that application; (4) establish the procedures to be used by a borrower
to initiate a borrower defense to repayment application for loans first
disbursed on or after July 1, 2019; (5) establish a time limit for the
Secretary to initiate action to collect from the responsible school the
amount of any loans first disbursed on or after July 1, 2019 that are
subject to an approved borrower defense to repayment discharge; (6)
establish the procedures that the Department would use to determine the
liability of a school for the amount of any loan discharges and
reimbursement of loan payments resulting from successful borrower
defenses to repayment; (7) establish the conditions or events upon
which an institution is or may be required to provide to the Department
financial protection, such as a letter of credit, to help protect the
Federal government and taxpayers, against potential institutional
liabilities; (8) institute requirements to ensure borrowers are
informed and educated about pre-dispute arbitration agreements and
class action waivers that students are required to sign by the school
as a condition of enrollment; (9) revise the closed school discharge
regulations to extend the window for a borrower to qualify for a closed
school discharge and specify that if a closing school provides a
borrower an opportunity to complete his or her academic program through
a teach-out plan approved by the school's accrediting agency and, if
applicable, the school's State
[[Page 37248]]
authorizing agency, the borrower would not qualify for a closed school
discharge; (10) amend the eligibility criteria for the false
certification loan discharge by specifying that, in cases when a
borrower could not provide the school an official high school
transcript or diploma but provided an attestation that the borrower was
a high school graduate, the borrower would not qualify for a false
certification discharge based on not having a high school diploma; (11)
clarify the conditions under which FFEL Program loan holders may
capitalize the interest due on a loan to be consistent with the
Department's practice for loans it holds; (12) reflect the conditions
under which the discharge of a Direct Subsidized Loan will lead to the
elimination or recalculation of a Subsidized Usage Period under the 150
Percent Direct Subsidized Loan Limit or the restoration of interest
subsidy; and (13) prohibit guaranty agencies from charging collection
costs if a borrower enters into a repayment agreement within 60 days of
the default notice.
Public Participation
On June 16, 2017, we published a notification in the Federal
Register (82 FR 27640) announcing our intent to establish a negotiated
rulemaking committee under section 492 of the HEA to revise the
regulations on borrower defenses to repayment of Federal student loans
and other matters, and on the authority of guaranty agencies in the
FFEL Program to charge collection costs to defaulted borrowers under 34
CFR 682.410(b)(6). We also announced two public hearings at which
interested parties could comment on the topics suggested by the
Department and suggest additional topics for consideration for action
by the negotiated rulemaking committee. The hearings were held on--
July 10, 2017, in Washington, DC; and
July 12, 2017, in Dallas, TX.
Transcripts from the public hearings are available at www2.ed.gov/policy/highered/reg/hearulemaking/2017/.
We also invited parties unable to attend a public hearing to submit
written comments on the proposed topics and to submit other topics for
consideration. Written comments submitted in response to the June 16,
2017, Federal Register notification may be viewed through the Federal
eRulemaking Portal at www.regulations.gov, within docket ID ED-2017-
OPE-0076. Instructions for finding comments are also available on the
site under ``How to Use Regulations.gov'' in the Help section.
On August 30, 2017, we published a notification in the Federal
Register (82 FR 41194) requesting nominations for negotiators to serve
on the negotiated rulemaking committee and setting a schedule for
committee meetings.
Negotiated Rulemaking
Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to
obtain public involvement in the development of proposed regulations
affecting programs authorized by title IV of the HEA. After obtaining
extensive input and recommendations from the public, including
individuals and representatives of groups involved in the title IV, HEA
programs, the Secretary in most cases must subject the proposed
regulations to a negotiated rulemaking process. If negotiators reach
consensus on the proposed regulations, the Department agrees to publish
without alteration a defined group of regulations on which the
negotiators reached consensus unless the Secretary reopens the process
or provides a written explanation to the participants stating why the
Secretary has decided to depart from the agreement reached during
negotiations. Further information on the negotiated rulemaking process
can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
On August 30, 2017, the Department published a notification in the
Federal Register (82 FR 41194) announcing its intention to establish
two negotiated rulemaking committees and a subcommittee to prepare
proposed regulations governing the Federal Student Aid programs
authorized under title IV of the HEA. One negotiated rulemaking
committee was established to propose regulations relating to gainful
employment and the other to propose regulations pertaining to borrower
defenses to repayment of Federal student loans, the definition of
misrepresentation as it pertains to borrower defense, the program
participation agreement for schools participating in the title IV
programs, closed school and false certification loan discharges,
financial responsibility and administrative capability, arbitration and
class action lawsuits, revisions to regulations that will address
whether and to what extent guaranty agencies may charge collection
costs under 34 CFR 682.410(b)(6) to a defaulted borrower who enters
into a loan rehabilitation or other repayment agreement within 60 days
of being informed that the guaranty agency has paid a claim on the
loan.
A subcommittee, which was composed of individuals with expertise in
the applicable financial accounting and reporting standards set by the
Financial Accounting Standards Board (FASB), was established to discuss
whether and how the (FASB's) recent changes to the accounting standards
for financial reporting affected financial reporting requirements for
schools and to recommend appropriate regulatory changes to the
negotiated rulemaking committee.
The notification set forth a schedule for the committee meetings
and requested nominations for individual negotiators to serve on the
negotiating committee and the subcommittee. The Department sought
negotiators to represent the following groups: Students and former
students; consumer advocacy organizations; legal assistance
organizations that represent students and former students; groups
representing U.S. military service members or veteran Federal student
loan borrowers; financial aid administrators at postsecondary schools;
general counsels/attorneys and compliance officers at postsecondary
schools; chief financial officers (CFOs) and experienced business
officers at postsecondary schools; State attorneys general and other
appropriate State officials; State higher education executive officers;
institutions of higher education eligible to receive Federal assistance
under title III, parts A, B, and F, and title V of the HEA, which
include Historically Black Colleges and Universities, Hispanic-Serving
Institutions, American Indian Tribally Controlled Colleges and
Universities, Alaska Native and Native Hawaiian-Serving Institutions,
Predominantly Black Institutions, and other institutions with a
substantial enrollment of needy students as defined in title III of the
HEA; two-year public institutions of higher education; four-year public
institutions of higher education; private, nonprofit institutions of
higher education; private, proprietary institutions of higher
education; FFEL Program lenders and loan servicers; FFEL Program
guaranty agencies and guaranty agency servicers (including collection
agencies); and accrediting agencies. The Department sought subcommittee
members to represent the following constituencies who also have
expertise in the applicable financial accounting and reporting
standards set by the Financial Accounting Standards Board (FASB):
Private, nonprofit institutions of higher education, with knowledge of
the accounting standards and title IV financial responsibility
[[Page 37249]]
requirements for the private, nonprofit sector; private, proprietary
institutions of higher education, with knowledge of the accounting
standards and title IV financial responsibility requirements for the
proprietary sector; accrediting agencies; chief financial officers (to
include experienced business officers and bursars) at postsecondary
institutions; associations or organizations that provide accounting
guidance to auditors and institutions; certified public accountants or
firms who conduct financial statement audits of title IV participating
institutions; and FASB. The Department considered the nominations
submitted by the public and chose negotiators who would represent the
various constituencies.
The negotiating committee included the following members: Joseline
Garcia, United States Students Association, and Stevaughn Bush,
(alternate) Student, Howard University School of Law, representing
students and former students.
Ashley Harrington, Center for Responsible Lending, and Suzanne
Martindale (alternate), Consumers Union, representing consumer advocacy
organizations.
Abby Shafroth, National Consumer Law Center, and Juliana Fredman,
(alternate) Bay Area Legal Aid, representing legal assistance
organizations that represent students.
Will Hubbard, Student Veterans of America, and Walter Ochinko
(alternate), Veterans Education Success, representing U.S. military
service members or veterans.
Valerie Sharp, Evangel University, and Kimberly Brown (alternate),
Des Moines University, representing financial aid administrators.
Aaron Lacey, Partner, Thomas Coburn LLP, and Bryan Black,
(alternate), Attorney, representing General Counsels/attorneys and
compliance officers.
Kelli Hudson Perry, Rensselaer Polytechnic Institute, and Dawnelle
Robinson (alternate), Roanoke Chowan Community College, representing
CFOs and business officers.
John Ellis, State of Texas Office of the Attorney General, and Evan
Daniels (alternate), Office of the Arizona Attorney General,
representing State attorneys general and other appropriate State
officials.
Robert Flanigan, Jr., Spelman College, and Lodriguez Murray
(alternate), United Negro College Fund, representing minority serving
institutions.
Dan Madzelan, American Council on Education, and Barmak Nassirian
(alternate), American Association of State Colleges and Universities,
representing two-year public institutions.
Alyssa Dobson, Slippery Rock University, and Kay Lewis (alternate),
University of Washington, representing four-year public institutions.
Ashley Ann Reich, Liberty University, and Gregory Jones
(alternate), Compass Rose Foundation, representing private, non-profit
institutions.
Mike Busada, Ayers Career College, and Chris DeLuca (alternate),
DeLuca Law LLC, representing private, proprietary institutions with
enrollment of 450 students or fewer.
Michael Bottrill, SAE Institute North America, and Linda Rawles,
(alternate) Rawles Law, representing private, proprietary institutions
with enrollment of 451 students or more.
Wanda Hall, Edfinancial Services, and Colleen Slattery (alternate),
MOHELA, representing FFEL Program lenders and loan servicers.
Jaye O'Connell, Vermont Student Assistance Corporation, and Sheldon
Repp (alternate), National Council of Higher Education Resources,
representing FFEL Program guaranty agencies and guaranty agency
servicers.
Dr. Michale McComis, Accrediting Commission of Career Schools and
Colleges, and Karen Peterson Solinski, (alternate), Higher Learning
Commission, representing accreditors.
Annmarie Weisman, U.S. Department of Education, representing the
Department.
The subcommittee included the following members:
John Palmucci, Maryland University of Integrative Health,
representing private, non-profit institutions.
Jonathan Tarnow, Drinker Biddle & Reath LLP, representing private,
proprietary institutions.
Dr. Julianne Marie Malveaux, Economic Education, and formerly of
Bennett College, representing minority serving institutions.
Dale Larson, Dallas Theological Seminary, representing Accrediting
agencies.
Dawnelle Robinson, Shaw University, representing CFOs, business
officers, and bursars.
Susan M. Menditto, National Association of College and University
Business Officers, representing organizations that provide accounting
guidance to auditors and institutions.
Ronald E. Salluzzo, Attain, representing Certified public
accountants or firms who conduct compliance audits and/or prepare
financial statements of participating Title IV institutions.
Jeffrey Mechanick, the Financial Accounting Standards Board (FASB),
representing FASB.
The negotiated rulemaking committee met to develop proposed
regulations on November 13-15, 2017, January 8-11, 2018, and February
12-15, 2018. The subcommittee met in person on November 16-17, 2017,
January 4-5, 2018, and by telephone on January 30, 2018.
At its first meeting, the negotiating committee reached agreement
on its protocols and proposed agenda. The protocols provided, among
other things, that the committee would operate by consensus. Consensus
means that there must be no dissent by any member in order for the
committee to have reached agreement. Under the protocols, if the
committee reached a final consensus on all issues, the Department would
use the consensus-based language in its proposed regulations.
Furthermore, the Department would not alter the consensus-based
language of its proposed regulations unless the Department reopened the
negotiated rulemaking process or provided a written explanation to the
committee members regarding why it decided to depart from that
language.
During the first meeting, the negotiating committee agreed to
negotiate an agenda of eight issues related to student financial aid.
These eight issues were: Borrower defense to repayment standard; the
process for applying for and considering borrower defense claims;
financial responsibility and administrative capability; pre-dispute
arbitration agreements, class action waivers, and internal dispute
processes; closed school discharges; false certification discharges;
guaranty agency collection fees; and subsidized usage period
recalculations.
During committee meetings, the negotiators reviewed and discussed
the Department's drafts of regulatory language and the committee
members' alternative language and suggestions. At the final meeting on
February 15, 2018, the committee did not reach consensus on the
Department's proposed regulations. For that reason, and according to
the committee's protocols, all parties who participated in or who were
represented in the negotiated rulemaking, in addition to all members of
the public, may comment freely on the proposed regulations. For more
information on the negotiated rulemaking sessions, please visit:
www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html. Transcripts and audio recordings of the
negotiated rulemaking session are also available at:
[[Page 37250]]
www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html.
While transcripts have been made available by the Department to aid
public understanding of the negotiated rulemaking proceedings, the
transcripts have not been vetted or reviewed for accuracy or
completeness and should not be considered as the Department's official
transcription of the negotiated rulemaking proceedings.
Summary of Proposed Changes
The proposed regulations would--
Rescind specified provisions of the 2016 final
regulations, which have not yet become effective.
Amend Sec. 668.41 to require schools that require
students to accept pre-dispute arbitration agreements or class action
waivers as a condition of enrollment to disclose that information to
students, prospective students, and the public in an easily accessible
format;
Amend Sec. 668.91 to provide that the Secretary may
accept other types of surety or financial protection in addition to
letters of credit and that a hearing official must uphold the amount of
financial protection required by the Secretary unless certain
conditions are met;
Amend Sec. 668.94 to provide that a limitation on an
institution's participation in the Title IV programs may include
changing the institution's status from fully certified to provisionally
certified;
Amend Sec. 668.171 to establish the actions or events
that have or may have an adverse material effect on an institution's
financial condition and revise appendices A and B of the financial
responsibility regulations to conform with changes in accounting
standards;
Amend Sec. 668.172 to address changes to the accounting
standards regarding leases;
Amend Sec. 668.175 to expand the types of financial
protection acceptable to the Secretary;
Amend Sec. Sec. 674.33, 682.402 and 685.214 to extend the
window for a borrower to qualify for a closed school discharge and to
specify that if a closing school provided a borrower the reasonable
opportunity to complete his or her academic program through an orderly
school closure or a teach-out plan and that is approved by the school's
accrediting agency and, if applicable, the school's State authorizing
agency, the borrower will not qualify for a closed school discharge;
Amend Sec. Sec. 682.202, 682.405, and 682.410 to prohibit
guaranty agencies and FFEL Program lenders from capitalizing the
outstanding interest on a FFEL loan when the borrower rehabilitates a
defaulted FFEL loan;
Amend Sec. 682.405 to prohibit guaranty agencies and FFEL
Program lenders from charging collections costs when a borrower enters
into a repayment agreement within 60 days of the notice of default;
Amend Sec. 685.200 to specify that a loan discharge based
on school closure, false certification, an unpaid refund, or a defense
to repayment will lead to the elimination of or recalculation of the
subsidized usage period that is associated with the loan or loans
discharged;
Amend Sec. 685.206 to clarify that existing regulations
with regard to borrower defenses to repayment apply to loans first
disbursed prior to July 1, 2019; to establish a Federal standard for
deciding borrower defenses to repayment pertaining to a loan first
disbursed on or after July 1, 2019; to establish the procedures that
the Department would use to determine the liability of a school for the
amount of any loan discharges resulting from borrower defense claims
pertaining to loans first disbursed on or after July 1, 2019; and to
provide that the Secretary may initiate a proceeding to recover from an
institution the amount of any loan discharged by the Secretary based on
a defense to repayment within five years of the date of the final
decision to discharge the loan.
Amend Sec. 685.212 to add borrower defense to repayment
discharges to the discharge provisions listed in this section.
Amend Sec. 685.215 to provide that in cases when a Direct
Loan borrower could not obtain an official transcript or diploma from
high school and instead provided an attestation to the institution that
the borrower was a high school graduate, the borrower will not qualify
for a false certification discharge based on not having a high school
diploma.
Amend Sec. 685.300 to require institutions to accept
responsibility for the repayment of amounts discharged by the Secretary
pursuant to the borrower defense to repayment, closed school discharge,
false certification discharge, and unpaid refund discharge regulations.
Amend Sec. 685.304 to require institutions that use pre-
dispute arbitration agreements or class action waivers to provide
written, plain language descriptions of those agreements and to provide
the student borrower with written information on how to use the
school's internal dispute resolution process.
Amend Sec. 685.308 to require the repayment of funds and
the purchase of loans by the school if the Secretary determines that
the school is liable as a result of a successful claim for which the
Secretary discharged a loan, in whole or in part, pursuant to
Sec. Sec. 685.206, 685.214, and 685.216.
Significant Proposed Regulations
We discuss substantive issues under the sections of the proposed
regulations to which they pertain. Generally, we do not address
proposed regulatory provisions that are technical or otherwise minor in
effect.
In 2016, the Department conducted negotiated rulemaking and
published the 2016 final regulations on the topic of borrower defenses
to repayment and related issues, but those regulations have not yet
gone into effect. On June 16, 2017, the Department published in the
Federal Register a notification of the partial delay of effective dates
under section 705 of the Administrative Procedure Act (5 U.S.C. 705)
(82 FR 27621) (705 Notification), for certain provisions of the final
regulations until a legal challenge by the California Association of
Private Postsecondary Schools is resolved. See Complaint and Prayer for
Declaratory and Injunctive Relief, California Association of Private
Postsecondary Schools v. DeVos, Civil Action No. 1:17-cv-00999 (D.D.C.
May 24, 2017). Subsequently, we published an interim final rule (82 FR
49114), which gave notice that after the 705 notification delayed
implementation past July 1, 2017, pursuant to the Department's
interpretation of the master calendar requirement, the earliest the
regulation could go into effect was July 1, 2018. Then, on February 14,
2018, following a notice of proposed rulemaking, the Department
published a final rule establishing July 1, 2019, as the effective date
of the 2016 final regulations (83 FR 6458).
We now propose rescission of the 2016 final regulations that we
delayed through previous notification. In this preamble, we describe
the proposed changes to the regulations based on the currently
effective regulations and not the delayed provisions of the 2016 final
regulations. In light of the withdrawal (i.e. rescission) of the
delayed provisions of the 2016 final regulations, this approach is
required under 1 CFR part 21, which provides that each agency that
drafts regulations must do so as an amendment to the Code of Federal
Regulations. The currently effective regulations, not the delayed
provisions of the 2016 final regulations, are the provisions codified
in the Code of Federal Regulations. Thus, we are
[[Page 37251]]
amending the currently effective regulations, not the delayed
provisions of the 2016 final regulations, in this NPRM. Throughout the
``Significant Proposed Regulations'' section of this NPRM, we describe
our reasoning for the proposed rescissions in the context of the topics
to which they pertain. For purposes of determining the budget impact of
the regulation, we utilize the 2019 President's Budget Request, which
assumed the implementation of the 2016 regulation.
Please note that the following two issues in the 2016 final
regulations are being addressed through a separate rulemaking process
focused on the Gainful Employment regulations process: The requirement
that proprietary schools at which the median borrower has not repaid in
full, or paid down by at least one dollar the outstanding balance of,
the borrower's loans to provide a Department-issued plain language
warning in promotional materials and advertisements; and the
requirement for a school to disclose on its website and to prospective
and enrolled students if it is required to provide financial
protection, such as a letter of credit, to the Department. The
Department felt that the Gainful Employment rulemaking was the
appropriate place to propose and discuss eliminating these disclosures
because the Gainful Employment negotiated rulemaking committee
addressed other regulations on disclosures.
Thus, in this NPRM, we propose rescinding the revisions to or
additions to the following regulations:
Section 668.14(b)(30), (31), and (32) Program participation
agreement.
Section 668.41(h) and (i) Reporting and disclosure of information.
Section 668.71(c) Scope and special definitions.
Section 668.90(a)(3) Initial and final decisions.
Section 668.93(h), (i) and (j) Limitation.
Section 668.171 General.
Section 668.175(c), (d), (f), and (h) Alternative standards and
requirements.
Part 668, subpart L, appendix C.
Section 674.33(g)(3) and (8) Repayment.
Section 682.202(b)(1) Permissible charges by lenders to borrowers.
Section 682.211(i)(7) Forbearance.
Section 682.402(d)(3), (d)(6)(ii)(B)(1) and (2), (d)(6)(ii)(F)
introductory text, (d)(6)(ii)(F)(5), (d)(6)(ii)(G), (d)(6)(ii)(H)
through (K), (d)(7)(ii) and (iii), (d)(8), and (e)(6)(iii) Death,
disability, closed school, false certification, unpaid refunds, and
bankruptcy payments.
Section 682.405(b)(4)(ii) Loan rehabilitation agreement.
Section 682.410(b)(4) and (b)(6)(viii) Fiscal, administrative, and
enforcement requirements.
Section 685.200(f)(3)(v) and (f)(4)(iii) Borrower eligibility.
Section 685.205(b)(6) Forbearance.
Section 685.206(c) Borrower responsibilities and defenses.
Section 685.212(k) Discharge of a loan obligation.
Section 685.214(c)(2), (f)(4) through (7) Closed school discharge.
Section 685.215(a)(1), (c) introductory text, (c)(1) through (8),
and (d) Discharge for false certification of student eligibility or
unauthorized payment.
Section 685.222 Borrower defenses.
Part 685 subpart B, appendix A Examples of borrower relief.
Section 685.300(b)(11) and (12) and (d) through (i) Agreements
between an eligible school and the Secretary for participation in the
Direct Loan Program.
Section 685.308(a) Remedial actions.
Note: Section 668.90 has been redesignated as Sec. 668.91 and
Sec. 668.93 has been redesignated as Sec. 668.94 pursuant to the
borrower defense procedural rule, published January 19, 2017 at 82 FR
6253 (the borrower defense procedural rule).
Borrower Defenses--General (Sec. 685.206)
Background: Section 455(h) of the HEA authorizes the Secretary to
specify which acts or omissions of an institution of higher education a
borrower may assert as a defense to the repayment of a Direct Loan. 20
U.S.C. 1087e(h). Under the Department's current regulations at Sec.
685.206(c), a borrower may assert as a defense against repayment of a
loan in response to a proceeding by the Department to collect on a
Direct Loan, any act or omission of the school attended by the student
directly and clearly related to the making of a Direct Loan for
enrollment at the institution or the provision of educational services
for which the loan was made that would give rise to a cause of action
against the school under applicable State law (referred to in this
document as the ``State law standard'').
The Department first promulgated the Direct Loan Program's borrower
defense to repayment regulation December 1, 1994 (59 FR 61664, 61696),
which became effective on July 1, 1995. The Department's intent was for
this rule to be effective for the 1995-1996 academic year and then to
develop a more extensive rule for both the Direct Loan and FFEL Loan
programs through a negotiated rulemaking process. However, based on the
recommendation of the non-Federal negotiators on a negotiated
rulemaking committee convened in the spring of 1995 (60 FR 37768), the
Secretary decided not to develop further regulations or to revise Sec.
685.206(c).
Though the regulation has been in effect since 1995, it was rarely
used prior to 2015, when the Department received applications from
borrowers for loan relief in response to the Department's announcement
(see www.ed.gov/news/press-releases/fact-sheet-protecting-students-abusive-career-colleges and https://studentaid.ed.gov/sa/about/announcements/corinthian) that it would consider affirmative borrower
defense claims.
The current regulation does not set forth the process a borrower
may use to assert an affirmative borrower defense claim. Therefore, the
Department appointed a Special Master in June 2015 to create and
oversee a process to provide debt relief for borrowers who sought
Federal student loan discharges based on claims against the borrower's
institution. Later, the Department's Federal Student Aid (FSA) office
assumed responsibility for resolving these claims, and it continues to
do so. This FSA process has proven to be burdensome to borrowers, given
the time it takes to adjudicate each claim, and costly to taxpayers.
The Department is considering whether to allow only defensive
claims or to continue the approach taken in its 2015 interpretation
that allowed it to accept both defensive and affirmative claims. One
regulatory alternative, specified in the proposed amendatory language,
continues to provide a remedy to borrowers in a collections proceeding,
as has been the case since the borrower defense to repayment regulation
was promulgated in 1994, by permitting borrowers to assert defense to
repayment during a proceeding by the Department to collect on a Direct
Loan including, but not limited to, tax refund offset proceedings under
34 CFR 30.33, wage garnishment proceedings under section 488A of the
HEA, salary offset proceedings for Federal employees under 34 CFR part
31, and consumer reporting proceedings under 31 U.S.C. 3711(f).
The other regulatory alternative, specified in the proposed
amendatory language, would allow for both affirmative claims from
borrowers not in a collections action and defensive claims. If we do
accept affirmative claims, we would need to develop appropriate
deterrents to frivolous claims. At a minimum, the Department
[[Page 37252]]
would revise the affirmative claim review process to provide
institutions with a reasonable opportunity to see and respond to
borrower claims and would require the borrower to sign a waiver that
allows the institutions to provide the Department with any information
from the borrower's education record that is relevant to the claim. The
Department could also limit the period of time after a borrower leaves
an institution during which a borrower could make an affirmative claim.
Given the Department's long-standing requirement that institutions
retain certain documents for only three years, the Department could
limit claims to the three-year period following the borrower's
departure from the institution to ensure that the institution would
have access to records that could be relevant to their defense. The
Department seeks public comment on ways to balance the need to serve
borrowers with the need to limit unsubstantiated claims and provide an
opportunity for the institution to provide evidence in its own defense.
Borrower Defense to Repayment--Assertion of Defenses to Repayment in
Collection Proceedings and Federal Standard for Asserting a Borrower
Defense to Repayment
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c) establishes the conditions
under which a Direct Loan borrower may assert a defense to repayment,
the relief afforded by the Secretary in the event the defense is
successful, and the Secretary's authority to recover from the school
any loss that results from a defense to repayment discharge granted by
the Department. Specifically, Sec. 685.206(c)(1) provides that a
borrower may assert a defense to repayment based upon any act or
omission of the school that would give rise to a cause of action
against the school under applicable State law. The borrower may raise
such defense to repayment during a proceeding by the Department to
collect on a Direct Loan, including, but not limited to, tax refund
offset proceedings under 34 CFR 30.33, wage garnishment proceedings
under section 488A of the HEA, salary offset proceedings for Federal
employees under 34 CFR part 31, and consumer reporting proceedings
under 31 U.S.C. 3711(f). Under the current regulations, since 2015, the
Department has accepted affirmative claims, i.e., those not in
collection proceedings. Under 34 CFR 685.206(c)(2), if a borrower
defense to repayment discharge is approved, the borrower is relieved of
the obligation to pay all or part of the loan and associated costs and
fees, and may be afforded such further relief as the Secretary
determines is appropriate, including, among other things, reimbursement
of amounts previously paid toward the loan.
Proposed Regulations: Proposed Sec. 685.206(c) would specify that,
with respect to Direct Loans disbursed prior to July 1, 2019, the State
law standard would continue to apply. Proposed paragraph (c) maintains
that a borrower defense to repayment of these loans may be asserted in
proceedings including, but not limited to, tax refund offset
proceedings, wage garnishment proceedings, salary offset proceedings
for Federal employees, and consumer reporting agency reporting
proceedings, but includes clarifications as to statutory and regulatory
authorities for those specified proceedings.
Proposed Sec. 685.206(d) would establish a new uniform standard
not based upon applicable State law, also referred to here as the
``Federal standard'' for a borrower's defense to repayment discharge on
a Direct Loan first disbursed on or after July 1, 2019. First, Sec.
685.206(d)(1) would define terms applicable to the Federal standard,
including the term ``borrower defense to repayment.'' Consistent with
the Department's current interpretation that it is not appropriate for
the taxpayer to face potential loss based on action by schools in
matters unrelated to the Department's loan programs, this definition
would provide that a borrower defense to repayment discharge must
directly and clearly relate to the making of the Direct Loan, or the
making of a loan that was repaid by a Direct Consolidation Loan, for
enrollment at a school or the provision of educational services for
which the loan was obtained. In addition, we clarify that for the
purposes of this paragraph, ``borrower'' includes the student who
attended the institution for whom Direct Loans (Parent PLUS) were
obtained by a parent. Further, under this proposed definition, a
``borrower defense to repayment'' would be considered to include both a
defense to repayment of amounts owed to the Secretary on a Direct Loan
and reimbursement of payments previously made to the Secretary on the
Direct Loan. Proposed Sec. 685.206(d)(1) also would define the terms
``provision of educational services'' and ``school'' and
``institution.''
Parallel to the current regulation, the proposed regulations
provide that for loans first disbursed on or after July 1, 2019, a
borrower may assert a defense to repayment ``defensive'' claim as part
of a proceeding related to certain actions by the Department to collect
on a Direct Loan, including tax refund offset proceedings under 26
U.S.C. 6402(d), 31 U.S.C. 3716 and 3720A; wage garnishment proceedings
under section 488A of the Act or under 31 U.S.C. 3720D and 34 CFR part
34; salary offset proceedings for Federal employees under 34 CFR part
31, 5 U.S.C. 5514, and 31 U.S.C. 3716; and consumer reporting agency
reporting proceedings under 31 U.S.C. 3711(e). This language is
reflected in proposed Sec. 685.206(d)(2)--Alternative A.
The Department is also considering accepting ``affirmative'' claims
from borrowers not in a collections action. Proposed regulatory
language for this approach is set forth in Sec. 685.206(d)(2)--
Alternative B. Like Alternative A, Alternative B proposes to consider
both affirmative and defensive claims under a preponderance of the
evidence standard. But the Department seeks comment on whether claims
under this regulatory alternative should have to be supported by clear
and convincing evidence, rather than a preponderance of the evidence.
Such a standard might be appropriate, as it is the standard used in
most States for adjudicating fraud litigation and could deter some
frivolous affirmative claims. See Restatement (Third) of Torts: Liab.
for Econ. Harm section 9 TD No 2 (2014) (``The elements of a tort claim
ordinarily must be proven by a preponderance of the evidence, but most
courts have required clear and convincing evidence to establish some or
all of the elements of fraud.'')
The Department is interested in comments regarding the benefits or
risks of these proposals. The Department also seeks public comments
regarding other mechanisms that could be utilized to discourage the
submission of frivolous claims, which are costly for the Department and
institutions to adjudicate. Such mechanisms could include limiting the
period of time after a borrower leaves an institution during which a
defense to repayment claim can be submitted (such as imposing a 3 year
limit on borrower defense to repayment claims to align with the
Department's 3 year record retention requirement).
Under this proposed regulation, the Department would develop a
claim review process for either (or both) defensive or affirmative
claims that would provide institutions with a reasonable opportunity to
see and
[[Page 37253]]
respond to borrower claims. The Department proposes, for example, to
require the borrower to sign a waiver that allows the institution to
provide the Department with any information from the borrower's
education records that is relevant to the claim. The Department also
proposes to require borrowers to submit information about whether, for
reasons other than the education received, the borrower has been
removed from a job due to on-the-job-performance, disqualified from
work in the field for which the borrower trained, or worked less than
full-time in the chosen field. Such circumstances would not disqualify
a borrower from a successful defense to repayment, but might be
relevant to determining whether the asserted financial harm was in fact
caused by an alleged misrepresentation.
The proposed regulations also would remind borrowers submitting
affirmative or defensive claims that if the borrower receives a 100
percent discharge for the loan, the institution has the right to
withhold an official transcript for the borrower, as has always been
the case in instances in which the borrower has been awarded student
loan discharge through false certification, closed school or defense to
repayment discharge.
The Department also welcomes comments regarding the process the
Department might use to collect evidence from borrowers and schools, to
evaluate the merits of a borrower's defense to repayment claim, and to
render decisions on claims that are submitted affirmatively.
Under proposed Sec. 685.206(d)(4), a borrower defense to repayment
related to a loan that was repaid by a Direct Consolidation Loan
disbursed on or after July 1, 2019, would be evaluated under the
proposed Federal standard. Although this approach may result in
different treatment of some borrowers who took out loans before this
NPRM, such differences in treatment would arise only if the borrower
chose to take out a new Direct Consolidation Loan after July 1, 2019.
This is consistent with the longstanding treatment of consolidation
loans as new loans. The Department is interested in comments as to
whether this structure would likely lead borrowers to engage in, or
borrower advocates to encourage, strategic default for the sole purpose
of asserting a defense to repayment. Proposed Sec. 685.206(d)(5)
includes two alternatives relating to affirmative and defensive claims.
Section 685.206(d)(5)(i) and (ii)--Alternative A provides that the
Secretary will approve the borrower's defense to repayment claim if a
preponderance of the evidence establishes that the school at which the
borrower was enrolled made a misrepresentation, upon which the borrower
reasonably relied under the circumstances in deciding to obtain a
Direct Loan (or a loan repaid by a Direct Consolidation Loan) for the
student to enroll in a program at the school which resulted in
financial harm to the borrower. The proposed regulations in Sec.
685.206(d)(5) would define misrepresentation as a statement, act, or
omission by the eligible institution to the borrower that is (i) false,
misleading, or deceptive, (ii) made with knowledge of its false,
misleading, or deceptive nature or with a reckless disregard for the
truth, and (iii) directly and clearly related to the making of a Direct
Loan for enrollment at the school or to the provision of educational
services for which the loan was made. Proposed section 685.206(d)(5)(i)
and (ii)--Alternative B contains the same language with respect to
defensive claims and extends the proposed standard to affirmative
claims.
Proposed Sec. 685.206(d)(5)(iii) sets forth that the Secretary may
consider additional information when evaluating a claim. Proposed Sec.
685.206(d)(5)(iv) would provide additional information about what may
constitute a preponderance of the evidence of a misrepresentation and
evidence of financial harm. The Department is interested in comments as
to whether it should require clear and convincing evidence of
misrepresentation and financial harm (as opposed to a preponderance of
the evidence of misrepresentation and financial harm) in the event it
continues to consider affirmative claims.
Proposed Sec. 685.206(d)(6) would clarify that a school's
violation of an eligibility or compliance requirement in the HEA or the
Department's implementing regulations is not a basis for a borrower
defense to repayment unless that conduct would, by itself, establish a
basis for a defense to repayment. Proposed Sec. 685.206(d)(6) also
lists other circumstances that would not suffice to establish a defense
to repayment under the proposed Federal standard.
Reasons: During the public hearings and negotiated rulemaking
sessions, the Department heard from representatives from a broad range
of constituencies on what they thought was an appropriate basis for a
borrower defense to repayment. At the negotiated rulemaking sessions,
negotiators expressed a shared desire to develop a regulation that
would provide for fair treatment of borrowers who had been harmed by an
act or omission of a school, but differed widely in their views of how
this might be achieved. The Department began negotiations by asking
whether we should establish a Federal standard for evaluating future
borrower defense to repayment applications.
Defense to Repayment--Assertion of Borrower Defenses
As part of the discussions of a Federal standard, negotiators
debated whether borrowers should be allowed to assert defenses to
repayment affirmatively--in other words, at any point of time
regardless of whether the borrower's loan is in default and the subject
of Department collection proceedings--or only defensively, during such
collection proceedings. Many negotiators were in favor of permitting
borrowers to pursue affirmative claims to allow borrowers an
opportunity to rectify the harm stemming from an act or omission of a
school. One negotiator noted that the current regulation implies that a
borrower raises a defense to repayment in response to collection
activities and asked what, if any, discretion the Department might have
to interpret the regulation more broadly. Another negotiator asserted
that she understood that the Department did not interpret the current
regulation to limit claims to borrowers who are in default and that it
had allowed affirmative applications to be submitted by borrowers.
From 1994 to 2015, the Department's regulation--as per earlier
negotiated rulemaking--provided defense to repayment loan discharge
opportunities only to borrowers who were in a collection proceedings.
As a matter of practice, starting in 2015 and later codified in the
2016 regulations, the Department has (primarily in response to the
closure of Corinthian Colleges, Inc.) accepted borrower defenses to
repayment requests asserted affirmatively outside of the collection
proceedings specifically listed in the existing regulation.
We are now considering that for loans first disbursed on or after
July 1, 2019, the Department return to the pre-2015 interpretation such
that borrowers may only submit applications in connection with one of
the specific collection proceedings listed in current Sec. 685.206(c).
The language of both the statute and existing regulations on borrower
defenses is consistent with this approach, and the Department believes
it may better balance the competing interests of borrowers and
taxpayers. Under this approach, the Department would view the assertion
of
[[Page 37254]]
defenses to repayment as a last resort for borrowers, with disputes
between borrowers and schools primarily resolved by those parties in
the first instance. The proposal to allow borrowers to assert defenses
to repayment during the enumerated Department collection proceedings,
and not as affirmative claims at any point in time, aligns with the
Department's 20 year prior practice and protects taxpayers from
liabilities that should be leveraged first against the institutions
that committed acts or omissions covered by the defense to repayment
provision.
Section 455(h) of the HEA provides that ``a borrower may assert . .
. a defense to repayment of a loan made under [the Direct Loan
Program],'' on the basis of an act or omission of a school, as
specified by the Secretary. 20 U.S.C. 1087e(h) (emphasis added). The
current regulations implementing the statutory provision reflect the
Department's understanding at the time of the rule's promulgation in
1994 that the statute directs the Department to provide borrowers with
a defense to repayment, as part of certain Department collection
actions. See 34 CFR 685.206(c)(1) (``In any proceeding to collect on a
Direct Loan, the borrower may assert [ ] a defense to repayment . . .
These proceedings include, but are not limited to, the following . .
.'' (emphasis added)). The proceedings referenced in the regulation
only occur after a borrower defaults on a loan.
The Department processed a small number of defense to repayment
claims from borrowers in a collections proceeding under the existing
regulation from 1994 through 2015. In response to the closure of
Corinthian Colleges, Inc. (CCI) in 2015, however, the Department
changed its position and began to accept borrowers' requests for the
type of relief (loan discharges and certain further relief) provided
under 34 CFR 685.206(c), even before the borrower defaulted on a loan--
or, in other words, the Department allowed borrowers to affirmatively
assert borrower defense claims. As a result, the Department was flooded
with tens of thousands of borrower defense claims before it had
promulgated new regulations that officially notified the public of this
new interpretation or established a mechanism or structure under which
to adjudicate the large volume of claims.
After further consideration of the history and regulatory
provisions governing borrower defenses, the Department believes that it
may be appropriate to provide in the proposed regulations that, for
loans first disbursed after the proposed rules' anticipated effective
date of July 1, 2019, borrowers may request a loan discharge and
related relief under the proposed Federal misrepresentation standard
for such requests only by asserting such defense in a proceeding to
collect on the loan by the Department (i.e., a tax refund offset
proceeding, a wage garnishment proceeding, a salary offset proceeding
for a Federal employee, or a consumer reporting agency reporting
proceeding).
As noted above, this proposal is squarely within the Department's
authority under section 455(h) of the HEA to ``specify in regulations
which acts or omissions of an institution of higher education a
borrower may assert as a defense to repayment'' of a Direct Loan. 20
U.S.C. 1087e(h) (emphasis added). It is also consistent with the
Department's direction that students should use processes already in
place at schools, as well as at accrediting agencies and State
authorizing agencies, to resolve issues relating to the services
provided by the institution as quickly as possible following any
incident, rather than delaying corrective action and shifting the
financial burden to the taxpayer.
This differs from the approach taken in the 2016 final regulations.
In those regulations, the Department took the approach it had adopted
in 2015 to allow affirmative defense to repayment claims and
accordingly would have removed language referencing the Department's
collection proceedings as the forum for a borrower's assertion of a
defense to repayment. The Department continues to consider whether to
accept affirmative claims from borrowers, as opposed to only accepting
defensive claims from borrowers during a specified collection
proceeding. However, the Department believes that if it were to allow
affirmative claims, it would need to also consider appropriate
deterrents to frivolous claims.
The Department is concerned that in the event of affirmative
claims, it is relatively easy for a borrower to submit an application
for loan relief, even if the borrower has suffered no harm, on the
chance that perhaps some amount of loan forgiveness will be awarded.
Although the barriers to submitting a claim are low for borrowers, the
collective burden of numerous unjustified claims could be significant
for both the Department and institutions. This could delay our efforts
to review and provide loan relief to borrowers who have been genuinely
harmed. The Department seeks comment on how it could continue to accept
and review affirmative claims, but at the same time discourage
borrowers from submitting unjustified claims. One idea is to increase
the evidentiary standard to ``clear and convincing'' for affirmative
claims. The Department seeks comment on whether or not this evidentiary
standard would be appropriate to balance the need to serve borrowers
who have been harmed and the need to reduce the number of unjustified
claims students might otherwise submit. If such a standard is
warranted, the Department also seeks comment about whether it should
continue to evaluate defensive claims under the preponderance of the
evidence standard and on the rationale for having two different
evidentiary standards.
The Department believes that, even if it continues to accept
affirmative claims, it must also accept defensive claims so both
students in repayment and students in collections have access to
remedies for instances of fraud.
Defense to Repayment--Federal Standard (Provision of Educational
Services and Relationship With the Loan)
The language we propose in this NPRM clarifies that the
misrepresentation of a school forming the basis of a borrower defense
to repayment discharge must directly and clearly relate to the making
of a Direct Loan for enrollment at the school or the provision of
educational services for which the loan was made. This language
reflects the Department's consistent position, as explained in a Notice
of Interpretation issued in 1995 (60 FR 37769) and adopted in the 2016
final regulations (81 FR 76080 (revised 34 CFR 685.206(c)(1)), 76083
(new 34 CFR 685.222(a)(5))), that the Department will acknowledge a
borrower defense to repayment only if it directly relates to the loan
or to the school's provision of educational services for which the loan
was provided.
Some non-Federal negotiators requested that the regulation define
the term ``provision of educational services'' and include a reference
to educational resources. Another non-Federal negotiator noted that the
Department has made its understanding of this term ``provision of
educational services'' clear in the regulatory history for the borrower
defense regulation and that there are well-developed bodies of State
law that explain this term.
The Department agrees that the term ``provision of educational
services'' is open to interpretation and, in proposed Sec. 685.206(d),
we define that term as ``the educational resources provided by the
institution that are required by an accreditation agency or a state
licensing
[[Page 37255]]
or authorizing agency for the completion of the student's educational
program.'' We thus intend for a misrepresentation relating to the
``provision of educational services'' to be clearly and directly
related to the borrower's program of study. We also intend
misrepresentation to include items such as the nature of the school's
educational program or related resources required by an accreditor or
licensing authority, the nature of the school's financial charges, the
advertised outcomes (including job placement rates, licensure pass
rates, and graduation rates) of prior graduates of the school's
educational program, an institution's published rankings or selectivity
statistics, the eligibility of graduates of the educational program for
licensure or certification, the State agency authorization or approval
of the school or educational program, or an accreditor approval of the
school or educational program.
Defense to Repayment--Consolidation Loans
The Department proposes that for a Direct Consolidation Loan first
issued on or after the anticipated effective date of these regulations,
a borrower may assert a defense to repayment under the proposed Federal
standard (discussed below). Under the Department's existing regulation
at 34 CFR 685.220, a borrower may consolidate certain specified loans
into a Direct Consolidation Loan. Generally, the Department views a
consolidation loan as a new loan, distinct from the underlying loans
that were paid in full by the proceeds of the Direct Consolidation
Loan. The Department's borrower defense authority is part of the Direct
Loan Program, see 20 U.S.C. 1087e(h) (``[A] borrower may assert . . . a
defense to repayment of a loan made under this part [as to the Direct
Loan Program]'') and Direct Consolidation Loans are made under the
Direct Loan Program. As a result, the Department's existing practice is
to provide relief under the Direct Loan authority if the underlying
loans have been consolidated under the Direct Loan Program into a
Direct Consolidation Loan. Or, if consolidation is being considered
depending on the outcome of any preliminary analysis of whether relief
might be available under 34 CFR 685.206(c), relief is not actually
provided until the borrower's loans have been consolidated into a
Direct Consolidation Loan.
The Department's proposal clarifies the Department's position and
the standard that it proposes to use to evaluate a Direct Consolidation
Loan borrower's defense to repayment claim. The Department will
consider a misrepresentation that the borrower reasonably relied upon
under the circumstances in deciding to obtain the underlying loan
repaid by the Direct Consolidation Loan, for the student to enroll or
continue enrollment in a program at an institution.
The Department's standard is designed to provide borrowers with
relief for the misrepresentations made with either knowledge of their
false, misleading, or deceptive nature, or with a reckless disregard
for the truth. Where misconduct of such nature has been demonstrated,
the Department believes it is appropriate to provide borrowers with
relief, regardless of whether the underlying loan is a Direct Loan.
However, given that the Department's borrower defense authority is part
of the Direct Loan Program, see 20 U.S.C. 1087e(h) (``[A] borrower may
assert . . . a defense to repayment of a loan made under this part [as
to the Direct Loan Program]''), the Department will only consider
providing such relief if the underlying loans were themselves Direct
Loans or have been consolidated under the Direct Loan Program, into a
Direct Consolidation Loan. If a defense to repayment was approved on a
Direct Consolidation Loan, borrowers would receive a discharge of the
remaining balance on their Direct Consolidation Loan in an amount
proportionate to the amount of the underlying loan at issue and would
receive proportionate reimbursements of any payments made to the
Secretary on the underlying loan or the Direct Consolidation Loan. See
Hiatt v. Indiana State Student Assistance Comm. (In re Hiatt), 36 F.3d.
21, 24 (7th Cir., 1994) and In re McBurney, 357 B.R. 536, 538 (9th Cir
BAP, 2006), supporting the consideration of consolidation loans as new
loans.
Under the Department's proposal, the standard that would be applied
to determine if a defense to repayment has been established is the
Federal standard for Direct Consolidation Loans first disbursed after
July 1, 2019. The 2016 final regulations would have similarly applied a
Federal standard to some underlying loans that were not Direct Loans,
but it would have done so based upon the underlying loans' date of
first disbursement. Thus, under the 2016 final regulations, the same
claim might have required the application of different standards to
different underlying loans, if the borrower had both underlying Direct
Loans and loans that are not Direct Loans. The Department believes that
the language it proposes in this NPRM is more consistent with the
Department's longstanding policy regarding the treatment of
consolidated loans, would be more easily understood, would create less
confusion for schools and borrowers, and would be easier to administer
for the Department. Further, as a consolidation loan is a new loan, the
Department believes it is appropriate to apply the date of first
disbursement of that loan to determine what standard would apply. The
Department understands that this approach may deter some borrowers who
might otherwise wish to consolidate their loans but do not wish to be
subject to the proposed standard and associated time limits. But the
Department believes that this concern is outweighed by the benefits of
this standard. In all events, as under the existing regulations, a
borrower would be able to choose consolidation if he or she determines
it is the right option for the borrower. The Department invites comment
on this approach.
Defense to Repayment--Federal Standard (Misrepresentation)
In this rulemaking, the Department is proposing an exclusively
Federal standard not based in State law for loans disbursed after July
1, 2019, for ease of administration and to provide fair, equitable
treatment for all borrowers regardless of the State in which the school
is located or the student was in residence while enrolled or while in
repayment. That Federal standard differs somewhat from the
``substantial misrepresentation'' standard adopted in the 2016 final
regulations and drawn from more general enforcement contexts. 81 FR
75939-75940. It also differs somewhat from the proposal that the
Department offered during negotiations, in that it relies solely on
misrepresentation as the basis for discharge, rather than also allowing
final judgments to serve as a basis for discharge. As discussed in more
detail below, the Department believes that the standard it proposes
will provide more equitable treatment for borrowers and ease of
administration for the Department.
During discussions relating to the Federal standard for borrower
defense to repayment applications, negotiators disagreed about whether
to establish a Federal standard at all. Some negotiators expressed
opposition, arguing that protecting consumers and ensuring the
educational quality of schools licensed to operate by the State are the
responsibilities of the States. Other negotiators noted that a Federal
standard not based in State law could disadvantage borrowers. Many
States'
[[Page 37256]]
consumer protection laws might be more favorable to borrowers than the
Federal standard proposed by the Department (discussed immediately
below). These negotiators also noted that the proposed Departmental
process to adjudicate claims under a Federal standard would not provide
borrowers with the benefit of a discovery process like the one that
exists in judicial proceedings. Still, many negotiators supported
establishing a Federal standard, arguing that doing so would provide
clarity, uniformity of borrower treatment, and ease of administration.
Some negotiators stated that the Department should adopt a structure
under which a Federal standard would serve as a minimum standard, but
with the Department also evaluating whether a borrower defense claim
would receive more favorable treatment under applicable State law and
then applying the more favorable standard to the borrower defense
claim.
The Department is persuaded that an exclusively Federal standard
for borrower defense to repayment applications is appropriate. The
Department's primary reason for proposing a Federal standard for
borrower defenses to repayment is that Direct Loans are Federal assets
and the benefits of such loans should be established by Federal law. In
addition, the Department believes that using a Federal standard will
reduce the burden on borrowers and the Department. Applying a State
law-based standard means that borrowers have to determine which State
law applies to their claim and the Department has to review that
determination. Moreover, borrowers in some States may have access to
more favorable law than borrowers in other States for the same Federal
defense to repayment. In contrast, applying a Federal standard will
eliminate the issue of what law applies and ensure that all borrowers'
claims are evaluated under the same rules.
The Department's proposed Federal standard is a modified version of
the proposal it offered at the negotiated rulemaking sessions. The
Department's proposal during negotiations would have included two
different bases for a borrower to assert a defense to repayment for
loans first disbursed on or after July 1, 2019: (1) A final, definitive
judgment by a State or Federal court of competent jurisdiction,
rendered in a contested proceeding, where the borrower was awarded
monetary damages against the institution relating to the student's
enrollment at the subject institution or the provision of educational
services for which the loan was obtained, and (2) generally, a
misrepresentation by the school made with intent to deceive, knowledge
of the falsity of the misrepresentation, or a reckless disregard for
the truth, and that resulted in financial harm to the borrower. In this
NPRM, the Department now proposes a modified version of the second
basis for relief--a misrepresentation standard, as discussed in depth
below.
With regard to the misrepresentation standard, negotiators
disagreed on the appropriate definition of ``misrepresentation'' and
whether the borrower should be required to prove the school's intent,
knowledge of falsity, or reckless disregard for the truth. Some
negotiators argued that it would be difficult for a borrower to prove
that a school had acted with the requisite intent or had knowledge of
the falsity of the misrepresentation, and that it would also be
difficult for a borrower to demonstrate that the school had engaged in
a level of misconduct that would amount to a ``reckless disregard for
the truth.'' These negotiators argued in favor of a standard that would
enable borrowers to avail themselves of the full range of States'
consumer protection laws that prohibit certain unfair and deceptive
conduct (commonly known as ``unfair and deceptive trade acts and
practices'' or ``UDAP'' laws). Some negotiators argued the Department
should not approve borrower defenses and also hold a school liable for
losses from approvals of misrepresentation-based defenses to repayment,
if the school had committed an inadvertent mistake or if the
misrepresentation had been made by an employee acting without the
school's knowledge or against the school's direction.
The 2016 final regulations provided that a borrower may assert a
borrower defense for a ``substantial misrepresentation'' as defined in
the Department's regulation at 34 CFR 668.71, if the school, any of its
representatives, or any institution, organization, or person with whom
the school has an agreement for specified services made such a
substantial misrepresentation that the borrower reasonably relied on to
the borrower's detriment in deciding to attend, or continue attending,
the school or in deciding to take out a Direct Loan. See 81 FR 76083
(text for 34 CFR 685.222(d)). The 2016 final regulations also included
a non-exclusive list of circumstances for a Department official to
consider in determining whether the borrower's reliance was reasonable.
Under those regulations, a borrower would be able to assert such a
borrower defense to recover funds previously collected by the Secretary
not later than six years after the borrower discovered, or reasonably
could have discovered, the substantial misrepresentation. The borrower
would also be able to assert a defense to any outstanding amounts owed
on the loan at any time.
The ``substantial misrepresentation'' definition was drawn from
Sec. 668.71, which permits the Department to bring an enforcement
action for a substantial misrepresentation in the form of a suspension,
limitation, termination, or fine action. The section generally defines
a misrepresentation as any false, erroneous, or misleading statement
made by a school, and it defines a misleading statement to include any
orally or visually made statement, or one that is made in writing or by
other means, that has the likelihood or tendency to deceive. It then
defines a ``substantial misrepresentation'' as any misrepresentation on
which the person to whom it was made could reasonably be expected to
rely, or has relied, to that person's detriment. The 2016 final
regulations amended the language of Sec. 668.71 to explicitly note
that an omission of information can amount to a misrepresentation. 81
FR 76072 (text of language added to 34 CFR 668.71). As stated above,
while a substantial misrepresentation under current Sec. 668.71
includes misrepresentations that a person had relied upon or could
reasonably have been expected to rely upon, for the purposes of
borrower defense to repayment under the 2016 final regulations, a
substantial misrepresentation would have been found only if the person
had, indeed, reasonably relied upon the misrepresentation to his or her
detriment.
In this NPRM, the Department proposes a different Federal standard
for defenses to repayment based upon misrepresentations by an
institution to the borrower. Under the proposed standard, a
misrepresentation is a statement, act, or omission by an eligible
institution to a borrower upon which the borrower reasonably relies
that is false, misleading, deceptive, and made with knowledge of its
false, misleading, or deceptive nature or with reckless disregard for
the truth and directly and clearly related to the making of a Direct
Loan, or a loan repaid by a Direct Consolidation Loan, for enrollment
at the school or to the provision of educational services for which the
loan was made. The vast majority of the borrower defense claims filed
since 2015 have alleged that the school at issue made statements to the
borrower that amount to misrepresentations under State law. As
[[Page 37257]]
a result, we believe it is appropriate to base the Federal standard
upon a school's misrepresentations. We have removed breach of contract
or State law judgment as a standard for borrower defense relief since
breach of contract or a State law judgment may be for actions or events
not directly related to the educational services provided by the
institution, and therefore do not qualify for relief under borrower
defense to repayment. That said, a State law judgment could serve as
evidence provided by a borrower in filing a borrower defense to
repayment application.
Nothing in this proposed regulation attempts to prevent a borrower
from taking action against an institution of higher education based on
State law. However, for the purpose of evaluating a borrower's defense
to repayment claim, only the new Federal standard will be considered.
The proposed standard takes the same position as in the 2016 final
regulations that certain persons and institutions affiliated with a
school may make misrepresentations leading to a borrower defense to
repayment under circumstances generally understood to render those
misrepresentations attributable to the school.
In the 2016 final regulations, the Department declined to include a
requirement that the borrower prove that the school had acted with
intent in making the misrepresentation. In the preamble to those
regulations, the Department also specifically declined to include any
requirement that the Department find that the school had knowledge of
the misrepresentation. 81 FR 75947. The Department reasoned, in 2016,
that it is more reasonable and fair to have an institution be
responsible for the harm caused to borrowers as a result of a
misrepresentation, even if such a misrepresentation is the result of
innocent or inadvertent mistakes. Id. at 75947-75948.
As was the case in the 2016 final regulations, the Department does
not propose that a defense to repayment be approved only when a school
can be shown to have made a misrepresentation with the intent to induce
the reliance of the borrower on the misrepresentation. The Department
agrees with negotiators that it is unlikely that a borrower would have
evidence to demonstrate that an institution had acted with intent to
deceive. But given its responsibility to the Federal taxpayer, the
Department believes that defense to repayment should be granted only
where a preponderance of the evidence shows that a school has made a
misrepresentation with either knowledge of its falsity or with a
reckless disregard of the truth. The Department's proposal includes a
non-exhaustive list of evidence that may indicate that such a
misrepresentation took place. The Department believes that this
standard strikes a balance between protecting borrowers by establishing
a standard of evidence that is reasonable for a borrower to meet and
protecting the Federal taxpayer by requiring a level of evidence that
ensures misrepresentation actually took place and the student relied
upon that misrepresentation and suffered harm.
Like the 2016 final regulations, the Department's proposed
misrepresentation standard also covers omissions. The Department
believes that an omission of information that makes a statement false,
misleading, or deceptive can cause injury to borrowers and can serve as
the basis for a defense to repayment. As it did in the 2016 final
regulations, the Department recognizes that the reasonableness of a
borrower's reliance on the misrepresentation may depend upon the
circumstances, and its proposed rule thus states that the Department
will look at whether a borrower reasonably relied upon the
misrepresentation ``under the circumstances.''
Under the proposed alternative regulations, which would return to
the practice of allowing borrower defense to repayment applications
only in response to Department collection proceedings, the proposed
standard differs from the time limitations imposed under the 2016 final
regulations. Those regulations imposed a six-year limitation period on
a borrower's ability to raise a defense to repayment claim for amounts
previously collected. Under the proposed standard, a borrower may be
able to assert a defense to repayment at any time during the repayment
period, once the loan is in collections, regardless of whether the
collection proceeding is one year or many years after a borrower's
discovery of the misrepresentation. The proposal does not impose a
limit on the borrower's ability to recover amounts previously collected
by the Department.
The Department considered an alternative approach in which the
borrower would have only three years following the end of enrollment at
the institution to assert a defense to repayment claim. This three-year
limit corresponds to the three-year record retention policy imposed by
the Department. It is unlikely that it would take a borrower more than
three years to realize that he or she was harmed by misrepresentations
upon which the borrower relied to make an enrollment decision. However,
since collection proceedings can be initiated at any time during the
repayment period, the current proposal similarly provides borrowers
with the opportunity to assert a defense to repayment during a
collection proceeding, regardless of how many years after enrollment
that proceeding is commenced. In the event that the Department is
persuaded by public comments provided in response to this NPRM to
continue accepting affirmative claims, the Department proposes to
implement a three-year limit on filing claims after the end of the
borrower's enrollment at the institution accused of misrepresentation.
The proposed standard also differs from the 2016 final regulations
in that it does not include breach of contract or a State law judgment
as a standard for defense to repayment. Although those standards are
utilized by the Department in enforcement actions, and breach of
contract or a State law judgment could be used as evidence to
substantiate a borrower defense claim, breach of contract or a State
law judgment, alone, does not automatically qualify a borrower for
borrower defense to repayment relief since these may pertain to actions
or activities other than the institution's provision of educational
services.
Some negotiators noted that consumer protection laws governing
misrepresentations are generally the province of the States, but the
Department's proposed Federal standard would not invade that province.
The proposed Federal standard would not prevent a borrower from
pursuing a claim against a school based on a violation of State law. It
simply would not provide for that claim to be the basis of a borrower
defense to repayment claim. Thus, it would leave such State law claims
to be pursued through arbitration, State courts, or other
administrative bodies responsible for adjudicating them.
Other negotiators expressed concern that changes to a financial aid
award letter not be construed as misrepresentations, and the Department
agrees that such changes ordinarily would not qualify as
misrepresentations. For example, if a financial aid award letter
changes as a result of a change in the borrower's financial
circumstances, the Department would not consider the change to form the
basis of a borrower defense to repayment claim under our proposed
regulations.
[[Page 37258]]
Borrower Defense--Judgments and Breach of Contract
During the negotiations, the Department discussed using a non-
default, contested Federal or State court judgment issued by a court of
competent jurisdiction, as a possible basis for borrower defense
claims. Negotiators expressed support generally for a judgment-based
standard as one basis for a claim, but some negotiators expressed
concern that lawsuits based on the acts or omissions of a school have
often been concluded by default judgments that did not result from a
contested proceeding or by settlement. Some negotiators also expressed
the concern that borrowers may not have the resources to bring such
lawsuits or that the schools may require borrowers to execute
agreements that would prevent such lawsuits. They urged that the
Department accept judgments obtained by government entities, such as
State Attorneys General. However, since Direct Loans are Federal
assets, only the Federal government has the authority to relieve a
borrower of his or her repayment obligation. Therefore, although a
State law judgment could serve as evidence to support a borrower
defense to repayment claim, the judgment alone would not be sufficient
to grant automatic relief.
The Department had included non-default, favorable contested
judgments as a basis for a borrower defense claim for loans first
disbursed after the anticipated effective date of the 2016 final
regulations. In the preamble to those regulations, the Department
stated that while it does not anticipate such judgments to be common,
such a standard would allow the Department to continue to recognize
State law causes of action, without putting the burden on the
Department to interpret and apply States' laws. 81 FR 75941-75942.
However, this does not alleviate the inequities that can result if, as
a result of differences in State laws, two borrowers who have suffered
equal harm as the result of the same misrepresentation receive
different treatment. Therefore, in this regulation we propose a single
Federal standard that would ensure equal treatment of borrowers
regardless of where they live or their school is located.
The Department acknowledges negotiators' concerns that some court
cases do not result in contested, non-default judgments, such as where
the institution chooses to settle pending litigation or an arbitration
proceeding and satisfies the claim pursuant to a settlement agreement
or consent judgment, or where an insurer for the institution satisfies
the claim. But the Department believes this concern is less pressing
for these regulations, which do not propose a judgment-based standard
for a defense to repayment claims. The Department also acknowledges
that private parties often settle disputes among themselves without
court action. The Department believes that it is preferable for a
school (or its insurer, if such coverage exists) to satisfy a student
borrower's meritorious claims of misrepresentation against it and to
provide appropriate relief directly to the student borrower for the
school's own actions where it is merited. A borrower who receives a
favorable decision in such a dispute but believes he or she still has
not received the relief to which he or she is entitled may submit the
record of that dispute process and decision as evidence in support of
the defense to repayment claim with the Department. As part of its
adjudication of a defense to repayment, and if the evidence is directly
and clearly related to the loan or to the school's provision of
education services for which the loan was provided, the Department may
also consider as evidence findings of fact by a court of competent
jurisdiction or arbitrator, admissions of fact by the school made in a
court of competent jurisdiction or arbitration, and court orders.
During the negotiated rulemaking sessions, one negotiator proposed
including breaches of contract as a basis for borrower defense claims.
In 2016, the Department included breach of contract as a basis for
borrower defense in recognition of lawsuits borrowers have brought
alleging breaches of contract. 81 FR 39341. But the majority of the
defense to repayment applications before the Secretary do not allege
breaches of contract, and the Department believes it is appropriate in
these proposed regulations to tailor the standard to the types of
claims being alleged by borrowers. Moreover, breach of contract, as
described in the 2016 regulations, would cover conduct beyond the scope
of defense to repayment since breach of contract is not limited to the
provision of education services. If the conduct underlying a breach of
contract would satisfy the proposed requirements for a
misrepresentation, a borrower may assert a defense to repayment for
that misrepresentation during a collection proceeding. Or, prior to
those proceedings, a borrower may pursue more expedient relief through
a school's internal dispute process, arbitration, or other legal
proceeding.
While the Department is proposing a new Federal standard based in
misrepresentation for loans first disbursed on or after the anticipated
effective date of the proposed regulations, July 1, 2019, we are not
proposing any changes to the existing State law standard (or, as noted
above, the context in which a defense to repayment may be requested)
for loans first disbursed before the anticipated effective date of
these regulations. Rather, for loans made on or before July 1, 2019,
the Department proposes to keep the State law-based standard in the
currently effective regulations. In the event that a borrower enters
into a consolidation loan, the date on which the loan was consolidated
(prior to or after July 1, 2019) determines whether the Department will
review a defense to repayment claim based on a State law standard or
the proposed Federal standard.
Borrower Defense--Evidentiary Standard for Asserting a Borrower Defense
During the negotiated rulemaking sessions, negotiators were divided
on the evidentiary standard that should be applied to borrower defense
to repayment claims adjudicated by the Department under a Federal
standard. There were extensive discussions regarding the meaning of,
and differences between, the terms ``clear and convincing evidence''
and ``preponderance of the evidence.'' Some negotiators argued that the
evidentiary standard should use terms that are consistent with legal
terminology and precedent. Other negotiators advocated using an
evidentiary standard that is not based on legal terminology and might
be clearer to individual borrowers. In addition, several negotiators
argued in favor of an evidentiary standard based on ``clear and
convincing evidence;'' others argued that a ``preponderance of the
evidence'' standard would be fairer to borrowers, since it would not
require a high level of evidence that borrowers would be unlikely to be
able to provide. One negotiator noted that preponderance of the
evidence is the typical standard that applies in civil cases.
Negotiators representing consumer advocates asserted that the
Department's proposal to apply a preponderance of the evidence standard
that requires corroboration of the borrower's attestation would be
harder to satisfy than a simpler preponderance of the evidence
standard.
We preliminarily agree with negotiators that, given the types of
evidence borrowers are likely to have in their possession, a
preponderance of the evidence standard is appropriate. The Department
is accordingly proposing an
[[Page 37259]]
evidentiary standard that requires the borrower to establish by a
preponderance of the evidence that the school at which the borrower
enrolled made a statement, act, or omission directly and clearly
related to enrollment at the school or the provision of educational
services upon which the borrower reasonably relied under the
circumstances in deciding to obtain a Direct Loan to enroll or continue
enrollment in a program at the school that resulted in financial harm
to the borrower.
As we noted in the 2016 final regulations, the Department uses a
preponderance of the evidence standard in other proceedings regarding
borrower debt issues. See 34 CFR 34.14(b), (c) (administrative wage
garnishment); 34 CFR 31.7(e) (Federal salary offset). We believe that
this evidentiary standard strikes a balance between ensuring that
borrowers who have been harmed are not subject to an overly burdensome
evidentiary standard and protecting the Federal government, taxpayers,
and institutions from unsubstantiated claims.
Proposed Sec. 685.206(d)(5)(ii)--Alternative A would provide that
the Secretary will find that the preponderance of the evidence supports
the approval of a borrower defense to repayment discharge when the
borrower's attestation is supported by sufficient evidence provided by
the borrower or otherwise in the possession of the Secretary. The
Secretary will permit the institution to review and respond to this
evidence and will consider the school's response. Alternative B for
this section would extend this standard to affirmative claims as well.
Borrower Defense--Financial Harm
Consistent with its proposal during the negotiated rulemaking
sessions, the Department proposes that a misrepresentation may serve as
a basis for a borrower defense to repayment only if the
misrepresentation resulted in financial harm to the borrower. During
discussions of this issue, some negotiators argued that the act of
taking a Federal student loan should be sufficient evidence of
financial harm to the borrower. These negotiators suggested that,
absent the misrepresentation, the borrower may have opted to not take a
Federal student loan.
The Department does not agree that taking a Federal student loan,
by itself, is sufficient evidence of financial harm to the borrower in
the context of a borrower defense to repayment. Borrowers consider a
variety of factors in choosing a school or program, including not just
cost, but also other attributes of the school, such as its facilities,
convenience, and the opportunity for the student to enroll in his or
her program of choice (which may be unavailable to the student at other
institutions). The borrower has the opportunity to compare schools' and
programs' relative costs and other factors before committing to borrow
and repay a Federal student loan, and the borrower has the opportunity
to leave an institution should it not provide educational opportunities
or experiences commensurate with the borrower's expectations.
Therefore, even in the event of misrepresentation, the borrower may not
be successful in receiving loan relief under the defense to repayment
regulation if that misrepresentation was not the basis for the
borrower's enrollment decision or it did not cause subsequent financial
harm.
Moreover, the Master Promissory Note signed by the borrower
describes the borrower's obligation to repay the full amount of the
loan even if the student borrower (or the student for whom a PLUS loan
was obtained) does not complete the program, does not complete the
program within the regular time for program completion, is unable to
obtain employment upon completion, or is otherwise dissatisfied with or
does not receive the educational or other services that the student
borrower purchased from the school. The foregoing information is
provided to borrowers again during entrance counseling.
As discussed earlier, some negotiators were concerned that a
borrower might allege misrepresentation on the part of the school based
solely on a change in the borrower's financial aid award due to changes
in financial circumstances or the availability of outside aid, such as
vocational rehabilitation funding. The Department does not view such
changes to necessarily be evidence of a misrepresentation on the part
of the school. Instead, the proposed regulations specify that financial
harm may be established if, for example, there were a significant
difference between the actual amount or nature of the tuition and fees
charged by the school for which the Direct Loan was obtained and the
amount or nature of the tuition and fees that the school represented to
the borrower the school would charge or was charging. Similarly,
financial harm might be established if an institution awarded sizeable
grants or scholarships to attract a student to an institution, but then
failed to continue such support throughout the program (except in cases
in which the student failed to meet the requirements of the scholarship
or grant), because the student could have made the decision to enroll
based on the reasonable belief that scholarship or grant support would
continue. Such misrepresentation could potentially form the basis of a
defense to repayment claim.
Some negotiators advocated including opportunity costs or the
quality of education as evidence of financial harm. However, the
Department believes these assertions of financial harm are too
difficult to quantify to be used for that purpose.
Under the 2016 final regulations, a borrower was required to show
that he or she had reasonably relied upon the misrepresentation to his
or her detriment. 81 FR 76083 (text of 34 CFR 685.222(d)(1)). The use
of the word ``detriment'' echoed the definition for substantial
misrepresentation under the Department's regulation for its enforcement
activities for a school's misrepresentation under 34 CFR 668.71, which
was expressly cross-referenced by the 2016 final regulations' borrower
defense to repayment standard. While the 2016 final regulations did not
include a definition for ``detriment,'' in the preamble, the Department
noted that generally the term refers to any loss, harm, or injury
suffered by a person or property. 81 FR 75951. Further, the Department
stated that there was no quantum or minimum amount of detriment
required for borrower defense under the substantial misrepresentation
standard and a school's failure to provide some element or quality of a
program that had been promised may be such a detriment. Id.
Under the proposed Federal standard, a borrower would be required
to demonstrate that the borrower had suffered financial harm as a
result of the misrepresentation by the school, and does not use the
word ``detriment.'' As the Department is not proposing to align the
Department's enforcement regulation at 34 CFR 668.71 for
misrepresentation to the borrower defense to repayment standard, we do
not believe it is necessary to use the same term in the proposed
regulation. Further, in light of the Department's interest in balancing
the need to protect both borrowers and Federal taxpayers, the
Department believes it is appropriate to require that financial harm,
in the form of a monetary loss as a result of the misrepresentation, be
present for a borrower defense to repayment to be approved. As with the
2016 final regulations, however, the Department does not believe it is
necessary for a borrower to demonstrate
[[Page 37260]]
a specific level of financial harm, other than the presence of such
harm, to be eligible for relief under the proposed standard.
Borrower Defense--Filing Deadline for Asserting a Borrower Defense
Claim
During the negotiated rulemaking sessions, negotiators discussed
whether to impose time limits on a borrower's ability to assert a
borrower defense to repayment and possible time periods for such
limits. Some negotiators expressed concern that the imposition of a
limitation period would bar otherwise valid borrower defenses to
repayment, even when the loan(s) in question remained collectible under
Federal law.
The proposed regulations do not impose a statute of limitations on
the filing of a borrower defense to repayment claim. However, a
borrower must comply with the filing deadlines established for the
different proceedings in which a borrower defense claim may be raised.
For example, when the Department intends to garnish a borrower's wages,
the borrower is sent a notice of the Department's intention to initiate
wage garnishment and is provided 30 days to request a hearing to
dispute that action. A borrower could raise a defense to repayment
claim during that 30-day timeframe, but would not be able to raise a
claim after that period has elapsed.
With our regulatory proposal to accept defense to repayment claims
during the enumerated collection proceedings, as opposed to the
regulatory proposal to accept both defensive and affirmative claims, we
do not propose to incorporate the timeframes for submission of borrower
defense to repayment claims that were included in the 2016 final
regulations. As discussed previously, the 2016 final regulations
established time limits for borrowers' claims regarding recovery of
amounts previously collected, but allowed defenses of repayment for
amounts owed to be brought at any time. This NPRM instead enables
borrowers to assert claims during collection proceedings, which can
occur at any time during the repayment period. Borrowers can
accordingly raise their defenses whenever such proceedings are
instituted, but must comply with the existing filing deadlines for
raising defenses in those collections proceedings. The Department
proposes adopting the existing filing deadlines for defensive claims
both because amending those deadlines was beyond the scope of the
negotiated rulemaking and because harmony of deadlines will reduce
confusion for borrowers.
The filing deadlines for the various proceedings in which a
defensive borrower defense claim may be raised are reflected in the
chart below:
---------------------------------------------------------------------------
\3\ The days listed may vary depending on the particular
circumstances of each borrower's situation.
------------------------------------------------------------------------
Number of days
\3\ for
Collection action borrower
response
------------------------------------------------------------------------
Tax Refund Offset proceedings........................... 65
under 34 CFR 30.33......................................
Salary Offset proceedings for Federal employees under 34 65
CFR part 31............................................
Wage Garnishment proceedings............................ 30
under section 488A of the HEA...........................
Consumer Reporting proceedings.......................... 30
under 31 U.S.C. 3711(f).................................
------------------------------------------------------------------------
Similar to our approach to timeframes in this NPRM, for suspension
of collections, we follow the existing processes in the applicable
collection proceeding. For example, with regard to wage garnishment
proceedings under section 488A of the HEA, the accompanying regulations
at 34 CFR 32.10 state that the wage deductions do not begin until a
written decision has been issued, if the borrower has requested a pre-
offset hearing to review the existence of amount of the debt. Thus, if
a borrower defense claim has been raised in the context of a wage
garnishment proceeding, collections would be suspended until a written
decision on the wage garnishment has been issued. The 2016 final
regulations also included suspension of collection for defaulted loans
during a pending borrower defense claim.
If the Department were to accept affirmative claims as well as
defensive claims, the Department proposes to impose a three-year time
limit on borrowers to file such claims based on regulations that
require institutions to retain administrative records for three years,
while allowing defensive claims to be asserted at any time in response
to collection proceedings. The Department welcomes comments on other
approaches to set up a window for submitting affirmative claims. Since
institutions would likely need access to records to defend themselves
against inaccurate claims, it would make sense to require that
affirmative borrower defense claims must be made within the first three
years after a student leaves an institution. We recognize that in the
case of defensive claims, it is likely that the institution would no
longer have access to certain records, but the Department must balance
that concern with the need to provide borrowers an opportunity to make
a defense to repayment claim during already established opportunities
for the borrower to challenge collection of the loan.
Borrower Defense--Exclusions
As discussed above, the Department's consistent position since 1995
has been that the Department will acknowledge a borrower defense to
repayment only if it directly relates to the loan or to the school's
provision of educational services for which the loan was provided. 60
FR 37769. As a result, the Department has not considered personal
injury tort claims or allegations of sexual or racial harassment to be
grounds for alleging a defense to repayment. In these regulations, the
Department proposes making this limit explicit and provides a non-
exhaustive list of circumstances that would not constitute, in and of
themselves, borrower defenses to repayment that are directly related to
the borrower's loan or the provision of educational services. This list
also includes slander or defamation, property damage, and allegations
about the general quality of the student's education or the
reasonableness of an educator's conduct in providing educational
services. The Department believes such a list will provide clarity and
guidance for borrowers and schools in applying the proposed defense to
repayment regulation.
The proposed regulations further state that a violation of the HEA
does not by itself establish a defense to repayment, unless the
underlying conduct also meets the Federal standard under the
regulations. This has been the Department's consistent position since
1995. See 60 FR 37769; 81 FR 76053 (text of 34 CFR 685.222(a)(3)
(defense to repayment regulation does not provide a private right of
action for a borrower nor create any new Federal right)).
For all of these reasons, we are proposing to adopt the regulations
described above and to rescind the Federal standard provisions of the
2016 final regulations.
Borrower Defense Adjudication Process (Sec. Sec. 685.206, 685.212)
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of a school a borrower
may assert as a defense to repayment of a Direct Loan.
Current Regulations: Section 685.206(c) provides that borrowers may
[[Page 37261]]
assert a borrower defense to repayment during proceedings which are
available to the borrower when the Department initiates certain
collection actions on a Direct Loan.
Section 685.212 establishes the conditions under which the
Department discharges a borrower's obligation to repay a loan, or a
portion of a loan, under various discharge or forgiveness provisions of
the HEA, including closed school discharges, false certification
discharges, and public service loan forgiveness.
Proposed Regulations: Proposed Sec. 685.206(d)(2) and (3)
describes the process by which a borrower would file a borrower defense
to repayment application for a loan disbursed on or after July 1, 2019.
Proposed Sec. 685.206(d)(2) would specify that a borrower may assert a
borrower defense to repayment in any of the enumerated proceedings to
collect on a Direct Loan. Proposed Sec. 685.206(d)(3) would specify
that the borrower must raise a defense to repayment within the
specified timeframe included in the notification to the borrower of the
Department's action to collect on a defaulted student loan. The
borrower would submit a completed borrower defense to repayment
application to the Department on a form approved by the Secretary and
signed under penalty of perjury. The borrower must also submit any
evidence supporting the defense to repayment within the specified
timeframe included in the Department's directions to the borrower.
Proposed Sec. 685.206(d)(7) provides that the school against which
the borrower alleges misrepresentation in a defense to repayment will
be notified of the pending application and allowed to submit a response
and evidence within the specified timeframe included in the notice.
Proposed Sec. 685.206(d)(8) provides the items the Secretary may
consider in resolving a borrower defense to repayment claim and that,
following such consideration, the Secretary will issue a written
decision informing both the borrower and the school of the relief, if
any, that the borrower will receive.
Proposed Sec. 685.206(d)(9) would provide that the Secretary would
decide the amount of financial relief provided to the borrower upon the
determination of successful borrower defense to repayment. This section
also would provide that the amount of relief awarded to a borrower
during the borrower defense process would be reduced by any amounts
that the borrower obtained from the school or other sources for claims
related to the justification of the defense to repayment, as reported
pursuant to proposed Sec. 685.206(d)(3).
Proposed Sec. 685.206(d)(10) provides that the determination of a
borrower defense by the Department is final and not subject to appeal.
Proposed Sec. 685.212(k)(1) would add borrower defense discharges
to the discharge provisions listed in Sec. 685.212.
Reasons: During negotiated rulemaking, some negotiators were in
favor of the Department providing borrowers with a non-adversarial
process through which to seek resolution, with others asserting that in
such a process, the Department should rely primarily on the borrower's
attestation, submitted under penalty of perjury, and that corroborating
evidence could come from the Department's own records. Other
negotiators advocated for a more extensive process for resolving
borrower defenses to repayment, and asserted that an unsubstantiated
assertion of wrongdoing by a borrower should not be sufficient to
justify the discharge of a borrower's Federal student loans or to
impose a financial liability upon the school for the relief provided to
the borrower.
The 2016 final regulations established separate adjudication
processes for borrower defense to repayment applications submitted by
individuals and those to be considered as a group. Generally, for the
individual application process, the 2016 final regulations established
that a borrower would submit an application on a form approved by the
Secretary and provide any supporting evidence or other information or
documentation reasonably requested by the Secretary. A Department
official would then take appropriate action to put the borrower in loan
forbearance, if not declined by the borrower, or, in the case of a
defaulted loan, in stopped collection status. Next, the Department
official would conduct a fact-finding process, during which the
Department would notify the school of the defense to repayment
application and consider the application and any supporting evidence
provided by the borrower. According to the 2016 regulations, the
Department official would consider any additional information found in
the Department's records, or obtained by the Department. If requested
by the borrower, the Department would identify relevant records to the
borrower and provide such records upon reasonable request. At the end
of the process, the Department official would issue a written decision.
Although the written decision would be the final decision of the
Department, the borrower could request reconsideration, upon the
identification of ``new evidence,'' or relevant evidence not previously
provided by the borrower or identified in the written decision. 81 FR
76083-76084 (text of 34 CFR 685.222(e)).
The process proposed by the Secretary in this NPRM would require
that the borrower submit an application to the Department along with
any supporting evidence. Whereas the 2016 final regulations did not
explicitly provide an opportunity for schools to submit evidence and
information in response to the borrower defense claim, this NPRM
proposes to provide schools with an opportunity to provide a response
and supporting evidence. Given the fact-specific nature of
misrepresentation claims, the Department believes that it is
appropriate to obtain as much evidence as possible from all sources,
including from the school alleged to have made the misrepresentation.
The Department would not, however, rely upon Department records or
other information obtained by the Secretary, unless the school had an
opportunity to review and respond to such evidence. The Department
believes that the proposed process will assist it in making fair and
accurate decisions, while providing borrowers and schools with due
process protections.
As discussed in the section titled ``Defense to Repayment--Federal
Standard for Asserting a Defense to Repayment,'' the Department is
proposing that borrowers who have defaulted on a Direct Loan may raise
a defense to repayment of loans first disbursed on or after July 1,
2019, on the basis of the proposed Federal misrepresentation standard,
in response to a notice of the Department's intent to engage in certain
collection actions. The Department's existing regulations as to those
collection actions provide certain processes and protections for
borrowers, which the Department is not proposing to change and would
apply to borrower defense to repayment applications made during the
course of those proceedings.
As is the case for defense to repayment claims under the existing
regulation and the 2016 final regulations, the Department proposes that
a decision made in the adjudication process be final as to the merits
of the defense to repayment and any relief to be provided as a result.
In this way, borrowers will not be subject to the additional wait that
an appeal period may cause and will receive more expedient relief. We
address the issue of reconsideration later in this section.
[[Page 37262]]
In the 2016 final regulations, the Department established a process
for evaluating defense to repayment applications, regardless of the
substantive standard that would be applied to the defense to repayment.
Because the Department is now proposing that, for loans first disbursed
on or after the anticipated effective date of these regulations (July
1, 2019), defenses to repayment applications be made only during the
specified collection proceedings. The Department will continue to apply
the State law standard for loans made prior to July 1, 2019. The
Department proposes only clarifying updates to the statutory and
regulatory cross-references for the collection proceedings listed for
defenses to repayment for pre-effective date loans, and otherwise
retains the existing language of current 34 CFR 685.206(c) as to such
defenses to repayment applications. We also propose to rescind the
process for adjudication of borrower defense to repayment portions of
the 2016 final regulations.
The Department seeks public comment regarding potential processes
that could be used to adjudicate affirmative claims, should the
Department accept affirmative claims for some period after a borrower
ends enrollment at an institution. The Department preliminarily
believes that such a process must include an opportunity for the
institution to receive a copy of the borrower's claim and a signed
waiver allowing the institution to share relevant portions of the
borrower's education record with the Department, and provide sufficient
time for the institution to provide a response and any supporting
evidence of its own to the Secretary. In order to assist the
Department's assessment of the harm a potential misrepresentation
caused a borrower, the borrower, in submitting a defense to repayment
claim, might also be required to submit information about whether, for
reasons other than the education received, the borrower has been
removed from a job due to on-the-job-performance, disqualified from
work in the field for which the borrower trained, or working less than
full-time in the chosen field. In addition, the Secretary proposes to
include a provision emphasizing to borrowers submitting affirmative or
defensive claims that if the borrower receives a 100 percent discharge
for the loan, the institution has the right to withhold an official
transcript for the borrower, to avoid any confusion or surprise that
would result from such withholding. Finally, the regulations make clear
that the Secretary will also review both the borrower's claim and the
institution's response in making a defense to repayment decision.
Additional Borrower Defense to Repayment Application Process Proposals
At the negotiated rulemaking sessions, the Department proposed that
the regulations could allow borrowers to ask the Secretary to
reconsider a denial of a defense to repayment, if the reconsideration
claim was supported by newly discovered evidence. The negotiating
committee discussed variations on this reconsideration process idea, in
which either the school or the borrower could submit additional
evidence to the Department. Negotiators also proposed that the
regulations include an early dispute resolution process, whereby the
Department or another party would mediate borrower defense disputes
between a borrower and the school, to attempt to resolve the dispute
without the need for the parties to go through the Department's full
borrower defense adjudication process.
Under our proposed process for adjudicating defenses to repayment,
a defense to repayment would be submitted in response to the
Department's collection actions on a defaulted loan on a form approved
by Secretary, and the Department's Federal Student Aid office will make
a decision on the defense to repayment based on the submissions from
the borrower and the school, if any. The borrower and the school will
each be afforded the opportunity to see and respond to evidence
provided by the other.
The reconsideration process proposed by some members of the
negotiated rulemaking committee would involve either the borrower or
the school submitting additional, newly discovered, evidence to the
Department. Under the process and standard included in these proposed
regulations, the Department expects to receive and consider all
relevant evidence from the borrower and the institution during its
consideration of the borrower's defense. Therefore, we do not believe
that an appeal process or a process for reconsideration will be needed,
nor is one included in these proposed regulations.
With regard to the proposed early dispute resolution process, the
Department does not believe such a process is appropriate within the
proposed regulations governing borrower defense. A borrower and a
school may pursue voluntary resolution of a claim by the borrower at
any time, without the involvement of the Department. A borrower may
also pursue relief through his or her state consumer protection agency.
Group Process
A group of negotiators proposed that the Department establish a
process for considering groups of borrower defenses to repayment
claims. They argued that groups of borrowers who were all subject to
the same act or omission by a school should have their defenses
considered together as a group. These negotiators also asserted that a
group process in these cases would be more efficient and would result
in more equitable treatment of similarly situated borrowers.
The 2016 final regulations provided for a group process.
Specifically, the Secretary could initiate, upon consideration of
factors including, but not limited to, common facts and claims, fiscal
impact, and the promotion of compliance by the school or other title
IV, HEA program participant, a process to determine whether a group of
borrowers has a legitimate borrower defense claim. Those regulations
provided for the Secretary to identify groups comprised of borrowers
who individually filed applications, as well as borrowers who did not
file applications, should those borrowers have common facts and claims.
81 FR 76084. The Department further differentiated the processes based
upon whether the subject school was open or closed. 81 FR 76085.
The Department does not include a group process, whether the school
in question is open or closed, in these proposed regulations. Because
relief through a borrower's defense to repayment claim is based not
just on evidence of misrepresentation, but also evidence that the
borrower reasonably relied on the misrepresentation in deciding to
enroll or continue enrollment in the institution, and was harmed by the
misrepresentation, the Department must consider each borrower's claim
independently. The Department recognizes that a group of borrowers with
defaulted loans who are each subject to a proceeding to collect on a
Direct loan may assert misrepresentation on the part of the same school
based on the same facts and circumstances, such as when the student
borrowers were enrolled in a program that the school advertised to the
public as being fully accredited by a specific programmatic accrediting
agency when, in fact, it was not so accredited. The Department may, at
its discretion, determine it is more efficient to establish facts
regarding claims of misrepresentation put forth by a group
[[Page 37263]]
of borrowers. However, in approving an individual defense, the
Secretary would still need to determine that the borrower made a
decision based on the misrepresentation, that the borrower was harmed
by the misrepresentation, and to what, if any, amount of or type of
relief the borrower is entitled. To make that determination, it will be
necessary to have a completed application from each individual
borrower, and to examine the facts and circumstances of each borrower's
individual situation. In addition, it would be inappropriate to subject
borrowers who did not individually submit defense to repayment claims
to the possible collateral consequences of debt relief, including
potentially having their transcript withheld.
Relief
Proposed Sec. 685.206(d)(9) would provide that the Secretary would
decide the amount of financial relief provided to the borrower upon the
determination of an approved defense to repayment discharge. As part of
this determination, the amount of relief awarded to a borrower during
the defense to repayment process would be reduced by any amounts that
the borrower received from other sources based on a claim by the
borrower that relates to the same loan and the same misrepresentation
by the school as the defense to repayment. The rule would prevent a
double recovery for the same injury at the expense of the Federal
taxpayer.
As noted in the preamble to the 2016 final regulations, the
Department has a responsibility to protect the interests of Federal
taxpayers as well as borrowers. As a result, we continue to believe
that establishing a legal presumption of full relief would not be
appropriate. See, e.g., 81 FR 75973-75974. While the Department's other
loan discharge processes for closed school discharges, 34 CFR 685.214;
false certification, 34 CFR 685.215; and unpaid refunds, 34 CFR
685.216, do provide for full loan discharges and recovery of funds paid
on subject loans, the factual premises for such discharges are clearly
established in statute and are relatively straightforward. In contrast,
we anticipate that determinations for borrower defense claims will
involve more complicated issues of law and fact since students may have
been told different things by different representatives of an
institution or may have heard the same statements differently. In many
instances, borrower defense claims assert that an admissions
representative made certain claims or promises, and yet without a
recording of the actual conversation, it is hard to know precisely what
was said, the degree to which the borrower relied on that information
to make an enrollment decision, and the harm that came from the
decision.
In the NPRM for the 2016 final regulations, the Department proposed
certain methodologies for calculating relief, 81 FR 39420, but
ultimately did not include those in light of their confusing nature, 81
FR 75976. Instead, the Department stated that it would consider factors
such as the value of the education provided by the school and the
student's cost of attendance, as well as conceptual, non-binding
examples for substantial misrepresentation claims. See 81 FR 76086-
76087. The Department proposes to allow for partial relief, based on
the degree of harm suffered by the borrower. Given the complexity of
such determinations, however, the Department invites comments on this
proposal and on methods for calculating partial relief in connection
with defenses to repayment. We also propose to rescind the application
provisions of the 2016 final regulations.
Recovery From The School (Sec. Sec. 685.206 and 685.308)
Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution of
higher education a borrower may assert as a defense to repayment of a
Direct Loan.
Current Regulations: Section 685.206(c)(3) states that the
Department may initiate an appropriate proceeding to require a school
whose act or omission resulted in a successful borrower defense to
repayment to require the school to pay the Department the amount of the
loan to which the defense applies. It specifies that this proceeding
may not be initiated after the period of record retention required in
Sec. 685.309(c), unless the school received notice of the borrower's
defense during that period.
Proposed Regulations: Proposed Sec. 685.206(d)(13) would clarify
that, for borrower defense to repayment discharges granted under the
new Federal standard, the Secretary may initiate, within five years of
the date of the final determination of the borrower's defense to
repayment application, an appropriate proceeding to require a school
whose misrepresentation resulted in an approved borrower defense to
repayment discharge to pay the Department the amount of the discharged
loan. The recovery proceeding would be conducted in accordance with 34
CFR part 668 subpart G.
Proposed Sec. 685.206(d)(11) would require that a borrower who has
received a defense to repayment loan discharge reasonably to cooperate
with the Secretary in any proceeding to recover funds from the school.
The Secretary may revoke relief granted to a borrower who does not
fulfill this obligation. Proposed Sec. 685.206(d)(12) would require a
borrower whose defense to repayment is successful to transfer to the
Secretary any right to recovery against third parties of any amounts
discharged by the Department, based on the borrower's defense to
repayment.
Conforming changes would be made by proposed Sec. Sec. 685.300 and
685.308 related to the agreements signed by schools to participate in
the Direct Loan Program and to remedial actions that the Department may
take to require repayment of funds from schools in various
circumstances, respectively.
Reasons: Proposed Sec. 685.206(d)(13) would establish that the
Secretary may initiate a recovery proceeding to require the school
whose act or omission resulted in the borrower's successful defense to
repayment discharge of a Direct Loan to pay to the Secretary the amount
discharged. The Department proposes the subpart G hearing as a
mechanism for recovery of funds from schools resulting from a borrower
defense to repayment discharge. These proceedings are well established
in regulation and familiar to schools. The subpart G hearing offers due
process to schools, with an opportunity for a preconference hearing via
telephone, an informal meeting, or a paper process; submission of
evidence; and a hearing. The burden of proof rests with the Department,
and the school has an opportunity to appeal the decision of the hearing
official to the Secretary.
Proposed Sec. 685.206(d)(11) would help to ensure that the
Department receives the borrower's cooperation, if needed, in any
proceeding against the school. It is similar to the requirements
applicable to other loan cancellation provisions. Cooperation includes
providing testimony regarding any representation made by the borrower
to support a successful borrower defense to repayment, and producing,
within timeframes established by the Secretary, any documentation
reasonably available to the borrower with respect to those
representations and any sworn statement required by the Secretary with
respect to those representations and documents.
In the preamble to the 2016 final regulations, 81 FR 75929-75932,
the Department explained that it has the legal authority to recover
liabilities from
[[Page 37264]]
schools related to approved borrower defenses to repayment. The
Department continues to maintain that it has this authority under its
statutory and existing regulatory framework as part of its
responsibility to administer the Direct Loan Program for the reasons
stated in the preamble to those regulations. We note that this has been
the Department's consistent position on borrower defenses to repayment,
as is reflected in the existing borrower defense to repayment
regulation at 34 CFR 685.206(c)(3).
Consistent with the Department's longstanding view, we propose in
these regulations to add language to 34 CFR 685.300 regarding Program
Participation Agreements schools must sign to participate in the Direct
Loan Program. This language would clarify that schools are responsible
to the Department for the amounts of the loans underlying approved
borrower defense claims, as well as those for other Direct Loan
discharges (closed school discharges, false certification discharges,
and unpaid refund discharges) approved under the Department's other
regulations. The Department also proposes to amend 34 CFR 685.308 to
make corresponding changes clarifying that the Department may take
remedial actions to recover such losses. The Department also proposes
to rescind the recovery from schools provisions of the 2016 final
regulations.
Statute of Limitations for Recovering Funds From Schools (Sec. Sec.
685.206 and 685.308)
The negotiators discussed whether to impose a time limit on the
Department's ability to recover losses for the amount of an approved
borrower defense to repayment from a school. Negotiators noted that
current Sec. 685.206(c)(3) imposes a three-year limit on the
Secretary's ability to initiate an action based on the period for the
retention of records described in Sec. 685.309(c). This three-year
limit is derived from Sec. Sec. 668.24 and 685.309(c), which describe
the requirement to retain ``program records''--records of the
determination of eligibility for Federal student financial assistance
and the management of Federal funds provided to the school. Section
668.24(e)(2) provides that the school must keep records of borrower
eligibility and other records of its ``participation'' in the Direct
Loan Program for three years after the last award year in which the
student attended the school. In these proposed regulations, we maintain
this time limit for recovery actions on approved borrower defense to
repayment claims for loans first disbursed before July 1, 2019.
We propose to extend that time limit to five years from the date of
the Department's final determination on the borrower's defense to
repayment for loans first disbursed after July 1, 2019. Although, as
explained above, the Department does not view liabilities from borrower
defense to repayment as fines, penalties, or forfeitures, a five-year
limitation period is used in other contexts by the Federal government,
such as in enforcement actions. See 28 U.S.C. 2462. Further, given that
the Department does not have a basis for recovery against a school
until a borrower defense to repayment has been approved, we believe
that the five years should run from the final determination of a
borrower's defense to repayment claim, instead of from the last award
year the borrower attended school. Therefore, we propose in these
regulations that for loans first disbursed on or after July 1, 2019,
the Secretary will provide notice to the school of the defense to
repayment application and will not initiate such a proceeding more than
five years after the date of the final determination of the borrower's
defense to repayment. We also propose to rescind the statute of
limitations provisions of the 2016 final regulations.
Pre-Dispute Arbitration Agreements and Internal Dispute Processes
(Sec. Sec. 668.41 and 685.304)
Statute: Section 485(a) of the HEA identifies information that
participating schools must provide to prospective and enrolled
students. Sections 485(b) and (l) of the HEA establish counseling
requirements for borrowers of Federal student loans. Section 454(a) of
the HEA authorizes the Secretary to specify in regulation the
requirements for school participation in the Direct Loan program.
Current Regulations: Section 668.41 describes the information a
school must report and disclose to prospective and enrolled students.
Section 668.41(a) defines terms used in the regulation. Section 685.304
describes the required entrance counseling that schools must provide to
Federal Direct Loan borrowers prior to making the first disbursement of
a Federal Direct student loan.
Proposed Regulations: We propose a new Sec. 668.41(h), which would
require schools that use pre-dispute arbitration agreements or class
action waivers as a condition of enrollment to disclose that
information in writing in an easily accessible format to students,
prospective students, and the public. We propose to add definitions to
paragraph (h)(2) for the terms ``class action,'' ``class action
waiver,'' and ``pre-dispute arbitration agreement.'' We propose to
define ``class action'' to mean a lawsuit or an arbitration proceeding
in which one or more parties seeks class treatment pursuant to Federal
Rule of Civil Procedure 23 or any State process analogous to Federal
Rule of Civil Procedure 23. We propose to define ``class action
waiver'' as any agreement or part of an agreement between a school and
a student that relates to the provision of educational services for
which the student received title IV funding and prevents an individual
from filing or participating in a class action that pertains to those
services. We propose to define ``pre-dispute arbitration agreement'' as
any agreement or part of an agreement between a school and a student
requiring arbitration of any future dispute between the parties
relating to the making of a Direct Loan or provision of educational
services for which the student received title IV funding.
We also propose to make other revisions to Sec. 668.41: revising
paragraph (a) to amend the definition of ``undergraduate students'' to
specify that such students are those enrolled in a program ``at or''
below the baccalaureate ``level,'' and revising paragraph (c) to add
cross-references to new Sec. 668.41(h).
Proposed revisions to Sec. 685.304 would require schools that
require borrowers to accept pre-dispute arbitration agreements or class
action waivers as a condition of enrollment to (1) clearly, and in
plain language, provide written explanation to the borrower of the
nature and application of the pre-dispute arbitration agreement and/or
class action waiver, and (2) provide to the borrower written
information on the availability of the school's internal dispute
resolution process.
Reasons: Current regulations do not address the use of pre-dispute
arbitration agreements or class action waivers in enrollment agreements
between schools and students or in other documents that must be signed
by the student as a condition of enrollment.
In 2016, the Department issued regulations that prohibited a school
participating in the Direct Loan Program from enforcing class action
waivers or pre-dispute arbitration agreements against borrowers with
Direct Loans for claims that may form the basis of a borrower defense
to repayment claim. The 2016 final regulations required participating
schools to ``forgo reliance on any pre-dispute agreement with a student
that waives the student's right
[[Page 37265]]
to participate in a class action against the school related to a
borrower defense claim.'' 81 FR at 75927, 76088. However, the 2016
regulations did permit a borrower to enter into a voluntary post-
dispute arbitration agreement with a school to arbitrate a borrower
defense claim. For these voluntary post-dispute arbitrations, the
Department required institutions to submit copies of the arbitral
filings, responses, awards, and certain other documents to the
Secretary within 60 days of the filing or receipt by the school, as
applicable. The Department also required schools to submit certain
judicial records of lawsuits filed as to claims related to borrower
defense to repayment.
Since issuance of the 2016 final regulations and subsequent delay
of their effective date, schools have been allowed to continue
enforcing pre-dispute arbitration agreements, and the Department has
heard from students, advocates representing students, and the public
about this practice. Many of these groups told the Department that the
implications of class-action waivers or pre-dispute arbitration
agreements can be unclear to students when they enroll at a school.
These groups urged the Department to take steps to provide increased
protection for student loan borrowers. Other negotiators argued that
students are and can be well-served by the arbitration process, which
they contend can be a more efficient, timely, and cost-effective option
for dispute resolution.
The Department is aware of court decisions holding that
prohibitions on pre-dispute arbitration agreements and class action
waivers violate the Federal Arbitration Act (FAA). The FAA
``establishes a liberal federal policy favoring arbitration
agreements'' that applies ``unless the FAA's mandate has been
overridden by a contrary congressional command.'' CompuCredit Corp. v.
Greenwood, 565 U.S. 95, 98 (2012). This policy protects the right of
parties to set dispute resolution procedures by contract.
In the 2016 regulations, the Department took the position that the
HEA gives the Department broad authority to impose conditions on
schools that wish to participate in a Federal benefit program and that
regulation of the use of pre-dispute arbitration agreements and class
action waivers was necessary to ``protect the interests of the United
States and promote the purposes'' of the Direct Loan Program under
section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6). We recognize, as
explained in the preamble to the 2016 final regulations, that pre-
dispute arbitration agreements and class action waivers may, in some
circumstances, not be well understood by consumers or facilitate the
Department's awareness of potential issues faced by students at a
school. However, our reweighing of the issue and subsequent legal
developments have led us to believe that the Department should take a
position more in line with the strong Federal policy favoring
arbitration.
We believe that arbitration offers a number of potential advantages
in this context. Arbitration may, for example, be more accessible to
borrowers since it does not require legal counsel and can be carried
out more quickly than a legal process that may drag on for years. It
may also allow an institution to more quickly identify and stop bad
practices to ensure that other students are not harmed. It may also
allow borrowers to obtain greater relief than they would in a consumer
class action case where attorneys often benefit most. And it may reduce
the expense of litigation that a university would otherwise pass on to
students in the form of higher tuition and fees. Arbitration also eases
burdens on the overtaxed U.S. court system.
Our reexamination of the legal landscape also weighs in favor of
the Department's proposal not to disrupt pre-dispute arbitration
agreements or class-action waivers. In particular, the U.S. Supreme
Court recently held that the FAA governs, unless Congress ``manifests a
clear intention'' to displace it, and that arbitration agreements
``must be enforced as written.'' Epic Systems Corp. v. Lewis, 584
U.S.--, 2018 WL 2292444 at 17 (May 21, 2018). Thus, in Epic Systems
Corp v. Lewis, the Court declined to afford deference to the National
Labor Relations Board's reading of the National Labor Relations Act
(NRLA) to trump FAA policy--even though an agency's interpretation of
its own statute normally receives deference. Id. Nothing in the NLRA
manifested Congress's clear intention to displace the FAA, and the FAA
accordingly controlled.
Epic Systems is consistent with the Supreme Court's earlier
decision holding that a prohibition on class arbitration waivers in
consumer contracts violates the FAA, AT&T Mobility LLC v. Concepcion,
563 U.S. 333, 347-51 (2011). We believe that the Supreme Court's recent
reaffirmation of the Federal policy in favor of arbitration may warrant
a different approach to these regulations.
That belief is further supported by recent congressional action.
Specifically, Congress passed, and the President signed, a joint
resolution disapproving a final rule published by the Bureau of
Consumer Financial Protection (BCFP) that would have regulated pre-
dispute arbitration agreements in contracts for specified consumer
financial products and services. That proposed rule was informed by the
same extensive study conducted by the BCFP on the impact of such
agreements that the Department relied on in its rationale for the pre-
dispute arbitration and class action waiver provisions in the 2016
final regulations. In light of Congress' clear action, the Department
believes a change in its position to align with the strong Federal
policy in favor of arbitration is appropriate.
The Department thus proposes to revise its treatment of pre-dispute
arbitration agreements and class action waivers. It is not currently
proposing to ban such agreements or waivers. And given the burden to
the Department of reviewing such records, the Department is also not
proposing that institutions be required to report information about
arbitration awards or judicial proceedings to the Secretary. However,
the Department acknowledges negotiators' concerns that borrowers and
students may not understand the implications of arbitration agreements
and class action waivers that may be included in their agreements with
the school.
The Department agrees that it is important that students understand
what a pre-dispute arbitration agreement or class action waiver means,
so that students can elect to enroll at an institution that does not
include such provisions if the student so desires. Also, it is
important for a student who attends an institution that requires
arbitration to know how to access and utilize arbitration, thus the
requirement that schools relying upon mandatory arbitration provide
plain language instruction on both the meaning of this restriction and
the ways a student can access it. Thus, the Department is proposing
regulatory changes to promote greater transparency by schools that
require students to enter into such agreements as a condition of
enrollment, to allow borrowers the opportunity to make an informed
choice as to whether to enroll in such schools.
During the negotiated rulemaking sessions, the Department proposed
including in the regulations a requirement that schools including pre-
dispute arbitration agreements or class action waivers in their
enrollment agreements clearly disclose that information to prospective
and continuing students, and educate borrowers during loan entrance
[[Page 37266]]
counseling about pre-dispute arbitration agreements, class action
waivers, and the schools' internal dispute processes. Negotiators
expressed two distinct points of view about the value of arbitration:
Some believed that an internal dispute resolution process or
arbitration proceeding serves the best interests of students, schools,
and taxpayers. They noted that the Department, as well as accreditors,
direct students with complaints to first attempt to resolve those
complaints with the school. And some of those negotiators also asserted
that arbitration can be quicker and less expensive than a court
proceeding, provide meaningful relief to the student at the school's
(rather than the Federal taxpayers') expense, and allow schools to
resolve issues with students outside of the courts. In contrast, other
negotiators expressed concerns that requiring students to use an
internal dispute resolution process or arbitration, or prohibiting
students from joining class action lawsuits, was more likely to
suppress students' meritorious claims against their schools.
Negotiators also differed as to the benefits of increased
transparency about such agreements. Some negotiators supported the
Department's proposal, asserting that it would enable prospective and
continuing students to make an informed choice before taking out a
Federal student loan to enroll or continue enrollment at a school that
required these agreements. They also noted that, if these processes are
beneficial to students, as asserted by some schools, this would be an
additional reason for highlighting them in the enrollment and student
loan application processes. One negotiator expressed concern that the
Department's initial proposed language was too broad and could apply to
arbitration agreements unrelated to the school's provision of
educational services, such as arbitration agreements relating to the
use of campus parking facilities or other student services.
After hearing from the negotiators, and for the foregoing reasons,
the Department has concluded that it is better to require schools to
disclose the existence of pre-dispute arbitration agreements and class
action waivers, rather than, as was done in 2016, outright ban these
practices. We acknowledge one negotiator's concern about the
Department's initial proposed language and have altered the proposed
definition of ``pre-dispute arbitration agreement'' to make clear that
the requirement applies only to agreements requiring arbitration of any
future disputes between the parties relating to the making of a Direct
Loan or the provision of educational services for which the student
received title IV funding. The Department believes that it would be
burdensome to schools and the Department to require submission of
arbitration documentation (which also may contain confidential
information) and are not proposing to include this requirement here. We
therefore propose to rescind our 2016 final regulations that banned
pre-dispute arbitration agreements and class action waivers, as well as
the requirement that schools using arbitration submit specific
documentation to the Department.
Closed School Discharges (Sec. Sec. 674.33, 682.402, and 685.214)
Statute: Sections 437(c) and 464(g)(1) of the HEA provide for the
discharge of a borrower's liability to repay a FFEL Loan or a Perkins
Loan if the student is unable to complete the program in which the
student was enrolled due to the closure of the school. The same
discharge is available to Direct Loan borrowers under section 455(a) of
the HEA.
Current Regulations: Sections 674.33(g), 682.402(d), and 685.214
describe the qualifications and procedures in the Perkins, FFEL, and
Direct Loan Programs for a borrower to receive a closed school
discharge. Under Sec. Sec. 674.33(g)(4), 682.402(d)(3), and
685.214(c), a Perkins, FFEL, or Direct Loan borrower, respectively,
must submit a written request and supporting sworn statement, under
penalty of perjury, to apply for a closed school discharge. Sections
674.33(g)(4)(i)(B), 682.402(d), and 685.214 provide that, to qualify
for a closed school discharge a student must have been enrolled in the
school at the time it closed or must have withdrawn from the school not
more than 120 days before the school closed. The regulations also
provide that the Secretary may extend the 120-day window under
exceptional circumstances. Sections 674.33(g)(4)(i)(C),
682.402(d)(3)(ii)(C), and 685.214(c)(1)(i)(C) provide that a borrower
may qualify for a closed school discharge if the borrower did not
complete, and is not in the process of completing, the program of study
through a teach-out at another school.
Proposed Regulations: Proposed revisions to Sec. Sec.
674.33(g)(4), 682.402(d)(3) and (d)(6)(ii)(G) and (H), and 685.214(c)
would replace the requirement that, to apply for a closed school loan
discharge, the borrower submit a sworn statement with a requirement
that the borrower submit a completed application signed under penalty
of perjury.
Proposed revisions to Sec. Sec. 674.33(g), 682.402(d), and
685.214(c) would extend the window for a borrower to qualify for a
closed school discharge based on withdrawal from a closed school
without completion of a program from 120 days before the school closed
to 180 days, and would modify some of the examples of ``exceptional
circumstances'' under which the Secretary may extend the proposed 180-
day period.
Proposed Sec. Sec. 674.33(g)(4)(i)(D), 682.402(d)(3)(iii), and
685.214(c)(1)(ii) would state that if a closing school provided an
opportunity to a borrower to complete the program of study while the
school was still open by allowing students to complete their program of
study before shutting down through an orderly closure (referred to by
accreditors as a teach-out) approved by the school's accrediting agency
and, if applicable, the school's State authorizing agency, the borrower
would not qualify for a closed school discharge.
Proposed revisions to Sec. 682.402(d)(6)(ii)(F) would require a
guaranty agency that denies a closed school discharge request to inform
the borrower of the opportunity to request a review of the guaranty
agency's decision by the Secretary and explain how the borrower may
request that review. Proposed Sec. 682.402(d)(6)(ii)(J) would describe
the responsibilities of the guaranty agency and the Secretary if the
borrower requests a review.
Reasons:
Application Process
The current regulations refer to a borrower submitting a sworn
statement made under penalty of perjury, but borrowers now apply for
closed school discharges by filing a Federal closed school discharge
application. This application includes several certifications that the
borrower must make under penalty of perjury. The closed school
discharge application takes the place of the sworn statement that was
formerly required, and several of our proposed revisions to the
regulations reflect that change.
In the 2016 regulations, the Department included provisions that
provided automatic closed school discharges for borrowers who have not
re-enrolled in a Title IV-eligible institution within three years of
their schools' closures. See, e.g., 81 FR at 76038.
During the 2017-2018 negotiations, some negotiators proposed that
the Department also provide for an automatic closed school discharge in
certain circumstances. The negotiators
[[Page 37267]]
proposed that a borrower who attended a closed school and who did not
re-enroll within one year, or, alternatively, three years, of the
school closing be granted a closed school discharge without being
required to submit an application.
In these regulations, we are not proposing an automatic closed
school discharge. Under existing Sec. Sec. 674.33(g)(3)(ii),
682.402(d)(8), and 685.214(c)(2), the Department may grant a closed
school discharge without an application if the Secretary determines,
based on information in the Secretary's (or, in the case of a FFEL
loan, the guaranty agency's) possession that the borrower qualifies for
the discharge. Thus, the Secretary already has the authority to grant a
discharge without an application in appropriate cases at her
discretion, and, therefore, we do not believe that it is necessary to
establish in the proposed regulations a requirement that the Secretary
grant automatic closed school discharges. In addition, because an
institution (or the entity maintaining records from a closed school)
might withhold official transcripts of borrowers who received a defense
to repayment of closed school discharge, automatic discharges could
have collateral consequences for students who did not opt-in.
Furthermore, through these proposed regulations, the Department is
encouraging schools that are closing to go through an orderly closure,
which includes offering appropriate teach-outs to their students. Under
the proposed regulations, students who decline to participate in an
appropriate teach-out, when made available by the institution and
approved by the accreditor (and, if applicable, State authorizing
entities) are not eligible for a closed school discharge. An
application will be useful, and in some cases necessary, for the
Department to determine whether the student was provided with an
appropriate opportunity to complete a teach-out. For these reasons, we
are proposing to rescind the regulations concerning automatic closed
school discharge that were part of the 2016 final regulations.
Extending the Window To Qualify for a Closed School Discharge From 120
Days to 180 Days
The HEA provides that a borrower may receive a closed school
discharge if the borrower ``is unable to complete the program in which
the student is enrolled due to the closure of the institution,''
(sections 454(g)(1) and 437(c)(1)) but does not establish a period
prior to the closure of the school that a borrower may withdraw and
still qualify for a closed school discharge. The Department has
nevertheless long interpreted the statute to allow discharge for
students who withdraw a short time before a school closure, recognizing
that a precipitous closure may be preceded by degradation in academic
quality or student services. In 2013, the Department expanded the
window for eligibility for a closed school loan discharge from 90 to
120 days, meaning that students who withdraw from the school within 120
days of the school's closure are eligible for closed school loan
discharge.
In the 2016 final regulations, the Department determined that the
120-day look-back period to qualify for closed school discharge in
current regulations is sufficient. The Department noted that under
current regulations in Sec. 685.214(c)(1)(B), it has the authority to
extend the look-back period due to ``exceptional circumstances.'' At
that time, we believed that this provision provided appropriate
flexibility to the Department in cases where it may be necessary to
extend the look-back period. See 81 FR at 76040.
However, during the 2017-2018 negotiated rulemaking sessions, the
Department proposed to extend the window for a borrower to qualify for
a closed school discharge from 120 days to 150 days, and most
negotiators supported that proposal. Some negotiators expressed
concerns that extending the window to 150 days would significantly
increase the number of borrowers who could qualify for a closed school
discharge, even if those borrowers could have graduated before the
school closed. They also noted that closed school discharges apply to
locations of a school that are closed, not just to schools that have
closed entirely, and many large universities have campuses at different
locations that they may choose to close in a responsible, planned
manner. One negotiator noted that schools often engage in short-term
partnerships with private entities to provide instruction at specific
off-campus locations. Even though such programs may be intended to last
for only a short term to address a specific need in the community,
students attending the school at these locations could qualify for
closed school discharges. In the view of these negotiators, extending
the window for eligibility for a closed school discharge could have the
effect of discouraging innovation and creativity by schools involving
other locations.
Some negotiators expressed concern that a longer window could lead
to strategic behavior on the part of borrowers. For example, if a
borrower is aware that a school will be closing, the borrower could
continue to attend the school and take out more loans, with the
intention of getting the loans discharged once the school closes. These
borrowers may be unaware that the institution might withhold official
transcripts from students who receive closed school discharges. Since a
longer window under which a borrower could qualify for a closed school
discharge would also increase the opportunity for a borrower to
complete the program in a school that is planning to close, these
negotiators argued that a borrower should not qualify for a closed
school discharge if the borrower could have completed the program
before the school closure date.
Other negotiators did not agree that borrowers should be ineligible
for a closed school discharge if they could have completed the program
at the school prior to its closure. They pointed out that schools that
close precipitously may show symptoms of failing months before the
actual closure date. These negotiators stated that they have seen
evidence of degradation in their interactions with such schools as
teachers and administrative staff members leave and the quality of
services provided by the school deteriorates. In the view of these
negotiators, borrowers at such schools should qualify for a closed
school discharge, even if they could have stayed at the failing school
and completed their program before the school officially closed its
doors.
Some of these negotiators proposed extending the window for a
closed school discharge to a year, since, in their view, a school that
closes may have problems well in advance of the actual closure date.
The negotiators pointed out that a school that only planned to open a
location temporarily, or that engaged in a planned, responsible closure
of a location, could stop accepting new students at the location, and
commit to allowing the current students to complete their studies at
the location before shutting down--in other words, conduct an orderly
closure under an approved teach-out plan--to avoid a dramatic expansion
of the borrowers entitled to closed-school discharge under this longer
look-back period.
Other negotiators objected strongly to the proposal to extend the
window to a full year. They stated that this would put schools in the
position of having to track every student who may have withdrawn or
transferred during that one-year period until those students completed
a program at another school, creating a ``quagmire'' for schools.
[[Page 37268]]
Based on the feedback we received and the Department's recent
experience with precipitous school closures, the Department is
proposing to extend the period to 180 days--60 days longer than
provided in the current regulations. We believe that 180 days makes the
most sense because it takes into account the situation in which, as a
result of the summer break during which time many institutions offer
few or no classes, a student who withdraws one semester prior to a
school's precipitous closure could have withdrawn as many as 180 days
earlier.
Exceptional Circumstances
The Department proposes clarifications and modifications to
Sec. Sec. 674.33(g)(4)(i)(B), 682.402(d), and 685.214 that provide
examples of ``exceptional circumstances'' under which the Secretary may
extend the period of time to provide a closed school discharge. For
example, we propose replacing the reference in the existing regulations
to the ``loss of accreditation'' with language referring to
``revocation or withdrawal by an accrediting agency of the school's
institutional accreditation.''
Generally, the negotiating committee approved of these changes. One
negotiator proposed adding an additional exceptional circumstance: The
school's discontinuation of the student's program of study. However,
other negotiators noted that the closed school discharge is intended
for closed school situations, not situations in which a school
terminates an academic program. These negotiators believed that adding
a reference to the discontinuation of a student's academic program in
the ``extenuating circumstances'' provision would be inconsistent with
the statutory intent of the closed school discharge. Because the closed
school discharge regulations are intended to address the closure of an
entire school or branch campus, as opposed to discontinuation of a
specific program offered at such a location, we agree with these
negotiators. Therefore, we have declined to include this additional
exceptional circumstance in the proposed regulations.
Teach-Out Plans, Orderly Closures and Transfer of Credits
Under these proposed regulations, we are proposing that students
who are provided an opportunity to complete their program through a
teach-out plan or an orderly closure approved by the school's
accreditor and, if applicable, the school's State authorizing agency
would not have the right to receive a closed school discharge as long
as the school upheld the conditions of the teach-out plan or orderly
closure. We believe that closing schools should be encouraged to offer
accreditor-approved and, if applicable, State authorizer-approved
teach-out plans and orderly closures to allow students the reasonable
opportunity to complete the academic programs, either at another
location after the school has closed, or by continuing to offer classes
to students until they have completed their program of study before the
school officially closes.
One negotiator noted that while closing schools may conduct orderly
closures or offer teach-out plans, a borrower can choose not to
participate in an orderly closure or a teach-out plan. This negotiator
argued that a borrower should not qualify for a closed school discharge
if he or she could have completed the program through an orderly
closure or through a teach-out plan, but chose not to do so. In this
negotiator's view, the law is written to encourage borrowers in closed
school situations to complete their programs under the approved teach-
out plan or through an orderly closure and not to receive closed school
discharges.
We agree that borrowers who have a reasonable opportunity to
complete their academic programs through an orderly closure or a teach-
out plan should not qualify for a closed school discharge, if the
orderly closure or the teach-out plan has been approved by the school's
accrediting agency and, if applicable, the school's State authorizing
agency. In such cases, the closure of the school did not render the
student unable to complete the program in which the student was
enrolled. Borrowers who attend closing schools may be better served by
completing their programs, either at the school or at another school
through a teach-out plan, than by having their loans forgiven and being
required to start their education over at another institution. Students
should be encouraged to complete their academic program, not to have
their loans discharged. And schools should be encouraged to provide
their students with an opportunity to do so. It is for this reason that
accreditors are required to review and approve a school's teach-out
plan if the institution is at risk for closure.
Department Review of Guaranty Agency Denial of a Closed School
Discharge Request
In the Perkins Loan and Direct Loan Programs, closed school
discharge determinations are made by the Department. The Department is
the loan holder for all Direct Loans and becomes the loan holder for
Perkins Loans held by a school that closes. In the FFEL Program, closed
school discharge determinations are generally made by the guaranty
agency. The current FFEL Program regulations do not specifically
provide an opportunity for a review of the guaranty agency's
determination of a borrower's eligibility for a closed school
discharge. Proposed Sec. 682.402(d)(6)(ii)(F) would provide an
opportunity for the borrower to receive Departmental review of closed
school discharge claims which have been denied by the guaranty agency
to provide a more complete review of the claims, comparable to that
provided for false certification discharge claims.
A negotiator pointed out that existing regulations allow the
Department to review closed school discharge application denials for
Direct Loan borrowers. This proposal is intended to establish parity
between the FFEL and Direct Loan programs with regard to the review of
closed school discharge applications.
Additional Closed School Discharge Proposals
The negotiated rulemaking committee also discussed several
additional proposed revisions to the closed school discharge
regulations.
Some negotiators proposed adding a provision specifying that a
borrower who graduated prior to the school's closure could not qualify
for a closed school discharge. The Department does not need to add such
a provision. A borrower who graduates prior to the closure of a school
is already ineligible for closed school discharge because the student
has completed his or her program of study and received a credential.
One negotiator proposed narrowing the scope of the closed school
discharge by disqualifying a borrower from a closed school discharge if
the borrower completed a ``comparable program'' of study at another
school. Another negotiator suggested defining ``comparable program'' as
meaning a program of equal or greater value or quality, based on
academic outcomes, graduation rates, and default rates. Another
negotiator recommended determining ``comparable program'' based on the
Classification of Instructional Programs (CIP) code plus credential
level. However, other negotiators expressed concerns that this proposal
might push borrowers into programs in which they originally did not
intend to enroll. They expressed concern that a student may be pushed
into a program that is not really ``comparable'' to the borrower's
original
[[Page 37269]]
program. A student may enroll in the program because there is nothing
else comparable nearby, although the better option for the student
would have been to apply for the closed school discharge. Other
negotiators questioned the value of adding the ``comparable program''
language at all. One negotiator suggested that, since a borrower can
transfer credits to another program, there is no need to explicitly use
or define the term ``comparable program'' in the regulations.
Given the uncertain statutory authority for, or effect of adding
the ``comparable program'' language suggested by the negotiator, the
Department declines to propose including such a provision in the
regulations.
False Certification Discharges (Sec. 685.215)
Statute: Section 437(c) of the HEA provides for the discharge of a
borrower's liability to repay a FFEL Loan if the student's eligibility
to borrow was falsely certified by the school. The false certification
discharge provisions also apply to Direct Loans, under the parallel
terms, conditions, and benefits provision in section 455(a) of the HEA.
Section 484(d) of the HEA specifies the requirements that a student who
does not have a high school diploma or a recognized equivalent of a
high school diploma must meet to qualify for a title IV, HEA loan.
Current Regulations: Section 685.215(a)(1)(i) provides that a
Direct Loan borrower may qualify for a false certification discharge if
the school certified the eligibility of a borrower who was admitted on
the basis of the ability to benefit, but the borrower did not in fact
meet the eligibility requirements in 34 CFR part 668 and section 484(d)
of the HEA, as applicable. Section 685.215(c) and (d) describes the
qualifications and procedures for receiving a false certification
discharge.
Proposed Regulations: The proposed changes to Sec.
685.215(a)(1)(i) would eliminate the reference to ``ability to
benefit'' and specify that a borrower qualifies for a false
certification discharge if the borrower reported not having a high
school diploma or its equivalent and did not satisfy the alternative to
graduation from high school requirements in 34 CFR part 668 and section
484(d) of the HEA. Thus, under proposed Sec. 685.215(a)(1)(i), if a
school certified the eligibility of a borrower who is not a high school
graduate (and does not meet the applicable alternative to high school
graduation requirements) at the time the loan was disbursed, the
borrower would qualify for a false certification discharge.
Proposed Sec. 685.215(c) and (d) would update the procedures for
applying for a false certification discharge. Proposed Sec.
685.215(c)(1) would describe the requirements a borrower must meet to
qualify for a discharge based on a false certification of high school
graduation status. Proposed Sec. 685.215(c)(1)(ii) would specify that
a borrower who was unable to obtain an official transcript or diploma
from his or her high school and, in place of a high school transcript
or diploma, submitted a written attestation that the borrower had a
high school diploma, does not qualify for a false certification
discharge if the borrower actually did not have a high school diploma.
The attestation would have to be provided under penalty of perjury.
Reasons:
Application Process
Current Sec. 685.215(c) requires the borrower to submit a
``written request and a sworn statement'' to apply for a false
certification discharge. We propose replacing this language with a
requirement that the borrower submit an application for discharge on
``a form approved by the Secretary, signed under penalty of perjury,''
to bring the regulations up to date with the current process. Borrowers
applying for false certification discharges now submit a Federal false
certification discharge application. This application includes several
certifications that the borrower must make under penalty of perjury.
The false certification discharge application takes the place of the
sworn statement that was formerly required.
False Certification of a Borrower Without a High School Diploma or
Equivalent
We propose removing the ``ability to benefit'' language from Sec.
685.215(a)(1)(i) because there is no longer a statutory basis for
certifying the eligibility of non-high school graduates based on an
``ability to benefit.'' Section 484(d) of the HEA establishes different
standards under which a non-high school graduate may qualify for title
IV aid. We believe that it is preferable to refer to section 484(d) of
the HEA by cross-reference, rather than to incorporate the statutory
language in the regulations. Under this approach, the regulatory
language will incorporate any current or future alternatives to the
high school graduation requirements specified in section 484(d) of the
HEA.
Some of the non-Federal negotiators noted that a borrower may
provide false information to the school the borrower is applying to
attend regarding their high school graduation status. The negotiators
asserted that, unless the school investigates the borrower's claim that
he or she is a high school graduate--for instance by requesting
transcripts, which are harder to falsify than a diploma--the school may
unknowingly falsely certify the borrower's eligibility. One negotiator
proposed adding language specifying that, for a borrower to qualify for
a false certification discharge, the school must be unable to provide
to the Department clear and convincing evidence that the student
provided the school with evidence of their high school graduation
status. The negotiator pointed out that in some instances--for example
with homeschooled students--the school basically only has a
representation from the student that the student is a high school
graduate. Under this proposal, the borrower would have to demonstrate
that the school knowingly certified the eligibility of the borrower
even though the borrower did not meet the high school graduation
requirements.
There was strong disagreement between the negotiators over whether
the school must ``knowingly'' falsely certify the high school
graduation status of a borrower for the borrower to qualify for a false
certification discharge. Some negotiators noted that it is the school's
responsibility to determine the borrower's eligibility. If the school
does not, and certifies eligibility anyway, the borrower's eligibility
may have been falsely certified, and the borrower should qualify for
the discharge. Other negotiators felt that a mistaken certification of
eligibility should not qualify a borrower for a false certification
discharge. One negotiator pointed out that, regardless of whether the
school knew if the borrower was a high school graduate, if the school
certified a non-high school graduate's eligibility, the borrower's
eligibility would still have been falsely certified, and the borrower
would still qualify for a false certification discharge. Other
negotiators expressed concern with this proposal, noting that borrowers
would have a difficult time proving that the school ``knowingly''
falsified the borrower's eligibility.
Under current regulations, a school may be responsible for the
repayment of funds related to a false certification discharge due to a
school's ``negligent or willful false certification'' (34 CFR
685.308(a)(2)). It would be inconsistent with these requirements to
require that a school would have to ``knowingly'' falsely certify a
borrower's eligibility for the borrower to qualify for a false
certification discharge. However, the
[[Page 37270]]
Department believes that schools should be able to rely on an
attestation from a borrower that the borrower earned a high school
diploma in cases when the borrower is unable to obtain an official
transcript or diploma from the high school. Therefore, we are proposing
regulatory language that would provide that when a borrower provides an
institution an attestation of their high school graduation status for
purposes of admission to the institution, they may not subsequently
qualify for a false certification discharge based on not having a high
school diploma. Moreover, if the institution has confirmed with a State
authority that the school was approved by that State to issue high
school diplomas at the time of the borrower's graduation from that
school, the institution must collect evidence that a student has a bona
fide diploma from the school. The school has no additional obligation
to collect transcripts or other information in order to certify the
student.
A negotiator noted that the current regulations specify that the
borrower qualifies for a false certification discharge if the borrower
did not have a high school diploma or recognized equivalent at the time
the loan was originated. The negotiator pointed out that the loan can
be originated but the funds might not be disbursed and suggested that
the date of disbursement might be the appropriate date rather than the
date of origination. In addition, a borrower could be a senior in high
school at the time the loan was originated, with the expectation that
the borrower will have graduated high school at the time of enrollment.
While a loan can be originated months before a borrower enrolls in a
school, it is not disbursed until the student is enrolled.
The Department agrees that using disbursement date rather than
origination date would be a more accurate indicator that a school
falsely certified a borrower's high school graduation status, and has
made that change in the proposed language.
One negotiator suggested amending the regulations to specify that a
borrower must have a ``valid high school diploma.'' The negotiator
believed that this addition would protect schools from companies that
create false diplomas for potential student loan borrowers. Although
the 2016 final regulations did not use the phrase ``valid high school
diploma,'' those regulations added language to 34 CFR 685.215 intended
to state more explicitly that a school's certification of eligibility
for a borrower who is not a high school graduate, and who does not meet
the alternative to high school graduate requirements, is grounds for a
false certification discharge. As explained in the preamble to the NPRM
for the 2016 final regulations, the added language was meant to address
the problem of schools encouraging students to obtain false high school
diplomas to qualify for Direct Loans. See 81 FR 39377. Upon further
review however, the Department believes that the existing language of
34 CFR 685.215, with its proposed updates for changes in the
Department's statutory authority as noted above, already covers such
circumstances. The Department accordingly does not propose including
such additional language in the regulations proposed in this NPRM, and
proposes to rescind these provisions of the 2016 final regulations. A
school still falsely certifies a borrower's eligibility if it is aware
that a student does not have a high school diploma and encourages the
student to obtain a false diploma. The addition of the word ``valid''
to the requirement that a borrower have a high school diploma would not
have any meaningful effect, as an ``invalid'' high school diploma would
not be a ``high school diploma'' for the purposes of this regulation.
In the 2016 final regulations, the Department also added language
to clarify a provision in existing 34 CFR 685.215 that a borrower may
receive a false certification discharge of a Direct Loan if the school
certified the eligibility of a student who, because of a physical or
mental condition, age, criminal record, or other reason accepted by the
Secretary, would not meet the requirements for employment in the
student's State of residence in the occupation for which the training
program for which the loan was provided was intended--or in other
words, certified the student despite the fact that the student had a
disqualifying status. 34 CFR 685.215(a)(1)(iii). Upon further review,
however, the Department believes that the changes in the 2016 final
regulations did not alter the operation of the existing regulation as
to disqualifying conditions in any meaningful way, and as a result does
not propose such added language in these regulations. We, therefore,
propose to rescind this provision of the 2016 final regulations.
Finally, in the 2016 final regulations, the Department added that
the Department may consider evidence that a school had falsified the
Satisfactory Academic Progress (SAP) of its students to determine
whether to discharge a borrower's loan without an application from the
borrower. 81 FR 76082 (text of 34 CFR 685.215(c)(8)). Existing 34 CFR
685.215 already provides that the Department may discharge a borrower's
Direct Loan by reason of false certification without an application.
Evaluation of an institution's implementation of their SAP policy is
already part of an FSA program review, so there is already a mechanism
in place to identify inappropriate activities in implementing an
institution's SAP policy. Therefore, the Department declines to include
such a provision in the regulations proposed in this NPRM and proposes
rescinding this provision of the 2016 final regulations.
Financial Responsibility (Sec. 668.171 General)
Statute: Section 487(c)(1) of the HEA authorizes the Secretary to
establish reasonable standards of financial responsibility. Section
498(a) of the HEA provides that, for purposes of qualifying an
institution to participate in the title IV, HEA programs, the Secretary
must determine the legal authority of the institution to operate within
a State, its accreditation status, and its administrative capability
and financial responsibility.
Section 498(c)(1) of the HEA authorizes the Secretary to establish
ratios and other criteria for determining whether an institution has
the financial responsibility required to (1) provide the services
described in its official publications, (2) provide the administrative
resources necessary to comply with title IV, HEA requirements, and (3)
meet all of its financial obligations, including but not limited to
refunds of institutional charges and repayments to the Secretary for
liabilities and debts incurred for programs administered by the
Secretary.
Current Regulations: The current regulations in Sec. 668.171(a)
mirror the statutory requirements that to begin and to continue to
participate in the title IV, HEA programs, an institution must
demonstrate that it is financially responsible. The Secretary
determines whether an institution is financially responsible based on
its ability to provide the services described in its official
publications, properly administer the title IV, HEA programs, and meet
all of its financial obligations.
The Secretary determines that a private non-profit or proprietary
institution is financially responsible if it satisfies the ratio
requirements and other criteria specified in the general standards
under Sec. 668.171(b) and appendix A or B to subpart L of the General
Provisions regulations. Under those standards, an institution:
Must have a composite score of at least 1.5, based on its
Equity, Primary Reserve, and Net Income ratios;
[[Page 37271]]
Must have sufficient cash reserves to make required
refunds;
Must be current in its debt payments. An institution is
not current in its debt payment if it is in violation of any loan
agreement or fails to make a payment for 120 days on a debt obligation
and a creditor has filed suit to recover funds under that obligation;
and
Must be meeting all of its financial obligations,
including but not limited to refunds it is required to make under its
refund policy or under Sec. 668.22, and repayments to the Secretary
for debts and liabilities arising from the institution's participation
in the title IV, HEA programs.
Proposed Regulations: We propose to restructure Sec. 668.171, in
part, by amending paragraph (b) and adding new paragraphs (c) and (d)
that provide that an institution does not or may not be able to meet
its financial or administrative obligations if it is subject to one or
more of the following actions or events:
Mandatory triggering events:
Liabilities from borrower defenses to repayment or final
judgments or determinations. After the end of the fiscal year for which
the Secretary has most recently calculated an institution's composite
score, the institution incurs a liability arising from borrower defense
to repayment discharges granted by the Secretary, or a final judgment
or determination from an administrative or judicial action or
proceeding initiated by a Federal or State entity and as a result of
that liability, the institution's recalculated composite score is less
than 1.0, as determined by the Secretary under proposed paragraph (e)
of this section.
Withdrawal of owner's equity. For a proprietary
institution whose composite score is less than 1.5, there is a
withdrawal of owner's equity from the institution by any means,
including by declaring a dividend (unless the withdrawal is a transfer
to an entity included in the affiliated entity group on whose basis the
institution's composite score was calculated), and as a result of that
withdrawal, the institution's recalculated composite score is less than
1.0, as determined by the Secretary under proposed paragraph (e) of
this section.
SEC and Exchange Actions for publicly traded institutions.
The SEC issues an order suspending or revoking the registration of the
institution's securities pursuant to section 12(j) of the Securities
and Exchange Act of 1934 (the ``Exchange Act'') or suspends trading on
the institution's securities on any national securities exchange
pursuant to section 12(k) of the Exchange Act or the national
securities exchange on which the institution's securities are traded
delists, either voluntarily or involuntarily, the institution's
securities pursuant to the rules of the relevant national securities
exchange.
Discretionary triggering events:
Accrediting agency actions. The institution is issued a
show-cause order that if not satisfied, would lead the accreditor to
withdraw, revoke or suspend institutional accreditation.
Loan agreement violations. The institution violated a
provision or requirement in a security or loan agreement with a
creditor, and as provided under the terms of that security or loan
agreement, a monetary or nonmonetary default or delinquency event
occurs, or other events occur, that trigger, or enable the creditor to
require or impose on the institution, an increase in collateral, a
change in contractual obligations, an increase in interest rates or
payments, or other sanctions, penalties, or fees.
The institution is cited by a State licensing or
authorizing agency for violating a State or agency requirement and
notified that its licensure or authorization will be withdrawn or
terminated if the institution does not take the steps necessary to come
into compliance with those requirements.
90/10 Revenue Requirement. For its most recently completed
fiscal year, a proprietary institution did not derive at least 10
percent of its revenue from sources other than title IV, HEA program
funds, as provided under Sec. 668.28(c).
Cohort default rate (CDR). The institution's two most
recent official cohort default rates are 30 percent or greater, as
determined under 34 CFR part 668, subpart N, unless the institution
files a challenge, request for adjustment, or appeal under that subpart
with respect to its rates for one or both of those fiscal years, and
that challenge, request, or appeal remains pending, results in reducing
below 30 percent the official cohort default rate for either or both
years, or precludes the rates from either or both years from resulting
in a loss of eligibility or provisional certification.
Also, we propose to add a new paragraph (e) under which the
Secretary would recalculate an institution's most recent composite
score for a mandatory triggering event under proposed paragraph (c)(1)
by recognizing as an expense the actual amount of the liability
incurred by an institution or by accounting for the withdrawal of
owner's equity. Specifically, the Secretary would use the audited
financial statements from which the institution's most recent composite
score was calculated and would account for that expense or withdrawal
by:
For the actual liabilities incurred by a proprietary
institution, (1) increasing expenses and decreasing adjusted equity by
that amount for the primary reserve ratio, (2) decreasing modified
equity by that amount for the equity ratio, and (3) decreasing income
before taxes by that amount for the net income ratio.
For the withdrawal of owner's equity, (1) decreasing
adjusted equity by the amount for the primary reserve ratio, and (2)
decreasing modified equity by that amount for the equity ratio.
For the actual liabilities incurred by a non-profit
institution, (1) increasing expenses and decreasing expendable net
assets by that amount for the primary reserve ratio, (2) decreasing
modified net assets by that amount for the equity ratio, and (3)
decreasing change in net assets without donor restrictions by that
amount for the net income ratio.
In addition, we propose to add a new paragraph (f) under which an
institution would be required to notify the Secretary no later than 45
days after the end of its fiscal year if it did not satisfy the 90/10
revenue requirement, and notify the Secretary no later than 10 days
after any other mandatory or discretionary triggering event occurs. In
that notice, or in response to a preliminary determination by the
Secretary that the institution is not financially responsible based on
one or more of those actions or events, the institution could:
Demonstrate that the reported withdrawal of owner's equity
was used exclusively to meet tax liabilities of the institution or its
owners for income derived from the institution;
Show that the mandatory or discretionary event has been
resolved, or demonstrate that the institution has insurance that will
cover all or part of the liabilities that arise from final judgments or
determinations; or
Provide information about the conditions or circumstances
that precipitated that triggering event that demonstrates that the
action or event has not or will not have a material adverse effect on
the institution.
Show that the creditor waived a violation of a loan
agreement and if applicable, identify any conditions or changes to the
loan agreement that the creditor imposed in exchange for granting the
waiver.
Finally, the Secretary would consider the information provided by
the institution in determining whether to issue a final determination
that the
[[Page 37272]]
institution is not financially responsible.
Reasons: Under the current process, for the most part, the
Department determines annually whether an institution is financially
responsible based on its audited financial statements, which are
submitted to the Department six to nine months after the end of the
institution's fiscal year. Under these proposed regulations, we may
determine at the time that certain actions or events occur that the
institution is not financially responsible. We address the significance
of an action or event that occurs after the close of an audited period
(or, in other words, between audit cycles), to assess in a more timely
manner whether the institution, regardless of its composite score,
satisfies the statutory requirements that it is able to provide the
services described in its publications and statements, to provide the
administrative resources necessary to comply with title IV, HEA
requirements, and to meet all of its financial obligations. In doing
so, we propose to expand the range of events that could make an
institution not financially responsible, from the provisions under
Sec. 668.171(b)(3) relating to whether an institution is current in
its debt payments, to other events that may pose a material adverse
risk to the financial viability of the institution. In cases where the
Department determines that an event poses a material adverse risk, this
approach would enable us to address that risk contemporaneously by
taking the steps necessary to protect the Federal interest.
Mandatory Triggering Events
With regard to liabilities arising from defenses to repayment
discharges adjudicated by the Secretary or an administrative or
judicial action or proceeding initiated by a Federal or State entity,
we would assess the risk by determining whether the payment of those
liabilities would cause the institution's composite score to fall below
1.0. As noted above, the actual amount of the liability would be
treated as an expense and the Department would recalculate the
institution's most recent composite score using that amount. Assuming
that an institution's composite score is 1.0 or higher, if its
recalculated composite score does not fall below 1.0, we would conclude
that the institution has the resources to pay those liabilities and
continue operations. In cases where the institution's recalculated
score is less than 1.0, we would conclude that the payment of those
liabilities would have a material adverse effect on its operations that
warrants additional oversight and financial protection.
During negotiated rulemaking, several non-Federal negotiators
argued that including liabilities arising from judicial or
administrative actions initiated by a Federal or State entity may cause
small or not material changes from an accounting perspective, and
reporting those liabilities to the Department would be burdensome and
of little value. They suggested that an institution should report only
those liabilities that are material, as determined by the institution
or its accountant. While we agree that reporting all liabilities from
actions resulting in final judgments or determinations may not be
necessary, we are concerned that the subjective nature of materiality
evaluations could result in an institution not reporting an otherwise
significant action. We believe that a better, more objective, approach
would be to evaluate the impact of the liability on the institution's
composite score, regardless of the amount or materiality of the
liability.
The withdrawal of owner's equity is currently an event that an
institution reports to the Department under the provisions of the zone
alternative in Sec. 668.175(d). An institution participates under the
zone alternative if its composite score is between 1.0 and 1.5. We
proposed at negotiated rulemaking to relocate this provision to the
general standards of financial responsibility under Sec. 668.171.
Under those general standards, this provision would still be a
reportable event, but only in cases where an institution's financial
condition is already precarious and any withdrawal of funds from the
institution would further jeopardize its ability to continue as a going
concern. In this NPRM, we propose to account for the withdrawal of
owner's equity by decreasing adjusted equity and modified equity in
recalculating the institution's composite score. Doing so would enable
the Department to quantify objectively the impact of the withdrawal.
For publicly-traded institutions, we believe that the SEC or stock
exchange-related issues listed in the proposed regulations are actions
which would jeopardize the institution's ability to meet its financial
obligations or continue as a going concern.
When the SEC suspends trading on the institution's stock, the SEC
does not make this warning public or announce that it is considering a
suspension until it determines that the suspension is required to
protect investors and the public interest.\4\ In that event, the SEC
posts the suspension and the grounds for the suspension on its website.
Therefore, under the reporting requirements in proposed Sec.
668.171(e), the institution would be required to notify the Department
within 10 days of receiving notification from the SEC that the
institution is being suspended. The SEC may decide to, for example,
suspend trading on the institution's stock based on (1) a lack of
current, accurate, or adequate information about the institution, for
example when the institution is not current in filing its periodic
reports; (2) questions about the accuracy of publicly available
information, including information in institutional press releases and
reports and information about the institution's current operational
status, financial condition, or business transactions; or (3) questions
about trading in the stock, including trading by insiders, potential
market manipulation, and the ability to clear and settle transactions
in the stock.\5\ Because an action by the SEC to suspend trading in, or
delist, an institution's stock directly impairs an institution's
ability to raise funds--creditors may call in loans or the
institution's credit rating may be downgraded--the Department needs to
be informed of those actions in a timely manner.
---------------------------------------------------------------------------
\4\ See SEC Investor Bulletin: Trading Suspensions, available at
www.sec.gov/answers/tradingsuspension.htm.
\5\ Id.
---------------------------------------------------------------------------
With regard to compliance with stock exchange requirements, the
major exchanges typically require institutions whose stock is listed to
satisfy certain minimum requirements such as stock price, number of
shareholders, and the level of shareholder's equity.\6\ Among other
things, if a stock falls below the minimum price, the institution fails
to provide timely reports of its performance and operations in its Form
10-Q or 10-K filings with the SEC, or other requirements are not met,
the exchange may delist the institution's stock. Delisting is generally
regarded as the first step toward a Chapter 11 bankruptcy. However,
before the exchange initiates a process to delist the stock, the
exchange notifies the institution and may, as applicable, give the
institution several days to respond
[[Page 37273]]
with a plan of the actions it intends to take to come into compliance
with exchange requirements.
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\6\ See, e.g., New York Stock Exchange Rule 801.00:
Suspension and Delisting: Securities admitted to the list may be
suspended from dealings or removed from the list at any time that a
company falls below certain quantitative and qualitative continued
listing criteria. When a company falls below any criterion, the
Exchange will review the appropriateness of continued listing.
Available at nysemanual.nyse.com/lcm/sections/lcmsections/chp_1_9/default.asp.
---------------------------------------------------------------------------
With respect to an institution's failure to timely file a required
annual or quarterly report with the SEC, we noted previously in this
discussion that the late filing of, or failure to file, a required SEC
report may precipitate an adverse action by the SEC or a stock
exchange. Or, a late filing may limit the institution's ability to
conduct certain types of registered securities offerings. In addition,
capital markets tend to react negatively in response to late filings.
All told, the consequences of late SEC filing may impact the
institution's capital position and its financial responsibility for
title IV purposes.
With regard to the proposed provision regarding an institution that
voluntarily delists its stock; we note that this action would typically
relate to a change in ownership that would be subject to Department
review. However, even if that action does not trigger a change in
ownership, we believe the shift from equity to private financing is a
significant event warranting review.
Discretionary Triggering Events
During negotiated rulemaking, the Department proposed several
actions or events, all of which were discretionary, that would likely
have a material adverse effect on an institution's financial condition.
Some of the non-Federal negotiators noted that the 2016 final
regulations contained a wider range of triggering events, some
mandatory and some discretionary, and urged the Department to adopt
that framework and those triggering events in this NPRM to better
protect taxpayers. As previously discussed, we are proposing in this
NPRM only mandatory triggering events whose consequences are known and
quantified (e.g., the actual liabilities incurred from defense to
repayment discharge) and objectively assessed through the composite
score methodology, or whose consequences pose a severe and imminent
risk (e.g., SEC or stock exchange actions) to the Federal interest that
warrant financial protection.
This approach differs from that in the 2016 final regulations.
Those regulations included as mandatory triggering events (1) events
whose consequences were speculative (e.g., estimating the dollar value
of a pending lawsuit or pending defense to repayment claims, or
evaluating the effects of fluctuations in title IV funding levels), (2)
events more suited to accreditor action or increased oversight by the
Department (e.g., high drop-out rates and unspecified State violations
that may have no bearing on an institution's financial condition or
ability to operate in the State), and (3) results of a test (e.g., a
financial stress test) whose future development and application was
unspecified. Upon further review, we believe these triggering events
are inappropriate and would have unnecessarily required institutions to
provide a letter of credit or other financial protection. But we
propose to include some of the 2016 triggers as discretionary events-
certain accrediting agency actions, violations of loan agreements,
State licensure and authorization violations, and high cohort default
rates. We are also proposing to rescind the mandatory triggering event
provisions of the 2016 final regulations.
When an accrediting agency issues an institutional accreditation
show-cause order, such action may call into question the institution's
continued ability to operate as an accredited institution. As a
discretionary trigger, we would work with the institution and the
accreditor to determine whether that action has or will have a material
adverse effect on the institution's condition or its ability to
continue as a going concern before determining whether the institution
is financially responsible.
The Department also intends to modify the provisions currently in
Sec. 668.171(b)(3) to address violations of loan agreements as a
discretionary triggering event. That section currently provides that an
institution is not current in debt payments if a loan agreement
violation is noted in its audited financial statements or it is more
than 120 days delinquent in making a payment and a creditor has filed
suit. The Department intends to replace that rule with a discretionary
trigger that looks more holistically at the nature and outcome of loan
violations. Doing so removes the constraints of relying on disclosures
in annual audits or the filing of a lawsuit, and is more in keeping
with our goal of assessing potential financial issues
contemporaneously. As noted in the proposed provision, a violation of a
loan agreement can precipitate a number of consequences that may have a
material adverse effect on an institution's ability to meet its
financial obligations. For example, the creditor may decide to waive
the violation entirely or waive it in exchange for other concessions.
In any case, as a discretionary trigger, the Department would work with
the institution to determine whether the violation has or could have
material financial consequences before determining whether the
institution is financially responsible.
The Department similarly plans a more targeted approach to
violations of State authorization or licensing requirements. Unlike the
2016 final regulations where an institution would report to the
Department any violation of a State authorization or licensing
requirement, we propose to consider only those violations that, if
unresolved, could lead to termination of the institution's ability to
continue to provide educational programs or otherwise continue to
operate in the State. Therefore, we propose to rescind these mandatory
reporting provisions of the 2016 final regulations.
The Department also proposes to treat the 90/10 revenue requirement
as a discretionary triggering event. A proprietary institution that
fails the requirement for one fiscal year is in danger of losing its
eligibility to participate in the title IV, HEA programs if it fails
again in the subsequent fiscal year. Along the same lines, an
institution whose cohort default rate is 30% or more for two
consecutive years is in danger of losing its title IV loan eligibility
if its default rate is 30% or more in the subsequent year. In either
case, that risk of lost eligibility may require the Department to seek
financial protection from the institution. While the 2016 final
regulations would have required an affected institution to provide a
letter of credit or other financial protection immediately, the
Department believes it is more appropriate for the Department to review
the institution's efforts to remedy or mitigate the reasons for its
failure, to evaluate the institution's potential and plan to teach-out
students if closure appears inevitable, and to assess the extent to
which there were anomalous or mitigating circumstances leading to its
failure, before determining whether the institution is financially
responsible.
In response to requests by the non-Federal negotiators that a
process be created to allow an institution to provide information about
an action or event to the Department before the Department issues a
final determination, we suggested such a process during the
negotiations and propose that same process in these regulations. Under
that process, an institution has the opportunity to provide information
for reportable events twice--once when it notifies the Department that
the event occurred and then, if it has additional information, whenever
the Department makes a preliminary determination that the event would
have a material adverse impact on the institution. For the
[[Page 37274]]
reporting requirements in proposed paragraph (f), we adopt the
timeframe currently in Sec. 668.28 for notifying the Department of 90/
10 failures. For all other events addressed in these proposed
regulations, we believe 10 days provides sufficient time for
institutions to report those events and for the Department to take
action, if needed.
Financial Ratios (Sec. 668.172)
Statute: Section 498(c)(1) of the HEA authorizes the Secretary to
establish ratios and other criteria for determining whether an
institution has the financial responsibility required to (1) provide
the services described in its official publications; (2) provide the
administrative resources necessary to comply with title IV, HEA
requirements; and (3) meet all of its financial obligations, including
but not limited to refunds of institutional charges and repayments to
the Secretary for liabilities and debts incurred for programs
administered by the Secretary.
Current Regulations: Section 668.172 defines the Primary Reserve,
Equity, and Net Income ratios that comprise the composite score and
Appendices A and B illustrate how the composite score is calculated
using sample financial statements from proprietary and private non-
profit institutions.
Proposed Changes: The Secretary proposes to calculate a composite
score in accordance with new standards issued by the Financial
Standards Accounting Board (FASB) in Accounting Standards Update (ASU)
2016-02, ASC 842 (Leases). However, the Department will need to update
the composite score calculation to take into account this dramatic
change in FASB standards, which it cannot do immediately. As a result,
for 6 years following the implementation of the new FASB standards, or
following the publication of new composite score formula regulations to
take into account the FASB change, whichever is shorter, institutions
that fail the composite score based on the new FASB standards, but
would have had a passing composite score under the former FASB
standards (with regard to leases), may request the calculation of an
alternative composite score based on additional data provided by the
institution to the Department to enable it to calculate an alternative
composite score excluding operating leases. The Department will use the
higher of those two composite scores to determine whether the
institution is financially responsible.
Reasons: The new FASB reporting requirements could negatively
impact an institution's composite score even though the underlying
financial condition of the institution has not changed. Based on
changes FASB announced in February, 2016 in ASU-2016-2, operating
leases longer than 12 months will be recorded under GAAP as separate
liabilities and right-of-use assets. Consequently, adding operating
leases to the Balance Sheet (for proprietary institutions) or to the
Statement of Financial Position (for non-profit institutions) could
decrease the Equity Ratio if the right-of-use assets in the Modified
Assets category significantly increased compared to Modified Equity or
Modified Net Assets, resulting in a lower composite score. With that in
mind, some of the non-Federal negotiators argued that, due to the long-
term nature of some leases, the Department should allow an institution
some time to change its business model regarding leases before applying
the new FASB standards to its existing leases for purposes of
calculating the composite score. We agreed, and in the final session of
negotiated rulemaking proposed a six year transition period during
which existing leases would be treated under the previous FASB
guidance.
However, upon further review, we believe that a transition period
would only partially defer and not adequately address the consequences
of the accounting changes and how those changes are reflected in the
composite score. While we recognize that schools must adhere to the new
FASB reporting requirements, which will be reflected in their audited
statements, we believe that including assets and liabilities associated
with those transactions in the composite score, where no lease-related
assets or liabilities are currently included, could encourage some
institutions to make changes in their business model that have negative
consequences for students. To mitigate a negative impact of the new
lease reporting requirements on their composite score, institutions may
enter into shorter term but higher cost leases instead of continuing in
or entering into longer term leases which typically have better terms,
such as lower monthly lease rates and more cost-effective lease
improvements. Shorter, more expensive leases may raise costs for
institutions, and therefore students, and could result in more frequent
campus relocations or closures that may interfere with students'
ability to complete their programs and raise the risk to taxpayers of
increased numbers of closed school student loan discharges. We believe
that it is undesirable to put an institution in a position where it
could incur increased costs from short-term leases or where the
institution would have to relocate or close because it could not
negotiate or renew a favorable lease agreement without jeopardizing its
composite score. In some instances, even if the school is able to
relocate to another comparable facility, the State authorizing body or
the accreditor may not approve that relocation if the new facility is
more than a certain geographic distance or travel time away from the
original campus, if it is on a different public transportation line or
if it lacks comparable access via public transportation. In such a
case, the campus move is treated as a campus closure, which requires
the institution to either teach-out the closing campus or suffer the
financial losses associated with closed school loan discharges. The
higher costs of short-term leases or relocation costs, or both, would
likely be passed on to students. Unfortunately, the composite score
currently has no mechanism for automatic updates in the event of
changes in accounting standards.
For these reasons, and because the impact of the upcoming FASB
lease requirements is unknown, we believe it is necessary to update the
composite score regulations to take into account this and other FASB
changes. Future negotiated rulemaking will be required to update the
composite score regulations, so until such time as revised composite
score regulations are established, or for six years after
implementation of the new FASB standards (for leases), the Department
will allow institutions the option to continue calculating the
composite score under current GAAP standards. Therefore, the Department
proposes an approach under which we will calculate a composite score
for all institutions under the new FASB requirements when they take
effect since all audited financial statements will be based on the new
requirements, but we will allow institutions to provide additional data
to support the calculation of an alternative composite score under
current GAAP standards (GAAP prior ASU-2016-2 implementation), and in
such a case, to use the higher of the two composite scores to evaluate
financial responsibility, for the next six years or until revised
composite score regulations are promulgated, which ever period is
shortest.
Appendix A to Subpart L, Part 668
Statute: Section 498(c)(1) of the HEA authorizes the Secretary to
establish ratios and other criteria for determining whether an
institution has the financial responsibility required to (1) provide
[[Page 37275]]
the services described in its official publications, (2) provide the
administrative resources necessary to comply with title IV, HEA
requirements, and (3) meet all of its financial obligations, including
but not limited to refunds of institutional charges and repayments to
the Secretary for liabilities and debts incurred for programs
administered by the Secretary.
Current Regulations: As provided under Sec. 668.172(a), appendix A
to subpart L contains three sections that illustrate how the composite
score is calculated for a proprietary institution. Section 1 sets forth
the ratios and defines the ratio terms. Section 2 provides a model
Balance Sheet and Statement of Income and Retained Earnings with
numbered line entries and shows the numbered entries that are used to
calculate each of the financial ratios. Section 3 takes the calculated
ratios from Section 2 and applies strength factors and weights
associated with each ratio to derive a blended, or composite, score
that the Secretary uses to determine, in part, whether the institution
is financially responsible.
Proposed Changes: The Secretary proposes revising these three
sections by amending the first section to reflect changes in accounting
standards and to make other clarifying changes that the Secretary
believes will improve compliance with the financial responsibility
standards. We propose to add a new section 2 that would provide a
Supplemental Schedule which schools would be required to provide as
part of their annual financial statement audit submission. Proposed
section 2 would be titled, ``Section 2: Financial Responsibility
Supplemental Schedule Requirement and Example.'' Proposed Section 3
would combine sections 2 and 3 from the current regulations, and would
be titled, ``Example Financial Statements and Composite Score
Calculation.''
Appendix A, Section 1
For a proprietary institution, the Secretary proposes to revise the
numerator, Adjusted Equity, and the denominator, Total Expenses, of the
Primary Reserve Ratio.
Changes to Adjusted Equity:
As currently defined, Adjusted Equity includes ``post-employment
and retirement liabilities'' and ``all debt obtained for long-term
purposes.'' The Secretary proposes changing these terms to ``post-
employment and defined benefit pension liabilities'' and ``all debt
obtained for long-term purposes, not to exceed property, plant and
equipment (PP&E),'' respectively. In addition, the Secretary proposes
to clarify the term ``unsecured related party receivables'' by
referencing the related entity disclosure requirements under Sec.
668.23(d). With regard to determining the value of PP&E, which is
currently the amount net of accumulated depreciation, the Secretary
proposes to include construction in progress and lease right-of-use
assets.
As noted above, we propose to amend the current definition of
``debt obtained for long-term purposes'', which currently includes the
short-term portion of the debt, up to the amount of PP&E. Specifically,
we are proposing to change the meaning of the term ``debt obtained for
long-term purposes'', to include lease liabilities for lease right-of-
use assets and the short-term portion of the debt, up to the amount of
net PP&E. However, if an institution wishes to include the debt as part
of the total debt obtained for long-term purposes, including debt
obtained through long-term lines of credit, the institution would have
to provide a disclosure in the financial statements that the debt,
including lines of credit, exceeds twelve months and was used to fund
capitalized assets (i.e., PP&E or capitalized expenditures per
Generally Accepted Accounting Principles (GAAP)). The disclosure for
the debt would include the issue date, term, nature of capitalized
amounts and amounts capitalized. The debt obtained for long-term
purposes would be limited to those amounts disclosed in the financial
statements that were used to fund capitalized assets. Any other debt
amount, including long-term lines of credit used to fund operations,
would be excluded from debt obtained for long-term purposes.
Changes to Total Expenses:
Currently, the regulations provide that the term ``Total Expenses''
excludes income tax, discontinued operations, extraordinary losses or
change in accounting principle. The Department proposes to change that
term to ``Total Expenses and Losses'' and define the proposed term as:
All expenses and losses, (excludes income tax, discontinued operations
not classified as an operating expense or change in accounting
principle), less any losses on investments, post-employment and defined
benefit pension plans and annuities. Any losses on investments would be
the net loss for the investments and Total Expenses and Losses would
include the nonservice component of net periodic pension and other
post-employment plan expenses.
Net Income Ratio
The Department proposes to modify the numerator of the Net Income
ratio, ``Income before Taxes,'' and the denominator, ``Total
Revenues.''
Currently, ``Income before Taxes'' is taken directly from the
institution's audited financial statements. The Department proposes to
define ``Income before Taxes'' to include all revenues, gains, expenses
and losses incurred by the institution during the accounting period.
Income before taxes would not include income taxes, discontinued
operations not classified as an operating expense or changes in
accounting principle.
With regard to the denominator, we propose to change the term
``Total Revenues'' to ``Total Revenues and Gains.''
We note that while the current regulations define the term ``Total
Pretax Revenues'' (total operating revenues + non-operating revenues
and gains, where investments gains should be recorded net of investment
losses), that term was erroneously published and we should have used
the term Total Revenues. The Secretary proposes to correct that error
and define the term, ``Total Revenues and Gains'' as all revenues and
gains not including positive income tax amounts, discontinued
operations not classified as an operating gain, or change in accounting
principle (investment gains would be recorded net of investment
losses).
Reasons: The proposed changes are intended to reflect current
accounting standards, particularly Accounting Standards Update (ASU)
2016-2 Leases (Topic 842), and clarify how the composite score is
calculated.
When implemented, ASU 2016-2 will require all non-profit and
proprietary institutions to recognize the assets and liabilities that
arise from leases. In accordance with FASB Concepts Statement No. 6,
Elements of Financial Statements, all leases create an asset and a
liability as of the date of the Statement of Financial Position, or
Balance Sheet, and therefore, an institution must recognize those lease
assets and lease liabilities as of that date. This is a change compared
to the previous GAAP approach, which did not require lease assets and
lease liabilities to be recognized for most leases.
Under this ASU, a proprietary institution is required to recognize
in its Balance Sheet a liability for the value of the lease agreement
(the lease liability) and a right-of-use asset representing its right
to use the underlying asset for lease terms longer than one fiscal
year. The principal difference from previous accounting guidance is
that the lease assets and lease liabilities arising from
[[Page 37276]]
operating leases will now be recognized in the Balance Sheet.
The Subcommittee asked the Department to consider including defined
benefit pension plan liabilities as a retirement liability that would
be added back to Adjusted Equity. The Subcommittee stated that changes
in accounting practice that now require defined pension plan
liabilities to be on the face of the financial statements, as well as,
the required insurance for pension liabilities and the timing of when
the liability would be payable, all indicate that defined benefit plan
liabilities should not reduce Adjusted Equity. In addition, the
Subcommittee argued that all other retirement liabilities are already
included in post-employment liabilities and rather than having post-
employment and retirement liabilities for expendable net assets it
would be clearer to the community to use post-employment and defined
benefit pension plan liabilities. The Department agreed that the
Subcommittee proposals would clarify how defined benefit pension plan
liabilities will be treated for purposes of Adjusted Equity.
In the preamble to the notification of final regulations published
in the Federal Register on November 25, 1997 (62 FR 62867) (1997
Regulations), the Department was clear that the expenses included in
the Primary Reserve Ratio included losses; however the appendix did not
include language concerning losses. Since the inception of the
composite score as a measure of a school's financial health, the
Department has included losses as part of the denominator for the
Primary Reserve Ratio. The proposed changes to the denominator for the
Primary Reserve Ratio reflect changes in the accounting terminology and
clarify what has consistently been the Department's practice. With
regard to losses, the Subcommittee suggested that there were some
losses that should not be reflected in the Primary Reserve Ratio. The
Subcommittee proposed that the Primary Reserve Ratio not include any
losses from post-employment and defined benefit pension plans and
annuities. The Department agreed.
As a result of ASU 2016-2, the Department proposes including the
right-of-use asset from leases as part of PP&E (which is a component of
Adjusted Equity in the Primary Reserve ratio). The Subcommittee
recommended that the Department include construction in progress in
PP&E for the purpose of calculating the Primary Reserve ratio. The
Subcommittee members pointed out that by its very nature, construction
in progress could not be considered an expendable asset because it
cannot be easily converted to cash or cash equivalents when an
institution is in financial difficulty. The Department agreed and
proposes here to include construction in progress with PP&E.
Initially, the Subcommittee's discussion about how to treat debt
obtained for long-term purposes in calculating the composite score,
focused around the change in accounting for leases under ASU 2016-2.
Under ASU 2016-2 the liability for leases is not considered debt for
accounting purposes. The Subcommittee noted that although the lease
liability was not debt, the liability was clearly associated with PP&E
and argued that it should be included as debt obtained for long-term
purposes for the composite score. This discussion then expanded to
consider the various types of debt and liabilities that the Department
encounters in evaluating financial statements and computing the
composite score. In 2017, both the Government Accountability Office
(GAO) and the Department's Office of Inspector General (OIG) issued
audit reports that found that the Department was not doing enough to
limit manipulation of the composite score to protect students from
institutions that could be in danger of financial difficulty
(``Education Should Address Oversight and Communication Gaps in Its
Monitoring of the Financial Condition of Schools'' (GAO-17-555) \7\ and
``Federal Student Aid's Processes for Identifying At-Risk Title IV
Schools and Mitigating Potential Harm to Students and Taxpayers'' (ED-
OIG A09Q0001) \8\). The Department is aware that some institutions use
debt, including long-term lines of credit, to improve their composite
scores without actually using the debt for long-term purposes. The use
of debt to improve the composite score, including long-term lines of
credit, can be difficult to identify from examining an institution's
audited financial statements. When the composite score was originally
developed, the Department's intention was that the long-term debt would
be added back for purposes of the calculation of the expendable net
assets was the amount of debt that was used for the purchase of
capitalized assets. We question the viability of an institution that
uses debt, including long-term lines of credit, for current operations
as opposed to long-term purposes. Consequently, the amount of long-term
debt that is added back for expendable net assets should have some
relationship to PP&E--and therefore should not be included in debt
obtained for long-term purposes if it is not used for the purchase of
capitalized assets.
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\7\ Available at: www.gao.gov/products/GAO-17-555.
\8\ Available at: www2.ed.gov/about/offices/list/oig/auditreports/fy2017/a09q0001.pdf.
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The Subcommittee specifically discussed the treatment of long-term
lines of credit with regard to debt obtained for long-term purposes and
agreed with the Department's proposed treatment of long-term lines of
credit. The Department proposes extending this treatment to all debt
not used for long-term purposes to further reduce or mitigate
manipulation of the composite score.
In the preamble to the 1997 Regulations, the Department was clear
that the calculation of expenses for the Primary Reserve Ratio included
losses; however, the Appendices to subpart L did not include language
concerning losses. Since the inception of the composite score, the
Department has included losses as part of the denominator for the
Primary Reserve Ratio. The proposed changes to the denominator for the
Primary Reserve Ratio reflect changes in the accounting terminology and
clarify what has consistently been the Department's practice. With
regard to losses, the Subcommittee suggested that there were some
losses that should not be reflected in the Primary Reserve Ratio. The
Subcommittee proposed that the Primary Reserve Ratio should not include
any losses on investments, post-employment and defined benefit pension
plans and annuities. The Department agreed and has reflected this
change in the proposed regulations.
The Department proposes to add a reference to the disclosure
requirement for unsecured related party transactions under Sec.
668.23(d). For both proprietary and non-profit schools, related party
receivables or other related assets are excluded from the composite
score calculation if the amount is not secured and perfected at the
date of the financial statements. The Related Party disclosure should
provide enough detail about the relationship, transaction(s) and any
conditions for the Department to be able to make a determination on
whether the related party receivable or other related assets are
properly secured for inclusion in the composite score calculation.
Appendices A and B, Section 2
Proposed changes: Under proposed Section 2 for appendices A and B,
proprietary and non-profit institutions would be required to submit a
Supplemental Schedule as part of their audited financial statements.
The Supplemental Schedule would contain
[[Page 37277]]
all of the financial elements required to calculate the composite score
and a corresponding or related reference to the Statement of Financial
Position, Statement of Activities, Schedule of Natural to Functional
Expenses, Balance Sheet, Income Statement, or Notes to the Financial
Statements. The amount entered in the Supplemental Schedule for each
element would tie directly to a line item, be part of a line item, tie
directly to a note, or be part of a note in the financial statements.
In addition, the audit opinion letter would contain a paragraph
referencing the auditor's additional analysis of the Supplemental
Schedule.
Reasons: As a result of the FASB updates, some elements needed to
calculate the composite score would no longer be readily available in
the audited financial statements, particularly for non-profit
institutions. The Subcommittee suggested using a Supplemental Schedule
as a means to address this issue. Moreover, by referencing the
financial statements, the Supplemental Schedule would increase
transparency in how the composite score is calculated for both
institutions and the Department. The Subcommittee requested and
received advice from auditors and accountants that the burden stemming
from the Supplemental Schedule would be minimal. The Subcommittee
believed, and we agree, that any burden is outweighed by the need for
the information and the increase in transparency.
Appendices A and B, Section 3
Proposed changes: Proposed Section 3 would combine, conceptually,
Sections 2 and 3 of the current appendices. While we do not propose to
modify the current strength factors and weights for each, proposed
Section 3 would be updated to reflect changes in terminology based on
the changes in accounting standards and modifications to the item
amounts used in the example financial statements.
Reasons: We propose to revise current Section 3 of appendices A and
B to conform with the proposed changes to Sections 1 and 2 of those
appendices.
Appendix B to Subpart L, Section 1
Statute: Section 498(c)(1) of the HEA authorizes the Secretary to
establish ratios and other criteria for determining whether an
institution has the financial responsibility required to (1) provide
the services described in its official publications, (2) provide the
administrative resources necessary to comply with title IV, HEA
requirements, and (3) meet all of its financial obligations, including
but not limited to refunds of institutional charges and repayments to
the Secretary for liabilities and debts incurred in programs
administered by the Secretary.
Current Regulations: Appendix B to subpart L contains three
sections that illustrate how the composite score is calculated for a
non-profit institution. Specifically, Section 1 sets forth the ratios
and defines the ratio terms. Section 2 provides a model Statement of
Activities and Balance Sheet with numbered line entries and shows the
numbered entries that are used to calculate each of the financial
ratios. Section 3 takes the calculated ratios from Section 2 and
applies strength factors and weights associated with each ratio to
derive a blended, or composite, score that the Secretary uses to
determine, in part, whether the institution is financially responsible.
Proposed Changes: We propose to revise appendix B by amending the
definitions of terms used in Section 1 to reflect changes in accounting
standards and other changes that the Secretary believes would clarify
how the composite score is calculated. We previously noted in the
discussion for appendix A the proposed changes to Sections 2 and 3 of
appendix B.
Appendix B, Section 1
The Department proposes to modify the definition of the terms
``Expendable Net Assets'' and ``Total Expenses'' as those terms are
used in calculating the Primary Reserve Ratio. Under the current
regulations, the ``Expendable Net Assets'' are:
(unrestricted net assets) + (temporarily restricted net assets)-
(annuities, term endowments and life income funds that are
temporarily restricted)-(intangible assets)-(net property, plant and
equipment) * + (post-employment and retirement liabilities) + (all
debt obtained for long-term purposes) **-(unsecured related-party
receivables).
*The value of property, plant and equipment is net of
accumulated appreciation, including capitalized lease assets.
** The value of all debt obtained for long-term purposes
includes the short-term portion of the debt, up to the amount of net
property, plant and equipment.
The Department proposes to revise the definition of ``Expendable
Net Assets'' to be:
(Net assets without donor restrictions) + (net assets with donor
restrictions)-(net assets with donor restrictions: Restricted in
perpetuity) *-(annuities, term endowments and life income funds with
donor restrictions) **-(intangible assets)-(net property, plant and
equipment) *** + (post-employment and defined benefits pension plan
liabilities) + (all long-term debt obtained for long-term purposes,
not to exceed total net property, plant and equipment) ****-
(unsecured related party transactions) *****.
* Net assets with donor restrictions: Restricted in perpetuity
is subtracted from total net assets. The amount of net assets with
donor restrictions: Restricted in perpetuity is disclosed as a line
item, part of line item, in a note, or part of a note in the
financial statements.
** Annuities, term endowments and life income funds with donor
restrictions are subtracted from total net assets. The amount of
annuities, term endowments and life income funds with donor
restrictions is disclosed in as a line item, part of line item, in a
note, or part of a note in the financial statements.
*** The value of property, plant and equipment includes
construction in progress and lease right-of-use assets and is net of
accumulated depreciation/amortization.
**** All Debt obtained for long-term purposes, not to exceed
total net property, plant and equipment includes lease liabilities
for lease right-of-use assets and the short-term portion of the
debt, up to the amount of net property, plant and equipment. If an
institution wishes to include the debt, including debt obtained
through long-term lines of credit in total debt obtained for long-
term purposes, the institution must include a disclosure in the
financial statements that the debt, including lines of credit
exceeds twelve months and was used to fund capitalized assets (i.e.,
property, plant and equipment or capitalized expenditures per
Generally Accepted Accounting Principles (GAAP)). The disclosures
that must be presented for any debt to be included in expendable net
assets include the issue date, term, nature of capitalized amounts
and amounts capitalized. Institutions that do not include debt in
total debt obtained for long-term purposes, including long-term
lines of credit, do not need to provide any additional disclosures
other than those required by GAAP. The debt obtained for long-term
purposes will be limited to only those amounts disclosed in the
financial statements that were used to fund capitalized assets. Any
debt amount including long-term lines of credit used to fund
operations must be excluded from debt obtained for long-term
purposes.
***** Unsecured related party receivables as required at 34 CFR
668.23(d).
Under the current regulations, the term ``Total Expenses'' is
defined as ``Total unrestricted expenses taken directly from the
audited financial statements.'' We propose to change the term to
``Total Expenses without Donor Restrictions and Losses without Donor
Restrictions.'' In addition, the Department proposes to define the new
term ``Total Expenses without Donor Restrictions and Losses without
Donor Restrictions'' as all expenses and losses without donor
restrictions from the Statement of Activities less any losses
[[Page 37278]]
without donor restrictions on investments, post-employment and defined
benefit pension plans, and annuities. (For institutions that have
defined benefit pension and other post-employment plans, total expenses
include the nonservice component of net periodic pension and other
post-employment plan expenses and these expenses will be classified as
non-operating. Consequently such expenses will be labeled non-operating
or included with ``other changes-non-operating changes in net assets
without donor restrictions'' when the Statement of Activities includes
an operating measure).
The numerator of the Equity Ratio, Modified Net Assets, is
currently defined as ``(total assets)-(intangible assets)-(unsecured
related-party receivables).'' We propose to change the definition of
Modified Net Assets to ``(net assets without donor restrictions) + (net
assets with donor restrictions)-(intangible assets)-(unsecured related
party receivables)''.
For the Net Income Ratio, the current regulations specify that the
amounts for both the numerator, ``Change in Unrestricted Net Assets,''
and the denominator, ``Total Unrestricted Revenue'', are taken directly
from the audited financial statements. We propose to rename the
numerator as ``Change in Net Assets without Donor Restrictions,'' and
the denominator as ``Total Revenue without Donor Restriction and Gains
without Donor Restrictions.'' In addition, the Department proposes that
the denominator, Total Revenue, would include amounts released from
restriction plus total gains. The Department notes that with regard to
gains, investment returns are reported as a net amount (interest,
dividends, unrealized and realized gains and losses net of external and
direct internal investment expense). Institutions that separately
report investment spending as operating revenue (e.g. spending from
funds functioning as endowment) and remaining net investment return as
a non-operating item, will need to aggregate these two amounts to
determine if there is a net investment gain or a net investment loss
(net investment gains are included with total gains).
Reasons: The proposed changes are intended to reflect current
accounting standards and clarify how the composite score is calculated.
Many of the proposed changes stem from significant changes to the
accounting standards, primarily ASU 2016-2 Leases (Topic 842) and 2016-
14 Not-for-Profit Entities (Topic 958), ASU 2016-2 and ASU 2016-14
respectively.
When implemented, ASU 2016-2 will require all non-profit and
proprietary institutions to recognize the assets and liabilities that
arise from leases. In accordance with FASB Concepts Statement No. 6,
Elements of Financial Statements, all leases create an asset and a
liability as of the Statement of Financial Position, or Balance Sheet,
date and, therefore, an institution must recognize those lease assets
and lease liabilities as of that date.
A non-profit institution must recognize in the Statement of
Financial Position a liability for the value of the lease agreement
(the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term. The principal
difference from previous guidance is that the lease assets and lease
liabilities arising from operating leases should be recognized in the
Statement of Financial Position.
Under ASU 2016-14, a non-profit institution must present on the
face of the Statement of Financial Position amounts for two classes of
net assets at the end of the period, rather than for the currently
required three classes. That is, the institution will report amounts
for net assets with donor restrictions and net assets without donor
restrictions, as well as the currently required amount for total net
assets. Temporarily restricted net assets, which were previously
reported, will be eliminated as a class of net assets. A non-profit
institution must also present on the face of the Statement of
Activities the amount of the change in each of the two classes of net
assets rather than the currently required three net asset classes, as
well as report the currently required amount of the change in total net
assets for the period. These changes were made as a result of
complexities arising from using the three classes of net assets which
focus on the absence or presence of donor imposed restrictions and
whether those restrictions are temporary or permanent.
ASU 2016-14 eliminated the use of the term ``temporarily restricted
net assets'' because of difficulties with classifying assets as
temporarily restricted. On its face, under this ASU, assets with donor
restrictions would not be considered expendable net assets. In
discussions with the Subcommittee, the Department agreed that there are
some elements of assets with donor restrictions that could be
considered expendable. An example of this would be an endowment where
the corpus is permanently restricted by the donor, but the earnings
from the endowment can be used to pay salaries. The Subcommittee put
forward that the primary element of assets with donor restrictions that
is not expendable is ``net assets with donor restrictions: restricted
in perpetuity.'' Subtracting ``net assets with donor restrictions:
restricted in perpetuity'' from net assets with donor restrictions plus
net assets without donor restrictions roughly approximates the amount
that would have been included in the composite score using unrestricted
net assets and temporarily restricted net assets. Likewise, using the
amounts from annuities, term endowments and life income funds with
donor restrictions, approximates the amount of annuities, term
endowments and life income funds that are temporarily restricted that
would have been used prior to the proposed change.
The Subcommittee asked the Department to consider including defined
benefit pension plan liabilities as a retirement liability that would
be added back to expendable net assets. The Subcommittee stated that
changes in accounting practice that now require defined pension plan
liabilities to be on the face of the financial statements, as well as
the required insurance for pension liabilities and the timing of when
the liability would be payable, all indicate that defined benefit plan
liabilities should not reduce expendable net assets. In addition, the
Subcommittee argued that all other retirement liabilities are already
included in post-employment liabilities, and rather than having post-
employment and retirement liabilities for expendable net assets, it
would be clearer to the community to use post-employment and defined
benefit pension plan liabilities. The Department agreed that the
Subcommittee proposals would clarify how defined benefit pension plan
liabilities will be treated for expendable net assets.
As a result of ASU 2016-2, the Department proposes including the
right-of-use asset from leases as part of PP&E (which is a component of
Expendable Net Assets in the Primary Reserve ratio). During the general
discussions with the Subcommittee about PP&E, the Subcommittee
recommended that the Department should include construction in progress
in PP&E for purposes of calculating the Primary Reserve ratio. The
Subcommittee pointed out that by its very nature, construction in
progress could not be considered an expendable asset because it cannot
be easily converted to cash or cash equivalents when an institution is
in financial difficulty. The Department agreed and
[[Page 37279]]
proposes here to include construction in progress with PP&E.
Initially, the discussion in the Subcommittee surrounding how to
treat debt obtained for long-term purposes in calculating the composite
score, focused around the change in accounting for leases under ASU
2016-2. Under ASU 2016-2 the liability for leases is not considered
debt for accounting purposes. The Subcommittee noted that although the
lease liability was not debt, the liability was clearly associated with
PP&E and argued that it should be included as debt obtained for long-
term purposes in the composite score calculation. This discussion then
expanded to consider the various types of debt and liabilities that the
Department encounters in evaluating financial statements and computing
the composite score. As noted above, in 2017, both GAO and OIG issued
audit reports that found that the Department was not doing enough to
limit manipulation of the composite score to protect students from
institutions that could be in danger of financial difficulty. The
Department is aware that some institutions use debt, including long-
term lines of credit, to improve their composite scores without
actually using the debt for long-term purposes. The use of debt to
improve the composite score, including long-term lines of credit, can
be difficult to identify from examining an institution's audited
financial statements. When the composite score was originally
developed, the long-term debt that was intended to be added back for
purposes of expendable net assets was the amount of debt that was used
for the purchase of capitalized assets. We question the viability of an
institution that uses debt, including long-term lines of credit, for
current operations as opposed to long-term purposes. Consequently, the
amount of long-term debt that is added back for expendable net assets
should have some relationship to PP&E--and therefore should not be
included in debt obtained for long-term purposes if it is not used for
the purchase of capitalized assets.
The Subcommittee specifically discussed the treatment of long-term
lines of credit with regard to debt obtained for long-term purposes and
agreed with the Department's proposed treatment of long-term lines of
credit. The Department proposes extending this treatment to all debt
not used for long-term purposes to further reduce or mitigate
manipulation of the composite score.
In the preamble to the 1997 Regulations, the Department was clear
that expenses for the Primary Reserve Ratio included losses; however,
the Appendices to subpart L did not include language concerning losses.
Since the inception of the composite score, the Department has included
losses as part of the denominator for the Primary Reserve Ratio. The
proposed changes to the denominator for the Primary Reserve Ratio
reflect changes in the accounting terminology and clarify what has
consistently been the Department's practice. With regard to losses, the
Subcommittee suggested that there were some losses that should not be
reflected in the Primary Reserve Ratio. The Subcommittee proposed that
the Primary Reserve Ratio should not include any losses without donor
restrictions on investments, post-employment and defined benefit
pension plans and annuities. The Department agreed.
All of the proposed changes to the Equity Ratio are based solely on
changes in accounting terminology as a result of ASU 2016-14.
The change to the numerator for the Net Income Ratio is based
solely on changes in accounting terminology as a result of ASU 2016-14.
The proposed changes to the denominator are based on changes in
accounting terminology and Department practice concerning gains. In the
preamble to the 1997 Regulations, the Department was clear that revenue
for the Net Income Ratio included gains; however the Appendices to
subpart L did not include language concerning gains. Since the
inception of the composite score, the Department has included gains as
part of the denominator for the Net Income Ratio.
The Department proposes to add a reference to the regulatory
disclosure requirement for unsecured related party transactions under
Sec. 668.23(d). While the Department believes that this reference
promotes clarity, Subcommittee members representing the non-profit
sector expressed concern that certain aspects of related party
transactions unique to the non-profit sector required more thorough
explanation. The Department agreed, and provides additional information
below.
For both proprietary and non-profit institutions, related party
receivables or other related assets are excluded from the composite
score if the amount is not secured and perfected as of the date of the
financial statements. The Related Party disclosure should provide
enough detail about the relationship, transaction(s) and any conditions
for the Department to be able to make a determination on whether the
related party receivable or other related assets are properly secured
for inclusion in the composite score.
For non-profit schools, related party contributions receivables
from board members would be allowed to be included in secured related
party receivables if there was no additional relationship or
transactions with the board member or his/her family or related
entities and there were no additional conditions associated with the
contribution if disclosed in the related party disclosure.
Alternative Standards and Requirements (Sec. 668.175)
Statute: Section 498(c)(3) of the HEA provides that if an
institution fails the composite score or other criteria established by
the Secretary to determine whether the institution is financially
responsible, the Secretary must determine that the institution is
financially responsible if it provides third-party financial
guarantees, such as performance bonds or letters of credit payable to
the Secretary, for an amount that is not less than one-half of the
annual potential liabilities of the institution to the Secretary for
title IV, HEA funds, including liabilities for loan obligations
discharged pursuant to section 437 of the HEA, and to students for
refunds of institutional charges, including required refunds of title
IV, HEA funds.
Current Regulations: As provided in Sec. 668.175, an institution
that is not financially responsible under the general standards in
Sec. 668.171 may begin or continue to participate in the title IV, HEA
programs only by qualifying under an alternative standard.
Under the zone alternative in Sec. 668.175(d), a participating
institution that is not financially responsible solely because its
composite score is less than 1.5 may participate as a financially
responsible institution for no more than three consecutive years, but
the Secretary requires the institution to (1) make disbursements to
students under the heightened cash monitoring or reimbursement payment
methods described in Sec. 668.162, and (2) provide timely information
regarding any adverse oversight or financial event, including any
withdrawal of owner's equity from the institution. In addition, the
Secretary may require the institution to (1) submit its financial
statement and compliance audits earlier than the date specified in
Sec. 668.23(a)(4), or (2) provide information about its current
operations and future plans.
Under the provisional certification alternative in Sec.
668.175(f), an institution that is not financially responsible
[[Page 37280]]
because it does not meet the general standards in Sec. 668.171(b), or
because of an audit opinion in Sec. 668.171(d) or a condition of past
performance in Sec. 668.174(a), may participate under a provisional
certification for no more than three consecutive years, if the
institution (1) provides an irrevocable letter of credit, for an amount
determined by the Secretary that is not less than 10 percent of the
title IV, HEA program funds the institution received during its most
recently completed fiscal year, (2) demonstrates that it was current in
its debt payments and has met all of its financial obligations for its
two most recent fiscal years, and (3) complies with the provisions
under the zone alternative.
Proposed Regulations: We propose to relocate to proposed new Sec.
668.171(c) one of the oversight and financial events that an
institution currently reports to the Department under the zone
alternative in Sec. 668.175(d)(2)(ii)--any withdrawal of owner's
equity from the institution.
We propose to remove Sec. 668.175(e) because the transition year
alternative, which pertained only to fiscal years beginning after July
1, 1997 and before June 30, 1998, is no longer relevant.
Also, we propose to add a new paragraph (h) that would expand the
types of financial protection the Secretary may accept. Specifically,
in lieu of submitting a letter of credit, the Secretary may permit an
institution to:
Provide the amount required in the form of other surety or
financial protection that the Secretary specifies in a notice published
in the Federal Register;
Provide cash for the amount required; or
Enter into an arrangement under which the Secretary would
offset the amount of title IV, HEA program funds that an institution
has earned in a manner that ensures that, no later than the end of a
six- to twelve-month period, the amount offset equals the amount of
financial protection the institution is required to provide. Under this
arrangement, the Secretary would use the funds offset to satisfy the
debts and liabilities owed to the Secretary that are not otherwise paid
directly by the institution, and would provide to the institution any
funds not used for this purpose during the period covered by the
agreement, or provide the institution any remaining funds if the
institution subsequently submits other financial protection for the
amount originally required.
In addition, we propose to amend the zone and provisional
certification alternatives under Sec. 668.175(d) and (f), to allow for
these expanded types of financial protection.
Reasons: Because the costs of obtaining an irrevocable LOC have
increased over time, to the point where financial institutions are not
only charging fees but in many cases requiring the LOC to be fully
collateralized, we are proposing to allow an institution to provide
alternative forms of financial protection that would reduce the costs
to an institution. Providing cash would eliminate the cost of fees
associated with an LOC and the administrative offset alternative would
relieve an institution from any collateralization requirements or from
having to commit upfront the resources needed to obtain the required
financial protection. However, we note that, to implement an
administrative offset, the Department would need to control the title
IV funds flowing to the institution and the current process for doing
that is to place the institution on the heightened cash monitoring
payment method (HCM2) under Sec. 668.162(d)(2). The Secretary would
provide funds to the institution under HCM2, but would withhold
temporarily a portion of any reimbursement claim payable to the
institution in an amount that ensures that by the end of the offset
period, the total amount withheld equals the amount of cash or the
letter of credit the institution would otherwise provide.
During negotiated rulemaking, we proposed that the offset agreement
would have to provide that the entire amount of the financial
protection required by the Department would have to be in place within
a nine-month period. The non-Federal negotiators argued that the
Department should have flexibility in setting the offset period
depending on the amount of protection that is needed or the amount of
the offset that the institution could reasonably provide on a monthly
basis as specified in the agreement. We agreed and propose here the
suggestion from the non-Federal negotiators that the total amount
offset must be in place within a six- to 12-month period, as determined
by the Department.
With regard to other types of surety, we are not aware of any
instruments or surety products that would provide the Department with
the level of financial protection, or ready access to funds, as an
irrevocable letter of credit. However, should such surety products
become available that the Department finds acceptable and that are less
costly or more readily available to institutions, the Secretary would
identify those products in a notice published in the Federal Register.
After that, an institution could use those products to satisfy the
financial protection requirements in these regulations.
Initial and Final Decisions (Sec. 668.90)
Statute: Section 498(d) of the HEA authorizes the Secretary to
consider the past performance of an institution or of a person in
control of an institution in determining whether an institution has the
financial capability to participate in the title IV, HEA programs.
Section 487(c)(1)(F) of the HEA, provides that the Secretary shall
prescribe such regulations as may be necessary to provide for the
limitation, suspension, or termination of the participation of an
eligible institution in any program under title IV of the HEA.
Current Regulations: When the Department proposes to limit,
suspend, or terminate a fully certified institution's participation in
a title IV, HEA program, the institution is entitled to a hearing
before a hearing official under Sec. 668.91. In addition to describing
the procedures for issuing initial and final decisions, Sec. 668.91
also provides requirements for hearing officials in making initial and
final decisions in specific circumstances.
The regulations generally provide that the hearing official is
responsible for determining whether an adverse action--a fine,
limitation, suspension, or termination--is ``warranted,'' but direct
that, in specific instances, the sanction must be imposed if certain
predicate conditions are proven. For instance, in an action involving a
failure by the institution to provide a surety in the amount specified
by the Secretary under Sec. 668.15, the hearing official is required
to consider the surety amount demanded to be ``appropriate,'' unless
the institution can demonstrate that the amount was ``unreasonable.''
Further, Sec. 668.91(a)(3)(v) states that, in a termination action
brought on the grounds that the institution is not financially
responsible under Sec. 668.15(c)(1), the hearing official must find
that termination is warranted unless the conditions in Sec.
668.15(d)(4) are met. Section 668.15(c)(1) provides that an institution
is not financially responsible if a person with substantial control
over that institution exercises or exercised substantial control over
another institution or third-party servicer that owes a liability to
the Secretary for a violation of any title IV, HEA program
requirements, and that liability is not being repaid. Section
668.15(d)(4) provides that the Secretary can nevertheless consider the
first institution to be financially responsible if the person at issue
has repaid a portion of the liability or the liability is being repaid
by others, or the institution
[[Page 37281]]
demonstrates that the person at issue in fact currently lacks that
ability to control or lacked that ability as to the debtor institution.
Proposed Regulations: The Secretary proposes to amend Sec.
668.91(a)(3)(iii) by substituting the terms ``letter of credit or other
financial protection'' for ``surety'' in describing what an institution
must provide to demonstrate financial responsibility and adding Sec.
668.171(b),(c), or (d) to the list of sections under which a condition
or event may trigger a financial protection requirement. Additionally,
we are proposing to modify Sec. 668.91(a)(3)(iii) to require the
hearing official to uphold the amount of a letter of credit or
financial protection demanded by the Secretary, unless the institution
demonstrates that the events or conditions on which the demand is based
no longer exist or have been resolved, do not and will not have an
material adverse effect on the institution's financial condition, or
the institution has insurance that will cover the liabilities arising
from those events or conditions. We propose to further modify Sec.
668.91(a)(3)(v) to list the specific circumstances in which a hearing
official may find that a termination or limitation action brought for a
failure of financial responsibility for an institution's past
performance failure under Sec. 668.174(a), or a failure of a past
performance condition for persons affiliated with an institution under
Sec. 668.174(b)(1), was not warranted. For the former, revised Sec.
668.91(a)(3)(v) would state that these circumstances would be
consistent with the provisional certification and financial protection
alternative in Sec. 668.175(f). For the latter, the circumstances
would be those provided in Sec. 668.174(b)(2).
Reasons: The proposed changes to Sec. 668.91(a)(3)(iii) would
update the regulations to reflect both the current language in Sec.
668.175 and proposed changes to that section. We believe that the new
language would provide more clarity than the current regulation, which
provides only that the institution has to show that the amount was
``unreasonable.'' The proposed language would clearly state that the
amount of the letter of credit or other financial protection would be
considered unwarranted only if the reasons for which the Secretary
required the financial protection no longer exist or have been
resolved, do not and will not have an material adverse effect on the
institution's financial condition, or the institution has insurance
that will cover the liabilities arising from those events or
conditions.
Our proposed revisions to Sec. 668.91(a)(3)(iii) would reflect
previous, as well as proposed, changes to the financial responsibility
standards. First, the current financial responsibility standards in
Sec. 668.175 require an institution in some instances to provide a
letter of credit to be considered financially responsible. We propose
to modify Sec. 668.91(a)(3)(iii) to reflect that language as well as
changes proposed to Sec. 668.175 by substituting the terms ``letter of
credit or other financial protection'' for ``surety.'' Thus, the
proposed changes to Sec. 668.91 would clarify that a limitation,
suspension, or termination action may involve a failure to provide any
of the specified forms of financial protection.
We further propose to modify Sec. 668.91(a)(3)(iii) to state the
specific grounds on which a hearing official may find that a limitation
or termination action for failure to provide financial protection
demanded is not warranted. Under the proposed regulations, the hearing
official must accept the amount of the letter of credit or financial
protection demanded by the Secretary, unless the institution
demonstrates that the events or conditions on which the demand for
financial protection or letter of credit is based no longer exist or
have been resolved, do not and will not have an material adverse effect
on the institution's financial condition, or the institution has
insurance that will cover the liabilities arising from those events or
conditions. Consequently, under the proposed regulations, the
institution could not claim that the event or condition does not
support the demand for financial protection or that the amount demanded
is unreasonable based on the institution's assessment of the risk posed
by the event or condition.
The proposed changes to Sec. 668.91(a)(3)(v) would also clarify
the regulation and conform it with existing regulations describing the
alternative methods by which an institution may meet the financial
responsibility standards. Section 668.91(a)(3)(v) would be revised to
state the grounds on which a hearing official could find that a
termination or limitation action based on an institution's failure of
financial responsibility, an institution's failure of a past
performance condition under Sec. 668.174(a) or a failure of a past
performance condition for persons affiliated with an institution under
Sec. 668.174(b)(1) was not warranted. The changes would not add
substantive new restrictions, but simply conform Sec. 668.91 to the
substantive requirements already in current regulations. Thus, as
revised, Sec. 668.91(a)(3)(v) would require the hearing official to
find that the limitation or termination for adverse past performance by
the institution itself was warranted, unless the institution met the
provisional certification and financial protection alternatives in
current Sec. 668.175(f). For an action based on the adverse past
performance of a person affiliated with an institution, the hearing
official would be required to find that limitation or termination of
the institution was warranted unless the institution demonstrated
either proof of repayment or that the person asserted to have
substantial control in fact lacks or lacked that control, as already
provided in Sec. 668.174(b)(2), or that the institution has accepted
provisional certification and provided the financial protection
required under Sec. 668.175.
This proposal is very similar to changes made to this section
(previously designated as Sec. 668.90) in the 2016 final regulations.
81 FR 76072. It parallels the changes made in those regulations to
conform this section to existing regulations, but departs from them to
conform to changes we are proposing in this notification. Specifically,
because we propose here different actions or events that might cause an
institution not to be financially responsible than were included in the
2016 final regulations, the changes we now propose to this section to
this section track our current proposal. Therefore, we propose to
rescind this provision of the 2016 final regulations.
Limitation (Sec. 668.94)
Statute: Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094, provides
that the Secretary shall prescribe such regulations as may be necessary
to provide for the limitation, suspension, or termination of an
eligible institution's participation in any program under title IV of
the HEA.
Current Regulations: Section 668.86 provides that the Secretary may
limit an institution's participation in a title IV, HEA program, under
specific circumstances, and describes procedures for the institution to
appeal the limitation. Current Sec. 668.94 lists types of specific
restrictions that may be imposed by a limitation action, and includes
in paragraph (i) ``other conditions as may be determined by the
Secretary to be reasonable and appropriate.'' 34 CFR 668.94(i).
The regulations at Sec. 668.13(c) provide that the Secretary may
provisionally certify an institution whose participation has been
limited or suspended under subpart G of part 668, and Sec. 668.171(e)
provides that the Secretary may take action under subpart G to limit or
terminate the participation
[[Page 37282]]
of an institution if the Secretary determines that the institution is
not financially responsible under Sec. 668.171 or Sec. 668.175.
Proposed Regulations: The Secretary proposes to amend Sec. 668.94
to clarify that a change in an institution's participation status from
fully certified to provisionally certified to participate in a title
IV, HEA program under Sec. 668.13(c) is a type of limitation that may
be the subject of a limitation proceeding under Sec. 668.86.
Reasons: The proposed change to Sec. 668.94 would clarify current
policy and provide for a more complete set of limitations covered in
Sec. 668.94. The 2016 final regulations included this same change to
this regulation (previously designated as Sec. 668.93, see 81 FR
76072), and we propose it again here to seek comment on it in the
context of our complete current proposal.
Guaranty Agency (GA) Collection Fees (34 CFR 682.202(b), 682.405(b),
and 682.410(b)(2) and (4))
Statute: Section 428F(a) of the HEA provides that to complete a
FFEL borrower's loan rehabilitation, the FFEL guaranty agency must sell
the loan to a FFEL Program lender or assign the loan to the Secretary.
Section 428H(e)(2) of the HEA allows a FFEL Program lender to
capitalize outstanding interest when the loan enters repayment, upon
default, and upon the expiration of periods of deferment and
forbearance, but does not specifically authorize the capitalization of
interest when the borrower rehabilitates a defaulted loan.
Current Regulations: The current FFEL Program regulations in
Sec. Sec. 682.202, 682.405, and 682.410 permit FFEL Program lenders to
capitalize interest when the borrower enters or resumes repayment and
requires a guaranty agency to capitalize interest when it pays the FFEL
Program lender's default claim. However, these regulations do not
specifically address whether a guaranty agency may capitalize interest
when the borrower has rehabilitated a defaulted FFEL Loan or whether a
FFEL Program lender may capitalize interest when purchasing a
rehabilitated FFEL Loan from a guaranty agency. In addition, the
Department interprets these regulations to bar guaranty agencies from
imposing collection costs when a borrower enters into a satisfactory
repayment agreement within 60 days of the first notice of default sent
to the borrower.
Proposed Regulations: The proposed revisions to Sec. Sec. 682.202,
682.405, and 682.410 would provide that the only time a guaranty agency
may capitalize interest owed by the borrower is when it pays the FFEL
Program lender's default claim. Therefore, the guaranty agency would
not be allowed to capitalize interest when it sells a rehabilitated
FFEL Loan.
Similarly, the proposed regulations would bar a FFEL Program lender
from capitalizing outstanding interest when purchasing a rehabilitated
FFEL Loan.
The proposed regulations would also provide that when a guaranty
agency holds a defaulted FFEL Loan and the guaranty agency has
suspended collection activity to give the borrower time to submit a
closed school or false certification discharge application, interest
capitalization is not permitted if collection on the loan resumes
because the borrower does not return the appropriate form within the
allotted timeframe.
Finally, the Department proposes to prohibit guaranty agencies from
charging collection costs to borrowers who, within 60 days of receiving
notice of default, enter into an acceptable repayment arrangement,
including a loan rehabilitation plan.
Reasons: Recently, the Department became aware that some guaranty
agencies and FFEL Program lenders were capitalizing interest when a
borrower rehabilitates a loan, while others were not. In addition, some
guaranty agencies were capitalizing interest when resuming collection
on a defaulted FFEL Loan when a borrower had not submitted a closed
school or false certification discharge within a specific timeframe.
The Department does not believe that interest capitalization in either
circumstance is appropriate, and the Department does not capitalize
interest on loans that it holds in comparable circumstances.
Additionally, to encourage borrowers to enter into satisfactory
repayment plans, the Department proposes that guaranty agencies may not
assess collection costs to a borrower who enters into an acceptable
repayment agreement, including a rehabilitation agreement, and honors
that agreement, within 60 days of receiving notice of default.
The negotiators did not object to any of these changes. In
addition, the 2016 final regulations included the changes we propose in
this NPRM regarding interest capitalization when a borrower
rehabilitates a loan, as well as when a guaranty agency resumes
collection on a defaulted FFEL Loan when a borrower had not submitted a
closed school or false certification discharge within a specific
timeframe. 81 FR 76079-80. We propose these changes again here to seek
comment on them in the context of our complete current proposal.
The changes we propose regarding collection costs for borrowers who
enter into an acceptable repayment arrangement, including a loan
rehabilitation plan, within 60 days of receiving notice of default were
not included in the 2016 final regulations. These changes are
consistent with the interpretation and position that the Department
previously took in Dear Colleague Letter (DCL) GE-15-14 (July 10,
2015). That DCL was withdrawn in order to allow for public comment on
our interpretation, which we seek through this notification.
Subsidized Usage Period and Interest Accrual (34 CFR 685.200(f))
Statute: Section 455(q) of the HEA provides that a first-time
borrower on or after July 1, 2013, is not eligible for additional
Direct Subsidized Loans if the borrower has received Direct Subsidized
Loans for a period that is equal to or greater than 150 percent of the
length of the borrower's current program of study (``150 percent
limit''). In addition, some borrowers who are not eligible for Direct
Subsidized Loans because of the 150 percent limit become responsible
for the interest that accrues on their loans when it would otherwise be
paid by the government. The statute does not address what effect a
discharge of a Direct Subsidized Loan has on the 150 percent limit. The
statute also does not address whose responsibility it is to pay the
outstanding interest on any remaining loans that have not been
discharged, but which have previously lost eligibility for interest
subsidy.
Current Regulations: Section 685.200(f)(4) provides two exceptions
to the calculation of the period of time that counts against a
borrower's 150 percent limit--the subsidized usage period--that can
apply based on the borrower's enrollment status or loan amount. The
regulations do not have an exception to the calculation of a subsidized
usage period if the borrower receives a discharge of his or her Direct
Subsidized Loan. They also do not address whose responsibility it is to
pay the outstanding interest on any remaining loans that have not been
discharged, but have previously lost eligibility for the interest
subsidy based on the borrower's remaining eligibility period and
enrollment.
Proposed Regulations: Proposed Sec. [thinsp]685.200(f)(4)(iii)
would specify that a discharge based on a school closure, false
certification, unpaid refund, or borrower defense will lead to the
elimination, or recalculation, of the subsidized usage period that is
[[Page 37283]]
associated with the loan or loans discharged.
The proposed regulations would also specify that, when the full
amount of a Direct Subsidized Loan or a portion of a Direct Subsidized
Loan is discharged, the entire subsidized usage period associated with
that loan is eliminated. In the event that a borrower receives a closed
school, false certification, or, depending on the circumstances,
borrower defense or unpaid refund discharge, the Department would
completely discharge a Direct Subsidized Loan or a portion of a Direct
Subsidized Consolidation Loan that is attributable to a Direct
Subsidized Loan.
The proposed regulations would also specify that, when only a
portion of a Direct Subsidized Loan or a portion of a Direct
Consolidation Loan that is attributable to a Direct Subsidized Loan is
discharged, the subsidized usage period would be recalculated instead
of eliminated. Depending on the circumstances, discharges due to a
borrower defense or unpaid refund could result in only part of a Direct
Subsidized Loan or only a portion of the part of a Direct Consolidation
Loan that is attributable to a Direct Subsidized Loan being discharged.
The proposed regulations would specify that when a subsidized usage
period is recalculated, the period is only recalculated if the
borrower's subsidized usage period was calculated as one year as a
result of receiving the Direct Subsidized Loan in the amount of the
annual loan limit for a period of less than an academic year. For
example, if a borrower received a Direct Subsidized Loan in the amount
of $3,500 as a first-year student on a full-time basis for a single
semester of a two-semester academic year, the subsidized usage period
would be one year. If the borrower later receives an unpaid refund
discharge in the amount of $1,000, the subsidized usage period would be
recalculated, and the subsidized usage period would become 0.5 years
because the subsidized usage period was previously based on the amount
of the loan and, after the discharge, is based on the relationship
between the period for which the borrower received the loan (the loan
period) and the academic year for which the borrower received the loan.
In contrast, if the borrower received a Direct Subsidized Loan in
the amount of $3,500 as a first-year student on a full-time basis for a
full two-semester academic year, the subsidized usage period would be
one year. If the borrower later receives an unpaid refund discharge in
the amount of $1,000, the subsidized usage period would still be one
year because the subsidized usage period would still be calculated
based on the relationship between the loan period and the academic year
for which the borrower received the loan.
Proposed Sec. [thinsp]685.200(f)(3) would provide that, if a
borrower receives a discharge based on a school closure, false
certification, unpaid refund, or a borrower defense discharge that
results in a remaining eligibility period greater than zero, the
borrower is no longer responsible for the interest that accrues on a
Direct Subsidized Loan or on the portion of a Direct Consolidation Loan
that repaid a Direct Subsidized Loan, unless the borrower once again
becomes responsible for the interest that accrues on a previously
received Direct Subsidized Loan or on the portion of a Direct
Consolidation Loan that repaid a Direct Subsidized Loan, for the life
of the loan.
For example, suppose a borrower receives Direct Subsidized Loans
for three years at school A and then transfers to school B and receives
Direct Subsidized Loans for three additional years. Further suppose
that at this point, the borrower has no remaining Subsidized Loan
eligibility period and enrolls in an additional year of academic study
at school B, which triggers the loss of interest subsidy on all Direct
Subsidized Loans received at schools A and B. If the borrower later
receives a false certification discharge with respect to school B, the
borrower's remaining eligibility period is now greater than zero. The
borrower is no longer responsible for paying the interest subsidy lost
on the three loans from school A. If the borrower then enrolled in
school C and received three additional years of Direct Subsidized
Loans, resulting in a remaining eligibility period of zero, and then
enrolled in an additional year of academic study, the borrower would
lose the interest subsidy on the Direct Subsidized Loans received at
schools A and C.
Reasons: The proposed regulations would clarify and codify the
Department's current practice in this area. Under the circumstances in
which a borrower receives a closed school, false certification,
borrower defense, or unpaid refund discharge, the borrower has not
received all or part of the benefit of the loan due to an act or
omission of the school. In such an event, we believe that a student's
eligibility for future loans and the interest subsidy on existing loans
should not be negatively affected by having received the loan.
Accordingly, under the proposed regulations, we would increase the
borrower's eligibility for Direct Subsidized Loans or reinstate the
interest subsidy on other Direct Subsidized Loans under the 150 percent
limit where the borrower receives a discharge of a Direct Subsidized
Loan and the discharge was based on an act or an omission of the school
that caused the borrower to not receive all or part of the benefit of
the loan. The negotiators did not raise any objections to this change.
The 2016 final regulations included these same changes to this
regulation (81 FR 76080), and we propose them again here to seek
comment on them in the context of our complete current proposal.
Appendix A to Subpart L, Part 668: Ratio Methodology for Proprietary
Institutions
Section 1: Ratio and Ratio Terms
Primary Reserve Ratio Adjusted Equity
Total Expenses and Losses
Equity Ratio Modified Equity
Modified Assets
Net Income Ratio Income before Taxes
Total Revenues and Gains
Definitions
Adjusted Equity = (total owner's equity) - (intangible assets) -
(unsecured related-party receivables) * - (net property, plant and
equipment) ** + (post-employment and defined benefit pension
liabilities) + (all debt obtained for long-term purposes, not to exceed
total net property, plant and equipment) ***
Total Expenses and Losses excludes income tax, discontinued
operations not classified as an operating expense or change in
accounting principle and any losses on investments, post-employment and
defined benefit pension plans and annuities. Any losses on investments
would be the net loss for the investments. Total Expenses and Losses
include the nonservice component of net periodic pension and other
post-employment plan expenses.
Modified Equity = (total owner's equity) - (intangible assets) -
(unsecured related-party receivables)
Modified Assets = (total assets) - (intangible assets) - (unsecured
related-party receivables)
Income before Taxes includes all revenues, gains, expenses and
losses incurred by the school during the accounting period. Income
before taxes does not include income taxes, discontinued operations not
classified as an operating expense or changes in accounting principle.
Total Revenues and Gains does not include positive income tax
amounts, discontinued operations not classified
[[Page 37284]]
as an operating gain, or change in accounting principle (investment
gains should be recorded net of investment losses.
* Unsecured related party receivables as required at 34 CFR
668.23(d).
** The value of property, plant and equipment includes construction
in progress and lease right-of-use assets, and is net of accumulated
depreciation/amortization.
*** All debt obtained for long-term purposes, not to exceed total
net property, plant and equipment includes lease liabilities for lease
right-of-use assets and the short-term portion of the debt, up to the
amount of net property, plant and equipment. If an institution wishes
to include the debt, including debt obtained through long-term lines of
credit in total debt obtained for long-term purposes, the institution
must include a disclosure in the financial statements that the debt,
including lines of credit exceeds twelve months and was used to fund
capitalized assets (i.e., property, plant and equipment or capitalized
expenditures per Generally Accepted Accounting Principles (GAAP)). The
disclosures that must be presented for any debt to be used in adjusted
equity include the issue date, term, nature of capitalized amounts and
amounts capitalized. Institutions that do not include debt in total
debt obtained for long-term purposes, including long-term lines of
credit, do not need to provide any additional disclosures other than
those required by GAAP. The debt obtained for long-term purposes will
be limited to only those amounts disclosed in the financial statements
that were used to fund capitalized assets. Any debt amount including
long-term lines of credit used to fund operations must be excluded from
debt obtained for long-term purposes.
Section 2: Financial Responsibility Supplemental Schedule Requirement
and Example
A Supplemental Schedule must be submitted as part of the required
audited financial statements submission. The Supplemental Schedule
contains all of the financial elements required to compute the
composite score. Each item in the Supplemental Schedule must have a
reference to the Balance Sheet, Statement of (Loss) Income, or Notes to
the Financial Statements. The amount entered in the Supplemental
Schedules should tie directly to a line item, be part of a line item,
tie directly to a note, or be part of a note in the financial
statements. When an amount is zero, the institution would identify the
source of the amount as NA (Not Applicable) and enter zero as the
amount in the Supplemental Schedule. The audit opinion letter must
contain a paragraph that references the auditor's additional analysis
of the financial responsibility Supplemental Schedule.
Executive Orders 12866, 13563, and 13771
Under Executive Order 12866, the Secretary must determine whether
this regulatory action is ``significant'' and, therefore, subject to
the requirements of the Executive Order and subject to review by the
Office of Management and Budget (OMB). Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as an action likely
to result in a rule that may--
(1) Have an annual effect on the economy of $100 million or more,
or adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local, or
tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule).
(2) Create serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) Materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles stated in the
Executive order.
Under Executive Order 12866,\9\ section 3(f)(1), this regulatory
action is economically significant and subject to review by OMB. Also
under Executive Order 12866 and the Presidential Memorandum ``Plain
Language in Government Writing'', the Secretary invites comment on how
easy these regulations are to understand in the Clarity of the
Regulations section.
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\9\ Exec. Order No. 12866, 58 FR 190 (October 4, 1993).
Regulatory Planning and Review. Available at: www.reginfo.gov/public/jsp/Utilities/EO_12866.pdf.
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Under Executive Order 13771,\10\ for each new regulation that the
Department proposes for notice and comment or otherwise promulgates
that is a significant regulatory action under Executive Order 12866 and
that imposes total costs greater than zero, it must identify two
deregulatory actions. For FY 2018, no regulations exceeding the
agency's total incremental cost allowance will be permitted, unless
required by law or approved in writing by the Director of OMB. These
proposed regulations are a deregulatory action under E.O. 13771 and
therefore the two-for-one requirements of E.O. 13771 do not apply.
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\10\ Exec. Order No. 13771, 82 FR 22 (January 30, 2017).
Reducing Regulation and Controlling Regulatory Costs. Available at:
www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02451.pdf.
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We have also reviewed these regulations under Executive Order
13563, which supplements and explicitly reaffirms the principles,
structures, and definitions governing regulatory review established in
Executive Order 12866. To the extent permitted by law, Executive Order
13563 requires that an agency--
(1) Propose or adopt regulations only on a reasoned determination
that their benefits justify their costs recognizing that some benefits
and costs are difficult to quantify);
(2) Tailor its regulations to impose the least burden on society,
consistent with obtaining regulatory objectives and taking into
account--among other things, and to the extent practicable--the costs
of cumulative regulations;
(3) In choosing among alternative regulatory approaches, select
those approaches that maximize net benefits (including potential
economic, environmental, public health and safety, and other
advantages; distributive impacts; and equity);
(4) To the extent feasible, specify performance objectives, rather
than the behavior or manner of compliance a regulated entity must
adopt; and
(5) Identify and assess available alternatives to direct
regulation, including economic incentives--such as user fees or
marketable permits--to encourage the desired behavior, or provide
information that enables the public to make choices.
Executive Order 13563 also requires an agency ``to use the best
available techniques to quantify anticipated present and future
benefits and costs as accurately as possible.'' The Office of
Information and Regulatory Affairs of OMB has emphasized that these
techniques may include ``identifying changing future compliance costs
that might result from technological innovation or anticipated
behavioral changes.''
Under Executive Order 13563,\11\ the Secretary certifies that the
best available techniques were used to quantify the impacts of these
regulations. Finally, the Secretary certifies that this regulatory
action would not unduly interfere with State, local, and tribal
governments in
[[Page 37285]]
the exercise of their governmental functions.
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\11\ Public Law 106-554 appendix C 114 STAT 2763A-153-155.
section 515 Available at: www.gpo.gov/fdsys/pkg/PLAW-106publ554/pdf/PLAW-106publ554.pdf.
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The Department has analyzed the need for regulatory action,
alternatives available to it, and measured the impact of the changes
that would result from the proposed regulations relative to the
existing regulatory baseline under a cost-benefit approach. The
required Accounting Statement is included in the Net Budget Impacts
section.
Regulatory Impact Analysis (RIA)
As further detailed in the Net Budget Impacts section, this
proposed regulatory action would have an annual effect on the economy
of approximately $697 million in transfers among borrowers,
institutions, and the Federal Government related to defense to
repayment and closed school discharges, as well as $1.15 million in
costs to comply with paperwork requirements. This economic estimate was
produced by comparing the proposed regulation to the PB2019 budget. As
explained in Section (B)(1)(Baseline) of this RIA, we compare the
proposed regulations to the delayed 2016 regulations. We discuss the
need for regulatory action; regulatory alternatives considered; costs,
benefits, and transfers; net budget impacts and accounting statement;
regulatory flexibility act (small business impacts); and paperwork
reduction.
A. Need for Regulatory Action
These proposed regulations address a significant increase in burden
resulting from the vast increase in borrower defense claims since 2015.
The 2016 borrower defense regulations fail to adequately address this
increase in burden. These proposed regulations reduce burden by
restoring the limitation of defense to repayment claims to those loans
that are in certain collections proceedings, provide an opportunity for
institutions to submit a response to borrower allegations, and provide
for the Secretary to recover losses from institutions.
Although the borrower defense to repayment regulations have
provided an option for borrower relief for borrowers in a collections
proceeding since 1994, in 2015 the number of borrower defense to
repayment claims increased dramatically when institutions owned by
Corinthian Colleges, Inc., were placed on Heightened Cash Monitoring 1
(HCM1) status with an additional 20 day hold and the company declared
bankruptcy. Students enrolled at Corinthian campuses and those who had
left the institution within 120 days of its closure were eligible for a
closed school loan discharge. The Department decided to also provide
student loan discharge to additional borrowers who did not qualify for
a closed school loan discharge, but could qualify under a new
interpretation of the defense to repayment regulation (34 CFR
685.206(c)). The Department encouraged Corinthian borrowers to submit
defense to repayment claims, which it agreed to consider for all
Corinthian-related loans, including those not in a collections
proceeding. We refer to these claims as affirmative claims, as opposed
to defensive claims, which require the loan to be in a collections
proceeding.
This resulted in a significant increase in claim volume compared to
the prior years, when claim volume was no more than 10 in any given
year. Since 2015, the Department has considered both affirmative and
defensive claims, thus significantly expanding the number of claims
received and the potential cost to the Federal budget. The 2016
regulations also provide that borrowers could submit both affirmative
and defensive claims.
The proposed regulations revert back to the plain meaning of the
regulation, as it had been implemented prior to 2015, such that only
those borrowers in a collection proceeding would have a mechanism by
which they could exercise defenses to repayment. With the anticipated
substantial increase in the number of defense to repayment
applications, the Department believes that revisions to the 2016
regulations are necessary.\12\ However, the Department is also seeking
comment on continuing to accept affirmative claims and, if such claims
were accepted, on ways of reducing burden and taxpayer liability
associated with affirmative claims, since borrowers have nothing to
lose by attempting to seek student loan relief, even if
misrepresentation or harm as a result of misrepresentation did not
occur. In addition, provisions in the 2016 regulation that enable the
Secretary to initiate defense to repayment claims on behalf of entire
classes of borrowers in a collection proceeding to exercise defenses to
repayment as a last resort after exhausting other available consumer
protection processes. The Department also realized that claims received
from borrowers who had attended institutions that the Department had
not investigated or found instances of misrepresentation (i.e., other
than Corinthian)create the potential for unsubstantiated claims that
place no burden on the part of the borrower, but significant burden on
the part of the Department, it needed a mechanism to collect evidence
from institutions and to provide an opportunity for those institutions
to defend themselves against frivolous claims. Because an institution
might withhold official transcripts from students who receive a defense
to repayment loan discharge, (as institutions are permitted to do in
the case of loan discharges), automatic discharges could have
collateral consequences for students who unknowingly had their loans
discharged. An ``opt out'' mechanism could result in borrowers who
unknowingly lose the ability to verify the credentials they earned
using the subsequently discharged loans. Therefore, the Department
believes that it is imperative that individual borrowers apply for a
closed school loan discharge rather than receiving it automatically.
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\12\ U.S. Department of Education Office of Inspector General
(December 8, 2017), ``Federal Student Aid's Borrower Defense to
Repayment Loan Discharge Process'', retrieved from www2.ed.gov/about/offices/list/oig/auditreports/fy2018/i04r0003.pdf.
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The group discharge process, which would be removed by the proposed
regulations, may otherwise create large and unnecessary liabilities for
taxpayer funds. If group claims initiated by the Secretary include
borrowers who were not subjected to the misrepresentation, did not rely
on a misrepresentation to make an enrollment decision, or were not
harmed by the misrepresentation then those borrowers' loans should not
be forgiven with taxpayer funds. The Department believes that
institutions should be held accountable for acts or omissions that
constitute misrepresentation, but that arbitration, other student
complaint resolution or legal proceedings brought in State court should
serve as the primary means for borrowers to seek remedies against such
acts.
The increased number of school closures in recent years has
prompted the Department to review regulations related to closed schools
and therefore to propose changes to them. Under the current
regulations, students who are enrolled at institutions that close, as
well as those who left the institution no more than 120 days prior to
the closure, are entitled to a closed school student loan discharge
provided that the student does not transfer credits from the closed
school and complete the program at another institution. To ensure that
borrowers who left an institution in the semester prior to its closure
do not lose eligibility for closed school discharge because of a summer
break, the Department proposes to expand the closed school discharge
window from 120 days to 180 days prior to the school's closure. These
regulations also
[[Page 37286]]
incentivize institutions to provide students with an opportunity to
complete their program through an approved teach-out opportunity that
takes place at the closing institution or at another institution. The
teach-out opportunity must be approved by the accreditor and, if
applicable, the State authorizing agency. In the proposed regulation, a
borrower given the opportunity to complete his or her program through
an orderly teach-out at a closing institution, or through a partnership
with another institution, would not be eligible for closed school loan
discharge. This mirrors the existing regulations that disallow students
who transferred credits from the closed school to another school, or
who finished the program elsewhere, to qualify for the closed school
loan discharge. The teach-out opportunity must be approved by the
accreditor and, if applicable, the State authorizing agency to ensure
that the institution or its teach-out partner institution continues to
provide educational and student support services that meet the
accreditor's and agency's standards. Although the 2016 regulations
included an automatic closed school loan discharge for eligible
borrowers who did not re-enroll within 3 years of their school's
closure, upon further consideration, the Department has determined that
this could have unintended consequences for students because an
institution, or the custodian of its student records, is permitted to
and might withhold the official transcripts of borrowers who received a
closed school discharge. Although the 2016 regulation included an opt-
out provision, students who miss the notification (perhaps due to a
change in email or mailing address) or who do not fully understand the
opportunity or its potential consequences, could end up by default
participating in an action that could prevent them from verifying their
credits or credential in the future. The Department has heretofore
favored opt-in requirements rather than opt-out requirements, such as
in the case of Trial Enrollment Periods (https://ifap.ed.gov/dpcletters/GEN1112.html), to be sure that a student's omission does not
result in actions with negative financial or academic consequences. The
opt-out provision also could increase the cost to the taxpayer,
including for borrowers who are not seeking relief, because default
provisions typically capture a much larger population than opt-in
provisions. Therefore, the proposed regulations require borrowers to
submit an application in order to receive a closed school loan
discharge.
The proposed regulations also update the Department's regulations
regarding false certification loan discharges in response to the change
made to the HEA by Public Law 112-74, Consolidated Appropriations Act,
2012, that eliminated the option for students who did not have a high
school diploma or its equivalent to receive Title IV aid by
demonstrating the ability to benefit and to codify current practices.
Whereas the ability to benefit test once allowed students who were
unable to obtain an official high school transcript or diploma to
qualify for Title IV aid by other mechanisms, the elimination of this
test prevents them from receiving Title IV aid. Now when a student is
unable to obtain an official high school transcript, but attests in
writing under penalty of perjury that he or she has completed a high
school degree, the borrower may receive title IV financial aid, but
will not then be eligible for a false certification discharge if the
borrower had misstated the truth in signing the attestation.
These proposed regulations also address several provisions related
to determining the financial responsibility of institutions and
requiring surety in the event that the school's financial health is
threatened. The Financial Accounting Standards Board (FASB) recently
issued updated accounting standards that change the way that lease
liabilities are considered in determining an institution's financial
position. To align with these new standards, these proposed regulations
update the definition of terms used in 34 CFR part 668, subpart L,
appendices A and B, which are used to calculate an institution's
composite score. The composite score methodology must be updated to
align with the new FASB standards, but in the meantime, the
misalignment between the new FASB standards and the old composite score
methodology could have unintended consequences. Some of these
consequences could include institutions signing shorter term equipment
or facilities leases, thereby increasing the cost of education, or
potentially even closing schools whose financial position hasn't
changed from prior years, thereby increasing the number of closed
school loan discharges. Therefore, the Department would continue to
calculate the composite score under the prior FASB standard
(``alternative composite score'') for institutions that would have
passed the composite score under that standard but not the current
standard. This alternative composite score methodology will be in place
for the six years following the implementation of the new FASB standard
or until an updated composite score is developed through negotiated
rulemaking, whichever is sooner.
In addition, the proposed regulations expand the financial
responsibility requirements and add surety requirements in response to
certain triggering events that occur between audit cycles. Instead of
relying solely on information contained in an institution's audited
financial statements, which are submitted to the Department six to nine
months after the end of the institution's fiscal year, we propose to
determine at the time that certain events occur whether those events
have a material adverse effect on the institution's financial
condition. In cases where the Department determines that an event poses
a materially adverse risk, this approach would enable us to address
that risk quickly by taking the steps necessary to protect the Federal
interest.
We adopted a similar approach in the 2016 final regulations, but
here we propose to focus on known and quantifiable expenses. For
example, the actual liabilities incurred from defense to repayment
discharges could trigger surety requirements, but the existence of
pending litigation may or may not have a financial impact on the
school. We are proposing additional surety requirements for other
metrics or events for which the potential consequences pose a severe
and imminent risk (for example, SEC or stock exchange actions) to the
Federal interest.
We propose other triggering events, such as high cohort defaults
rates, loan agreement violations, and accrediting agency actions, that
could have a material adverse effect on an institution's operations or
its ability to continue operating, but the Department intends to fully
consider the circumstances surrounding such event before making a
determination that the institution is not financially responsible. In
that regard, these proposed regulations do not contain certain
mandatory triggering events that were included in the 2016 regulations
because the cost and burden of seeking surety is significant, and in
many cases speculative events, such as pending litigation or pending
defense to repayment claims, may be resolved with no or minimal
financial impact on the institution. Similarly, while the 2016
regulations included a mandatory surety for all State law violations,
the Department recognizes that many violations do not threaten the
financial stability or existence of the institution and therefore
should not trigger
[[Page 37287]]
mandatory surety requirements. These regulations also do not include as
a mandatory triggering event the results of a financial stress test,
which was included in the 2016 regulations without an explanation of
what that stress test would be and on what empirical basis it would be
developed.
B. Alternatives Considered
The Department and the non-Federal negotiators exchanged proposals
on every topic included in these proposed regulations. The table below
provides a side-by-side comparison of the 2016 regulations, the
proposed regulations, and two alternatives--Scenario 1 and Scenario 2.
OMB circular A-4 requires that agencies carefully consider all
appropriate alternatives for the key attributes or provisions of a
rule. They generally should analyze at least three options: The
preferred option; a more stringent option that achieves additional
benefits (and presumably costs more) beyond those realized by the
preferred option; and a less stringent option that costs less (and
presumably generates fewer benefits) than the preferred option. The
2016 regulations are summarized in this section and are also available
to the reader online.\13\ The specifics of the alternatives selected
are discussed more thoroughly in this section. Scenario 1 reflects a
more stringent option. Scenario 2 reflects the regulations currently in
effect (which in the case of defense to repayment dates back to 1994).
Further, the HEA refers to proprietary institutions, but some of the
Department's prior notifications and regulations use the term
``private, for-profit institutions.'' For the purposes of discussion,
the Department defines private, for-profit institutions to be the same
as proprietary institutions, and uses the term ``proprietary
institution'' throughout in order to be consistent with the HEA.
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\13\ https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf.
Table 1--Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------
Topic Baseline Proposal Scenario 1 Scenario 2
----------------------------------------------------------------------------------------------------------------
Closed school discharge 120 days.......... 180 days.......... 150 days.......... 120 days.
eligibility window.
Closed school discharge Borrower completed School offered a School offered a Borrower completed
exclusions. teach-out or teach-out plan. teach-out plan. teach-out or
transferred transferred
credits. credits.
Borrower Defense claims accepted Affirmative and Defensive only.... Affirmative and Defensive only.
defensive. defensive.
Party that adjudicates borrower Department........ Department........ State court or Department.
defense claims. arbiter.
Standard for borrower defense Federal Standard.. Federal standard.. State laws........ State laws.
claims.
Borrower defense application Application....... Select borrower Submit judgment Submit sworn
process. defense in from state court attestation or
response to wage or similar using application.
garnishment or application.
similar actions.
Loans associated with BD claims. Forbearance during Forbearance not Forbearance not Forbearance during
adjudication necessary. necessary. adjudication
Interest accrues. Interest accrues.
Composite score calculation and No FASB updates... Higher of current Higher of current No FASB updates.
timeline. or FASB-updated or FASB-updated
score forever. score for 6
years, then FASB-
updated score.
Financial responsibility Reporting that New reporting that New reporting that None.
triggers. automatically may result in automatically
results in surety surety request. results in surety
request. request.
Notification of mandatory Prohibits On website and On website, during None.
arbitration and class action mandatory entrance entrance and exit
waivers. arbitration counseling. counseling, and
clauses and class annually by email
action waivers. to students.
----------------------------------------------------------------------------------------------------------------
1. Baseline
Usually, the impact of a regulation is quantified relative to the
regulations currently in effect, which in this case would be the
borrower defense regulations from 1995, and associated data. However,
this impact analysis does not follow that practice because the 2016
regulations, although not yet in effect, would go into effect were it
not for these proposed regulations. Therefore, this analysis compares
the proposed regulations to the 2016 borrower defense regulations
rather than the 1995 regulations. Similarly, the delayed 2016
regulations on financial responsibility, closed school discharges, and
false certification discharges are used as a baseline for these topics.
Composite score calculations and FASB standards were not covered in the
2016 regulations, so they are compared to the regulations currently in
effect.
2. Summary of Proposed Regulations
The proposed regulations would amend the baseline regulations to
update composite score calculations to comply with new FASB standards,
create an alternative composite score that does not include new FASB
standards for lease liabilities, require institutions to disclose fewer
adverse events to the Department and notify students of mandatory
arbitration or class-action prohibitions, permit mandatory arbitration
clauses and class-action waivers, expand the closed school discharge
eligibility period, modify the conditions under which a Direct Loan
borrower may qualify for false certification and closed school
discharges, create a different process for adjudicating defense to
repayment applications, and, as part of the adjudication process,
provide that the Secretary will used the revised misrepresentation
standard explained in this NPRM, request evidence from institutions
prior to completing adjudication of any borrower defense claims.
Finally, the Department is also proposing changes to the regulations
regarding subsidy usage periods and collection costs charged by
guaranty agencies.
3. Alternative Scenario 1
Under Scenario 1, the Department would require borrowers to submit
a judgment from a Federal or State court or arbitration panel to
qualify for a defense to repayment discharge. Scenario 1 would not
include a process for the Department to adjudicate claims because
claimants would already have obtained a decision from a court or
arbitrator at the State level. This alternative would place an
increased burden on borrowers if they decide to
[[Page 37288]]
hire a lawyer in order to present their claims to a State court or
incur costs associated with an arbitration proceeding. Moreover,
because consumer protection laws vary by State, a borrower filing a
claim in one State may be subject to different criteria compared to a
borrower filing a defense to repayment claim in another State. It may
also be unclear as to which State serves as the relevant jurisdiction
for a given borrower.
Under Scenario 1, a guaranty agency would be able to charge a
borrower collection fees and capitalize interest after rehabilitating a
loan. The closed school discharge eligibility window would be expanded
to 150 days, but only students whose institutions did not offer them a
teach-out plan would be eligible for such a discharge.
This scenario would require an institution to notify current and
potential students of its pre-dispute arbitration and class-action
waiver policies on its website, at entrance and exit counselling for
all title IV borrowers, and annually to all enrolled students by email.
Institutions would also be required to disclose certain financial
responsibility risk events to the Department if they occur.
Lastly, this scenario would implement revisions to FASB standards
in the calculation of an institution's composite score without a
transition period and would prevent an institution from appealing the
composite score calculation. This scenario would include a requirement
that the institution automatically provide a surety in the event that a
financial responsibility risk event occurs.
4. Alternative Scenario 2
Scenario 2 would be to rescind the 2016 regulations on borrower
defenses and go back to the 1995 regulations. In Scenario 2 the
Department would accept only defensive borrower defense claims to
repayment applications or attestations and adjudicate them, applying a
State law standard. Under this alternative, borrowers could elect to
have loans placed in forbearance while their claims are adjudicated.
Scenario 2 would return the eligibility period for closed school
discharge to 120 days. Borrowers who complete a teach-out or transfer
credits would not qualify. The technical changes to the false
certification discharge provisions reflected in the 2016 regulations
would be rescinded.
C. In Scenario 2, no Changes to the Composite Score or Financial
Responsibility Standards Would Be Made as a Result of Changes to the
FASB Standards
Under this scenario, a guaranty agency could not capitalize
interest or charge collection fees on a loan that is sold following the
completion of loan rehabilitation, which is current Department practice
in the Direct Loan Program.\14\
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\14\ https://ifap.ed.gov/dpcletters/GEN1514.html.
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Costs, Benefits, and Transfers
These proposed regulations will affect all parties participating in
the title IV, HEA programs. In the following sections, the Department
discusses the effects these proposed regulations may have on borrowers,
institutions, guaranty agencies, and the Federal government.
1. Borrowers
These proposed regulations would affect borrowers relative to
defense to repayment applications, closed school discharges, false
certification discharges, loan rehabilitation, and institutional
disclosures. Borrowers may benefit from an ability to appeal to the
Secretary if a guaranty agency denies their closed school discharge
application, from the cost savings and campus stability associated with
longer leases from a more generous ``look back'' period with regard to
closed school loan discharges, and from the ability to increased
opportunities for borrowers to complete their program through an
approved teach-out plan. Borrowers are also more likely to have their
defense to repayment applications processed and decided more quickly if
the Department has a smaller volume of unjustified or ineligible
claims.
Borrowers may be disadvantaged by receiving fewer opportunities to
discharge loans if the Department returns to the pre-2015 practice of
accepting defense to repayment claims only from borrowers in a
collections proceeding. In addition, the Department is concerned that
students could engage in strategic defaults in order to avail
themselves to defense to repayment relief. Students who default and
then are unsuccessful in receiving defense to repayment loan relief may
suffer additional financial penalties and have the default listed on
their credit report. Therefore, the Department is considering
continuing to accept affirmative claims to enable borrowers who are
harmed by misrepresentations to seek relief while they are in
repayment. In the event that the Department continues to accept
affirmative claims, it will place certain limits and conditions on the
affirmative claims process to serve borrowers who were harmed while
preventing frivolous claims. These limits will also ensure that the
affirmative claim process aligns with the Department's record retention
policies so that institutions will have the ability to respond to the
borrower's claim. Some borrowers may incur burden to review
institutional disclosures on mandatory arbitration and class action
waivers, or to complete applications for defense to repayment
discharges, and there could be additional burden to borrowers who would
otherwise, through no affirmative action on their part, be included in
a class-action proceeding.
a. Borrower Defenses
When defense to repayment discharge applications are successful,
dollars are transferred from the Federal government to borrowers
because borrowers are relieved of an obligation to pay the government
for the loans being discharged. As further detailed in the Net Budget
Impacts section, the Department estimates that annualized transfers
from the Federal Government to affected borrowers, partially reimbursed
by institutions, would be reduced by $693.9 million. This is based on
the difference in cashflows associated with loan discharges when the
proposed regulations are compared to the President's Budget 2019
baseline (PB2019) and discounted at 7 percent. The proposed regulations
do not include a formula for computing partial discharges because
partial discharges are based on the nature of each borrower's
application and the magnitude of the harm experienced by the borrower.
The Department is interested in options for determining partial relief
and invites commenters to submit specific formulae for determining
partial relief derived from an assessment of the financial harm the
borrower experienced, as well as sources of data that could be used to
support the recommended formulae. To the extent borrowers with
successful defense to repayment claims have subsidized loans, the
elimination or recalculation of the borrowers' subsidized usage periods
could relieve them of their responsibility for accrued interest and
make them eligible for additional subsidized loans. A borrower defense
discharge is a remedy available to students when other consumer
protection tools are ineffective. Students harmed by institutional
misrepresentations continue to have the right to seek relief directly
from the
[[Page 37289]]
institution through arbitration, lawsuits in State court, or other
available means. Borrowers would possibly receive quicker and more
generous financial remedies from institutions through arbitration since
schools may be more motivated to make students whole in order to avoid
defense to repayment claims. The 2016 regulations would have eliminated
this complaint resolution option by prohibiting mandatory arbitration,
and while institutions may have continued to provide voluntary
arbitration, schools may not have made it obvious to students how to
avail themselves of arbitration opportunities. The proposed regulation
allows for mandatory arbitration clauses, but requires institutions to
provide the borrower with information about the meaning of a mandatory
arbitration clauses and how to use the arbitration process in the event
of a complaint against the institution. The benefit of arbitration is
that it is more accessible and less costly to students and institutions
than litigation. For borrowers who seek relief from a court, there may
be additional advantages since courts can award damages beyond the loan
value, which the Department cannot do. The proposed regulations,
therefore, would provide borrowers with the incentive to seek redress
first from institutions that should incur the cost of the harm to the
student. Only as a last resort should taxpayer funds be used to pay the
costs of institutional misrepresentations.
b. Closed School Discharges
Some borrowers may be impacted by the proposed changes to the
closed school discharge regulations. These proposed regulations would
extend the window for a student's eligibility for a closed school
discharge from 120 to 180 days from the date the school closed, to
account for the days a student would be unable to attend an institution
during a summer term at institutions that offer no or only limited
classes during that time. The regulations would provide that borrowers
offered a reasonable teach-out plan by their institutions would not be
eligible for closed school discharges, if the plan was approved by the
institution's accrediting agency and, if applicable, the institution's
State authorizing agency. These proposed regulations also eliminate the
regulations that provided for an automatic closed school discharge
without application for students that had not received a closed school
discharge or re-enrolled at a title IV participating institution within
3 years of a school's closure. While the automatic discharge may
benefit some students who no longer would need to submit an application
to receive relief, it may have disadvantaged students who wish to
continue their education at a later time or provide proof of credit
completion to future employers. There could also be tax implications
associated with closed school loan discharges, and borrowers should be
aware of those implications and given the opportunity to make a
decision according to their needs and priorities.
The expansion of the eligibility period would increase the number
of students eligible under this criterion and encourage institutions to
provide opportunities for students to complete their programs in the
event that a school plans to close. The reduced availability of closed
school discharges because of the teach-out provision and the
elimination of the 3-year automatic discharge may reduce debt relief
for students who believe that their education provided no benefits, but
have not tried to transfer credits or complete their program elsewhere.
As further detailed in the Net Budget Impacts section, the Department
estimates that annualized closed school discharge transfers from the
Federal Government to affected borrowers would be reduced by $96.5
million, primarily due to the elimination of automatic closed school
discharges. This is based on the difference in cashflows associated
with loan discharges when the proposed regulations are compared to the
President's Budget 2019 baseline (PB2019) and discounted at 7 percent.
The Department's accreditation standards \15\ require accreditors to
approve teach-out plans at institutions under certain circumstances,
which emphasizes the importance of these plans to ensuring that
students have a chance to complete their program should the school
decide, or be required, to close. Teach-out plans that would require
extended commuting time for students or that do not cover the same
academic programs as the closing institution likely would not be
approved by accreditors, and therefore would not negate a student's
access to closed school discharges. In addition, an institution whose
financial position is so degraded that it could not provide adequate
instructional or support services would similarly not have their teach-
out plan approved, thus enabling borrowers at those institutions to
obtain a closed school discharge. In the case of two large, precipitous
closures in 2015 and 2016, it is possible that enabling those
institutions to teach-out their current students--including by
arranging teach-outs plans delivered by other institutions or under the
oversight of a qualified third party--would have benefited students and
saved hundreds of millions of dollars of taxpayer funds.
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\15\ 34 CFR 602.24(c).
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Large numbers of small, private non-profit colleges could close in
the next 10 years, which could contribute significantly to the cost of
closed school discharges if these institutions are not encouraged to
provide high quality teach-out options to their students.\16\ By way of
example, Mt. Ida College announced \17\ that it would close at the end
of the Spring 2018 semester and while the institution had considered
entering into a teach-out arrangement with another institution, this
did not materialize. While there may be other institutions that will
accept credits earned at Mt. Ida, due to the distance between Mt. Ida
and other campuses, it may be impractical for the student to attend
another institution.\18\ A proper teach-out plan may have enabled more
students to complete their program. The requirement of accreditors to
approve such options ensures protection for borrowers to ensure that a
teach-out plan provides an accessible and high quality opportunity to
complete the program.
---------------------------------------------------------------------------
\16\ www.insidehighered.com/news/2017/11/13/spate-recent-college-closures-has-some-seeking-long-predicted-consolidation-taking.
\17\ www.insidehighered.com/news/2018/04/09/mount-ida-after-trying-merger-will-shut-down.
\18\ www.insidehighered.com/news/2018/04/23/when-college-goes-under-everyone-suffers-mount-idas-faculty-feels-particular-sense.
---------------------------------------------------------------------------
c. False Certification Discharges
Some borrowers may be impacted by the proposed changes to the false
certification discharge regulations, although this provision of the
proposed regulations simply updates the regulations to codify current
practice required as a result of the removal of the ability to benefit
option as a pathway to eligibility for title IV aid. In the past, a
student unable to obtain a high school diploma could still receive
title IV funds if he or she could demonstrate that he or she could
benefit from a college education.
With that pathway eliminated by a statutory change, prospective
students unable to obtain high school transcripts when applying for
admission to a postsecondary institution would be allowed to certify to
their institutions that they graduated from high school or completed a
home school program and qualify for Federal financial aid. At the same
time, it will disallow students who misrepresented the truth in signing
such an attestation from subsequently seeking
[[Page 37290]]
false certification discharge. Although the Department has not seen an
increase in false certification discharges as a result of the
elimination of the ability to benefit option, given the increased
awareness of various loan discharge programs, the Department believes
it is prudent to set forth in regulation that in the event a student
falsely attests to having received a high school diploma, the student
would not be eligible for a false certification discharge. Codifying
this practice will not have a significant impact, but will ensure that
students unable to obtain an official diploma or transcript will retain
the opportunity to participate in postsecondary education. The
Department does not believe that there are significant numbers of
students who are unable to obtain an official transcript or diploma,
but recent experiences related to working with institutions following
natural disasters demonstrates that this alternative for those unable
to obtain an official transcript is important.
d. Institutional Disclosures of Mandatory Arbitration Requirements and
Class Action Waivers
Borrowers, students, and their families would benefit from
increased transparency from institutions' disclosures of mandatory
arbitration clauses and class action lawsuit waivers in their
enrollment agreements. Under the proposed regulations, institutions
would be required to disclose that their enrollment agreements contain
class action waivers and mandatory arbitration clauses. Institutions
would be required to make these disclosures to students, prospective
students, borrowers, and their families on institutions' websites and
in their marketing materials. Further, borrowers would be notified of
these during entrance counselling. As further discussed in the
Paperwork Reduction Act section, we estimate there is 5 minutes of
burden to 342,407 borrowers annually at $16.30 \19\ per hour to review
these notifications during entrance counseling, for an annual burden of
$446,506.
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\19\ Students' hourly rate estimated using BLS for Sales and
Related Workers, All Other, available at: www.bls.gov/oes/2017/may/oes_nat.htm#41-9099.
---------------------------------------------------------------------------
As institutions began preparing to implement the 2016 regulations,
some eliminated both mandatory and voluntary arbitration provisions to
be sure they would be in compliance with the letter and spirit of the
regulations. Under the proposed regulations, institutions would be able
to include these provisions in their enrollment agreements. The effect
will be to require borrowers to redress their grievances through a
quicker and less costly process, which we believe will benefit both the
institution and the borrower by introducing the judgment of an
impartial third party, but at a lower cost and burden than litigation.
Arbitration may be in the best interest of the student because it could
negate the need to hire legal counsel and result in adjudication of a
claim more quickly than in a lawsuit or the Department's 2016 borrower
defense claim adjudication process. Mandatory arbitration also reduces
the cost impact of unjustified lawsuits to institutions and to future
students, because litigation costs are ultimately passed on to future
students through tuition and fees. It also increases the likelihood
that damages will be paid directly to students, rather than used to pay
legal fees.
2. Institutions
Institutions will be impacted by the proposed regulations in the
areas of borrower defenses, closed school discharges, false
certification discharges, FASB accounting standards, financial
responsibility standards, and information disclosure. The benefits to
institutions include a decrease in the number of reimbursement requests
resulting from Department-decided loan discharges based on borrower
defenses, closed school, and false certification; an increased
involvement in the borrower defense adjudication process; the ability
to continue to receive the benefit from the cost savings associated
with longer-term leases and reduced relocation costs until such time as
the composite score methodology can be updated through future
negotiated rulemaking; and the ability to incorporate arbitration and
class action waivers in enrollment agreements. Institutions may incur
costs from increased arbitration and internal dispute resolution and
increased expenses to provide for teach-out plans in the event of a
school closure.
1. Borrower Defenses
Most institutions would not be burdened by the proposed regulatory
changes in borrower defense to repayment. We estimate that successful
defense to repayment applications under the proposed Federal standard
and process for defensive claims will affect only a small proportion of
institutions. The Department expects that the changes in these
regulations would result in fewer successful defense to repayment
applications, and therefore fewer discharges of loans. Therefore, the
Department expects to request fewer repayment transfers from
institutions to cover discharges of borrowers' loans. Under the main
budget estimate explained further in the Net Budget Impacts section,
the Department estimates an annual reduction of reimbursements of
borrower defense claims from institutions to the government of $223
million under the seven percent discount rate. However, the Department
believes that by requiring institutions that utilize mandatory
arbitration clauses to provide plain language information to students
about the role of mandatory arbitration clauses and the process to
access arbitration, more students may take advantage of arbitration to
settle disputes. In addition, given the benefits to both students and
institutions of resolving complaints through arbitration, more
institutions could offer arbitration opportunities, which could result
in added costs to institutions for arbitration and added financial
benefits to students who may more easily seek and be awarded financial
remedies.
2. Closed School Discharges
A small percentage of institutions close annually, with some
institutions providing teach-out opportunities to enable students to
complete their programs and others leaving students to navigate the
closure on their own, resulting in their eligibility for closed school
loan discharges. Although the proposed regulations expand the
eligibility window for students who left the institution but are still
eligible to receive closed school loan discharges from 120 to 180 days
it codifies current practice under which borrowers who were provided an
approved teach-out plan by their institution will have completed their
credential, and therefore would not qualify for closed school loan
discharges. The Department has worked with a number of schools that
have successfully completed teach-out plans, to the benefit of
borrowers and taxpayers. As additional schools close in the future, the
Department wants to encourage them to engage in orderly teach-outs
rather than precipitous closures. We believe the proposed regulations
would encourage institutions to provide teach-out opportunities,
despite their high cost, if they reduce the total liability that would
result from having to reimburse the Secretary for losses due to closed
school discharges. While teach-outs are costly to institutions, they
better serve students and reduce the risk to taxpayers, and therefore
should be incentivized.
Title IV-granting institutions are required by their accreditors
\20\ to have
[[Page 37291]]
an approved teach-out plan on file and to update that plan with more
specific information in the event that the institution is financially
distressed, is in danger of losing accreditation or State
authorization, or is considering a voluntary teach-out for other
reasons. Because accreditors, and in some cases, State authorizing
agencies, must approve teach-out plans and carefully monitor teach-out
activities, only those students who can be provided a high quality
education will not be eligible for a closed school loan discharge under
this provision.
---------------------------------------------------------------------------
\20\ 34 CFR 602.24(c).
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The Department is not including in these regulations provisions for
automatic closed school discharges for students who do not complete
their program 3 years after the school closed, which it included in the
2016 regulations. It is inappropriate for the Secretary to grant such
loan discharges without receiving an application from the borrower.
These proposed regulations will encourage more institutions to
engage in teach-out plans rather than precipitous closures, which would
generate significant savings to taxpayers. Although teach-outs have
considerable cost for institutions, these costs will be offset by
reducing the number of borrowers who seek and are granted closed school
discharges. It is important to keep in mind that closed schools include
branch campuses and additional locations of main campuses that continue
to operate. The Department has recognized the benefits of helping
students complete their programs prior to school closures, and
therefore sees benefit in promoting orderly teach-outs.
3. False Certification Discharges
A small percentage of institutions are affected by false
certification discharges annually. However, elimination of the ability
to benefit option for Title IV eligibility could result in growth in
the coming years of the number of students who enroll having attested
to receiving a high school diploma since an official high school
diploma or transcript is not available. To ensure that the unintended
consequence of this policy change is not an increase in the frequency
or cost of false certification discharges, the Department believes it
is necessary to specify that a student who misrepresents his or her
high school completion status under penalty of perjury cannot then
pursue a false certification loan discharge due to non-completion of
high school, a GED or a home school program.
The proposed regulations would continue to permit institutions to
obtain written assurance from prospective students who are unable to
obtain their high school transcripts when applying for admission and
Federal financial aid, without exposing themselves to financial
liabilities should those students misrepresent the truth in their
attestations. Although we believe this proposed regulation will not
have a significant impact in the short term, primarily because the
Department receives very few false certification discharge requests,
the elimination of the ability to benefit option could result in
increased numbers of enrollments by attestation, which could in turn
increase the frequency and cost of false certification discharges in
the future. The proposed regulations also will protect institutions as
they seek to serve students who are pursuing postsecondary education
but cannot obtain an official diploma or transcript.
This provision may result in small cost savings to some affected
institutions, but mostly it ensures that adult students who are most
likely to have difficulty in obtaining official transcripts maintain
the ability to pursue higher education without increasing the risk of
financial losses to taxpayers.
4. Financial Responsibility Standards
Both the 2016 final regulations and the proposed regulations
include conditions under which institutions would have to provide a
letter of credit or other form of surety in order to continue to
participate in the title IV, HEA programs. The following table compares
the financial responsibility triggers established by the 2016 final
regulations and in the proposed regulations. Mandatory events or
actions automatically result in a determination that the institution is
not financially responsible and trigger a request for surety from the
institution, whereas discretionary events or actions give the Secretary
the discretion to make that determination at the time the event or
action may occur.
BILLING CODE 4000-01-P
[[Page 37292]]
[GRAPHIC] [TIFF OMITTED] TP31JY18.003
[[Page 37293]]
[GRAPHIC] [TIFF OMITTED] TP31JY18.004
[[Page 37294]]
[GRAPHIC] [TIFF OMITTED] TP31JY18.005
BILLING CODE 4000-01-C
Some institutions may incur burden from the requirement to report
any action or event described in Sec. 668.171(e) within the specified
number of days after the action or event occurs. As further explained
in the Paperwork Reduction Act of 1995 section, the Department
estimates the burden for reporting these events to the Secretary would
be 720 hours annually for private schools and 2,274 hours for
proprietary institutions for a total burden of 2,994 hours. Using an
hourly rate of $44.41,\21\ we estimate that the costs incurred by this
regulatory change would be $132,964 annually ($44.41*2,994).
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\21\ Hourly wage data uses the Bureau of Labor Statistics,
available at swww.bls.gov/ooh/management/postsecondary-education-administrators.thm.
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FASB is a standard-setting body that establishes generally accepted
accounting principles and the Department requires that institutions
participating in the title IV, HEA programs file audited financial
statements annually, with the audits performed under FASB standards.
Therefore, financial statements will begin to contain elements that are
either
[[Page 37295]]
new or reported differently, including long-term lease liabilities.
These changes were not included in the 2016 regulations and are new to
these proposed regulations.
Changes in the definition of terms used under the financial
responsibility standards are being proposed to align the regulations
with current FASB standards.\22\ However, the new FASB lease standard
could have a profound impact on an institution's composite score and
the Department has no mechanism to make a timely adjustment to the
composite score calculation to accommodate this change. The Department
also has no data to understand what the impact of this change will be
on institutional composite scores. Models were created in SAS \23\ to
perform impact and sensitivity analyses on the proposed changes to the
composite score calculations. However, the Department does not have
structured data for these 12 values used in the calculation:
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\22\ www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350.
\23\ SAS Software. SAS Institute Inc. SAS and all other SAS
Institute Inc. product or service names are registered trademarks or
trademarks of SAS Institute Inc., Cary, NC, USA.
---------------------------------------------------------------------------
Lease Right-of-use Assets (VAR1);
Lease Right-of-use Liabilities (VAR2);
Net Assets With Donor Restrictions (VAR3);
Net Assets Without Donor Restrictions (VAR4);
Net Assets With Donor Restrictions: Restricted in
Perpetuity (VAR5);
Post-employment and defined benefit pension plan
liabilities (VAR6);
Loss for defined pension and other post-employment,
investments and annuities (VAR7);
Investment Gains (VAR8);
Non-operating investment amount needed for separation of
expenses (VAR9);
Annuities, term endowments and life funds not restricted
in perpetuity (VAR10);
Construction in process (VAR11); and
Debt purpose and related amount (VAR12).
The Department invites commenters to submit data to the Department
on these variables. Specific, numeric values submitted will be
considered for inclusion in the Department's models prior to
publication of the final regulations. We invite submission of data at
the institutional level as well as means or medians. Please submit data
in the format provided in Tables 3 and 4 (data without OPEID will also
be accepted).
Table 3--Financial Data for Proprietary Institutions
--------------------------------------------------------------------------------------------------------------------------------------------------------
OPEID VAR1 VAR2 VAR3 VAR4 VAR5 VAR6 VAR7 VAR8 VAR9 VAR10 VAR11 VAR12
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 4--Financial Data for Nonprofit Institutions
--------------------------------------------------------------------------------------------------------------------------------------------------------
OPEID VAR1 VAR2 VAR3 VAR4 VAR5 VAR6 VAR7 VAR8 VAR9 VAR10 VAR11 VAR12
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------
Therefore, while the Department must obtain audited financial
statements prepared in accordance with FASB standards, and it will
automatically calculate a composite score for all institutions using
the audited financial statements, those institutions that wish to have
an alternative composite score calculated based on the current
methodology (minus long term lease liabilities) can provide
supplemental data to the Department and request the alternative score
to be calculated. The Department will use the higher of the two scores
to determine an institution's financial responsibility. Under this
proposal, an institution can continue to rely on long-term leases that
reduce costs, increase campus stability and prevent increased school
closures that result from short-term leases that cannot be extended or
satisfactorily renegotiated.
The Department may use the data it would collect under the proposed
regulations to conduct analyses that might inform future negotiated
rulemaking to update the composite score methodology. As explained
further in the Paperwork Reduction Act of 1995 section, 1,896
proprietary institutions and 1,799 private institutions will each need
1 hour annually to prepare a Supplemental Schedule to post along with
their annual audit ((1,896+1,799) x 1 hour x $44.41). This will result
in an additional annual burden of $164,095. Further, 450 private
institutions and 474 proprietary institutions would each need 15
minutes to request that the Secretary make the second composite score
calculation, for an additional annual burden of $10,303. The Department
is not yet receiving these data on
[[Page 37296]]
institutions' financial statements, so it is unable to quantify
anticipated changes. We invite data submissions in this section for the
Department to use in composite score sensitivity analyses. If the
Department receives a sufficient number of complete data submissions,
it may include this sensitivity analysis in the RIA in the final
regulations.
5. Enrollment Agreements
The proposed regulations would permit institutions to include
mandatory arbitration clauses and class action waivers in enrollment
agreements they have with students receiving title IV financial aid.
These provisions were prohibited by the 2016 regulations. The recent
Supreme Court decision in Epic Systems Corp. v. Lewis, 584 U.S.__, 2018
WL 2292444 (May 21, 2018) held that arbitration clauses in employment
contracts must be enforced by the courts as written, in essence
confirming the right of private parties to sign contracts that compel
arbitration and waive class action rights. Institutions may benefit
from arbitration in that it is a faster and less expensive way to
resolve disputes, while reducing reputational effects; however, they
may incur costs resulting from an increased use of arbitration under
the proposed regulations. Students may also benefit from arbitration,
which is easier and less costly to navigate. On the other hand,
students will have reduced access to a judicial forum, which would
decrease the ability of a borrower to hold the institution publicly
accountable.
6. Institutional Disclosures
Some institutions will incur costs under the proposed disclosure
requirements. Institutions that include mandatory pre-dispute
arbitration clauses or class action waivers in their enrollment
agreements would be required to make certain disclosures. As further
explained in the Paperwork Reduction Act of 1995 section, the
Department estimates the burden for making these disclosures would
affect 944 proprietary institutions for a total of 4,720 hours
annually. Using an hourly rate of $44.41,\24\ we estimate the costs
incurred by this regulatory change would be $209,615. Also as discussed
in the Paperwork Reduction Act of 1995 section, we estimate these same
institutions would be required to include this information to borrowers
during entrance counseling, for a further burden of 3 hours each
annually, totaling $125,769 annually (944*3*44.41). Therefore, we
estimate the total burden for disclosures would be $335,384 annually
($209,615 + $125,769).
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\24\ Hourly wage data uses the Bureau of Labor Statistics,
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------
3. Guaranty Agencies
Guaranty agencies would incur one-time costs as well as annual
costs under the proposed regulations. The one-time costs would be to
update their systems to identify borrowers now eligible for closed
school discharges for reporting to lenders and to update their
notifications and establish a process for forwarding requests for
escalated reviews to the Secretary. As further explained in the
Paperwork Reduction Act of 1995 section, the Department estimates the
burden for making these system changes would be 336 hours (240+96).
Using an hourly rate of $44.41,\25\ we estimate costs incurred by this
regulatory change would be $14,921.76 (336 hours * $44.41 per hour).
Finally, there would be an ongoing, annual burden on guaranty agencies
to forward a borrower's request for escalated review of a denied closed
school discharge to the Secretary. We estimate this burden would be 74
hours annually. Using the same hourly rate, we estimate costs incurred
by this regulatory change would be $3,286.34 (74 hours * $44.41 per
hour). Therefore, the Department estimates increased costs to guaranty
agencies of $3,286 annually and $14,922 additional one-time costs in
the first year.
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\25\ Hourly wage data uses the Bureau of Labor Statistics,
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
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The Department does not have data on interest capitalization and
collection costs for rehabilitated loans to estimate the impact of the
changes in the proposed regulations. The Department invites commenters
to submit the following data points: proportion of rehabilitated loans
where collection costs were charged, mean collection costs charged
under this circumstance per loan, proportion of rehabilitated loans
where interest is capitalized prior to sale, and mean interest
capitalized under this circumstance per loan.
3. Federal Government
These proposed regulations would affect the Federal government's
administration of the title IV, HEA programs. The Federal government
would benefit in several ways, including significant reductions in
student loan discharge transfers, reduced administrative burden,
increased (or at least steady) public confidence in the student loan
program, and increased access to data. The Federal government would
incur costs to update its IT systems to implement the proposed changes.
a. Borrower Defenses
Borrower defense to repayment was described in the 1994 regulations
promulgated by the Department as a right that a borrower could exercise
once involved in a collections proceeding. The Department altered this
approach in 2015 by allowing borrowers to file affirmative borrower
defense claims, meaning claims while loans are in repayment or
forbearance, and the 2016 regulations continued that approach. The
proposed regulations would return to accepting defensive claims only,
transferring the cost burden of misrepresentation back to institutions
and the cost of administering consumer fraud allegations to the
appropriate entities--courts or arbitration. It is more likely that the
cost of misrepresentation would be incurred by institutions committing
the act or omission than the taxpayer, because borrowers would be
encouraged first to go to the institution to litigate claims of
misrepresentation and because the Department would recoup defense to
repayment discharge transfers from institutions.
In addition, although not quantifiable, a Federal student loan
program that does not result in additional financial burden to the
taxpayer is likely to be more stable and viable over the long term, and
therefore more likely to continue receiving Congressional and taxpayer
support. Therefore, restoring defense to repayment as a last resort
option rather than a first resort consumer protection mechanism will
likely ensure that the student loan program continues to serve
borrowers into the future.
Finally, the Department expects a marked reduction in
administrative burden as a result of the proposed changes to the
circumstances under which it would consider a borrower's defense to
repayment application. While the proposed regulations would rely
heavily upon existing collection processes to initiate a defense
against collection actions, the Department has also requested public
comment on how affirmative claims might be adjudicated and how
sufficient guardrails could be put in place to minimize the submission
of unjustified claims or those that do not fall within the scope of a
defense to repayment claim. Thus, until the final determination is made
regarding the Department's acceptance of affirmative claims, defensive
claims, or both, it is unable to provide an estimate of this reduction
in adjudication burden.
[[Page 37297]]
b. Loan Discharges
Under the proposed regulations, the Department would expect to
process and award fewer closed school and false certification loan
discharges than it would have under the 2016 regulations. To the extent
defense to repayment, closed school, and false certification loan
discharges are not reimbursed by institutions, Federal government
resources that could have been used for other purposes will be
transferred to affected borrowers. As further detailed in the Net
Budget Impacts section, the Department estimates that annualized
transfers from the Federal government to affected borrowers, partially
reimbursed by institutions, would be reduced by $693.9 million for
borrower defenses and $96.5 million for closed school discharges with
reductions in reimbursement from institutions of $223 million annually.
This is based on the difference in cashflows associated with loan
discharges when the proposed regulation is compared to the President's
Budget 2019 baseline (PB2019) and discounted at 7 percent.
c. Financial Responsibility Standards
The Department will benefit from receiving updated financial
statements consistent with FASB standards. By receiving information to
calculate both composite scores, the Department would have data
necessary for developing updated composite score regulations through
future rulemaking. The financial responsibility disclosures will enable
the Department to receive information to continue to calculate the
composite score.
The Department would incur one-time costs for modifying eZ-Audit
and other systems to collect the data needed to calculate composite
scores under the new FASB reporting requirements and other systems to
collect financial responsibility disclosures. The Department has not
yet conducted the Independent Government Cost Estimate (IGCE) to
determine the costs for making these system changes. Further, the
Department expects ongoing, increased administrative burden because it
would need to compute two composite scores for each institution under
the proposed regulations. However, the Department has not yet developed
its internal process for implementing the proposed regulations, which
may necessitate a software modification or individually-generated
calculations; consequently, it is unable to estimate the change in
administrative burden. Therefore, the Department is unable to estimate
its burden for implementing the proposed regulatory changes in the
financial responsibility provisions.
Net Budget Impacts & Accounting Statement
These proposed regulations are estimated to have a net Federal
budget impact over the 2019-2028 loan cohorts of $[-12.715] billion in
the primary estimate scenario, including $[-10.487] billion for changes
to the defense to repayment provisions and $-2.227 billion for changes
related to closed school discharges. A cohort reflects all loans
originated in a given fiscal year. Consistent with the requirements of
the Credit Reform Act of 1990, budget cost estimates for the student
loan programs reflect the estimated net present value of all future
non-administrative Federal costs associated with a cohort of loans. The
Net Budget Impact is compared to the 2019 President's Budget baseline
(PB2019). This baseline assumed that the borrower defense regulations
published by the Department on November 1, 2016, would go into effect
in 2019 and utilized the primary estimate scenario,\26\ as modified by
the change in the effective date to 2019, described in the final rule
published February 14, 2018.\27\
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\26\ See 81 FR 76057 published November 1, 2016, available at
ifap.ed.gov/fregisters/attachments/FR110116.pdf.
\27\ See 83 FR 6468, available at www.gpo.gov/fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf.
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The proposed regulatory provisions with the greatest impact on the
Federal budget are those related to the discharge of borrowers' loans.
Borrowers may pursue closed school, false certification, or defense to
repayment discharges. The precise allocation across the types of
discharges will depend on the borrower's eligibility and ease of
pursuing the different discharges, and we recognize that some
applications may be fluid in classification between defense to
repayment and the other discharges. In this analysis, we assign any
estimated effects from defense to repayment applications to the defense
to repayment estimate and the remaining effects associated with
eligibility and process changes related to closed school discharges to
the closed school discharge estimate.
1. Defense to Repayment Discharges
As noted previously, the Department had to incorporate the changes
to the defense to repayment provisions related to the 2016 final
regulations into its ongoing budget estimates, and changes described
here are evaluated against that baseline. In our main estimate, based
on the assumptions described in Table 5, we present our best estimate
of the impact of the changes to the defense to repayment provisions in
the proposed regulation.
a. Assumptions and Estimation Process
The net present value of the reduced stream of cash flows compared
to what the Department would have expected from a particular cohort,
risk group, and loan type generates the expected cost of the proposed
regulations. We applied an assumed level of school misconduct,
defensive claims, defense to repayment applications success, and
recoveries from institutions (respectively labeled as Conduct Percent,
Defensive Claims Percent, Borrower Percent, and Recovery Percent in
Table 5) to loan volume estimates to generate the estimated net number
of borrower defense applications for each cohort, loan type, and
sector. Table 5 presents the assumptions for the main budget estimate
with the budget estimate for each scenario presented in Table 6. We
also estimated the impact if the Department received no recoveries from
institutions, the results of which are discussed after Table 6.
The model can be described as follows: To generate gross
applications (gc), loan volumes (lv) by sector were multiplied by the
Conduct Percent (cp), the Defensive Applications Percent (dcp) and the
Borrower Percent (bp); to generate net applications (nc) processed in
the Student Loan Model, gross applications were then multiplied by the
Recovery Percent (rp). That is, gc = (lv * cp * dcp * bp) and nc = gc-
(gc * rp). The Conduct Percent represents the share of loan volume
estimated to be affected by institutional behavior resulting in a
defense to repayment application. The Borrower Percent captures the
percent of loan volume associated with approved defense to repayment
applications, and the Recovery Percent estimates the percent of net
loans eventually discharged. The numbers in Table 5 are the percentages
applied for the main estimate and PB2019 baseline scenarios for each
assumption for cohorts 2019-2028.
[[Page 37298]]
Table 5--Assumptions for Main Budget Estimate Compared to PB2019 Baseline
--------------------------------------------------------------------------------------------------------------------------------------------------------
PB2019 baseline NPRM main
Cohort -----------------------------------------------------------------------------------------------
Pub Priv Prop Pub Priv Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019.................................................... 1.8 1.8 12.24 1.71 1.71 11.63
2020.................................................... 1.7 1.7 11.6 1.62 1.62 11.02
2021.................................................... 1.5 1.5 9.8 1.43 1.43 9.31
2022.................................................... 1.4 1.4 8.8 1.33 1.33 8.36
2023.................................................... 1.3 1.3 8.4 1.24 1.24 7.98
2024.................................................... 1.2 1.2 8 1.14 1.14 7.6
2025.................................................... 1.2 1.2 7.8 1.14 1.14 7.41
2026.................................................... 1.1 1.1 7.7 1.05 1.05 7.32
2027.................................................... 1.1 1.1 7.7 1.05 1.05 7.32
2028.................................................... 1.1 1.1 7.7 1.05 1.05 7.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
2Yr pub/priv 2Yr prop 4Yr pub/priv 4Yr prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
Defensive Applications Percent (not in PB2019 Baseline)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cohorts............................................. 40 34 16 21 .............. ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
PB2019 baseline NPRM main
Cohort -----------------------------------------------------------------------------------------------
Pub Priv Prop Pub Priv Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019.................................................... 36.8 36.8 47.3 4 4 6
2020.................................................... 42.4 42.4 54.6 4.4 4.4 6.6
2021.................................................... 46.7 46.7 60 5 5 7.3
2022.................................................... 50 50 63 5.5 5.5 7.9
2023.................................................... 50 50 65 6 6 8.4
2024.................................................... 50 50 65 6.4 6.4 9
2025.................................................... 50 50 65 7 7 9.3
2026.................................................... 50 50 65 7 7 10
2027.................................................... 50 50 65 7 7 10
2028.................................................... 50 50 65 7 7 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019.................................................... 75 24.871 24.871 75 16 16
2020.................................................... 75 28.8 28.8 75 16 16
2021.................................................... 75 31.68 31.68 75 18.5 18.5
2022.................................................... 75 33.26 33.26 75 18.5 18.5
2023.................................................... 75 34.93 34.93 75 21 21
2024.................................................... 75 36.67 36.67 75 21 21
2025.................................................... 75 37.4 37.4 75 22.5 22.5
2026.................................................... 75 37.4 37.4 75 22.5 22.5
2027.................................................... 75 37.4 37.4 75 25 25
2028.................................................... 75 37.4 37.4 75 25 25
--------------------------------------------------------------------------------------------------------------------------------------------------------
As in previous estimates, the recovery percentage reflects the fact
that public institutions are not subject to the changes in the
financial responsibility triggers because of their presumed backing by
their respective States. Therefore, the PB2019 baseline and main
recovery scenarios are the same for public institutions and set at a
high level to reflect the Department's confidence in recovering amounts
from the expected low number of claims against public institutions. The
decrease in the recovery percentage assumption for private and
proprietary institutions compared to the PB2019 baseline reflects the
removal or modification of some financial responsibility triggers as
described in Table 2. We do not specify how many institutions are
represented in the estimate as the assumptions are based on loan
volumes and the scenario could represent a substantial number of
institutions engaging in acts giving rise to defense to repayment
applications or could represent a small number of institutions with
significant loan volume subject to a large number of applications.
According to Federal Student Aid data center loan volume reports, the
five largest proprietary institutions in loan volume received 24.59
percent of Direct Loans disbursed in the proprietary sector in award
year 2016-17 and the 50 largest proprietary institutions represent 66.6
percent of Direct Loans disbursed in that same time period.\28\ The
share of volume captured in the conduct percentage may be conservative
and estimate a higher number of defense to repayment applications than
may occur in the future as we did not want to underestimate costs
associated with changes to the borrower defense regulations. Due to the
similarities between the conduct covered by the standard in the
proposed regulations and the standard in the 2016 final regulations, as
described in the Discussion segment, the Conduct Percent did not change
from the PB2019 Baseline as much as the Borrower Percent. As recent
loan cohorts progress further in their repayment cycles if
[[Page 37299]]
future data indicate that the percent of volume affected by conduct
that meets the standard that would give rise to defense to repayment
applications differs from current estimates, that difference will be
reflected in future baseline re-estimates.
---------------------------------------------------------------------------
\28\ Federal Student Aid, Student Aid Data: Title IV Program
Volume by School Direct Loan Program AY2015-16, Q4, available at
studentaid.ed.gov/sa/about/data-center/student/title-iv accessed
August 22, 2016.
---------------------------------------------------------------------------
b. Discussion
The Department has some additional experience with processing
defense to repayment applications and data on the approximately 138,990
applications received since 2015, but while this information has helped
inform these estimates, it does not eliminate the uncertainty about
institutional and borrower response to the proposed regulations. As
noted earlier, given the limited number of applications that the
Department has adjudicated, both in number and sector of institutions
that are represented in this number, our data may not reflect the final
results of the Department's review and approval process.
By itself, the proposed Federal standard is not expected to
significantly change the percent of loan volume subject to conduct that
might give rise to a borrower defense claim. The conduct percent is
assumed to be 95 percent of the PB2019 baseline level.
As has been estimated previously, we are incorporating a deterrent
effect of the borrower defense to repayment provisions on institutional
behavior as is reflected in the decrease in the conduct percent in
Table 5. We believe that institutions will not want to suffer the
scrutiny that a significant number of borrower defense to repayment
applications would invite. As expected, when regulatory provisions
target specific institutional action or performance, institutional
behavior changes over several years, resulting in removal of the worst
performers and adaptation of other institutions' behavior so that a
lower steady state is established. We still expect a similar pattern to
develop with respect to borrower defense to repayment, as reflected in
the Conduct Percent in Table 5. Also, allowing institutions to present
evidence may result in fewer findings of misrepresentation that lead to
an adjudicated claim. We have not included the impact of this potential
evidence in our calculations as we have no basis for determining the
impact that an institutional defense will have on the adjudication of
applications.
Overall, we expect that the changes in the proposed regulations
that will reduce the anticipated number of borrower defense
applications are related more to changes in the process and emphasis on
defensive claims, not due to changes in the type of conduct on the part
of an institution that would result in a successful defense, as
demonstrated by the 95 percent overlap compared to the PB2019 baseline.
The proposed regulations reestablish a framework in which borrower
defense to repayment applications are submitted in response to certain
collection activities initiated by the Department, specifically
administrative wage garnishment, Treasury offset, credit bureau default
reporting, and Federal salary offset. As has always been the case,
borrowers will be able to seek relief from their institutions in State
or Federal courts or from State or Federal agencies, and the inclusion
of mandatory arbitration clauses in enrollment agreements may increase
financial settlements with students, but defense to repayment
applications through the Department will be reserved as a defense to
collection efforts. The Defensive Applications Percent attempts to
quantify the effect of this proposal by examining estimated lifetime
default rates for loans in standard repayment plans by SLM risk group.
The 2-year not for profit risk group was used for the 2-year or less
private and public sectors, and the 2-year proprietary risk group was
used for the 2-year proprietary sector. For 4-year institutions, the 4-
year freshman/sophomore risk group rate was used for 4-year proprietary
schools, and the weighted average of the 4-year freshman/sophomore and
4-year junior/senior rates were used for 4-year public and private
nonprofit institutions. The estimated default rates were used to
estimate the percent of loan volume associated with borrowers who, over
the life of the loan, might be in a position to raise a defense to
repayment. We used the higher estimated default rates associated with
the standard repayment plan so that we did not underestimate potential
future costs of the proposed defense to repayment regulations. Using
the higher rates also accounts for the possibility of increased
defaults by borrowers who may decide that the consequences of default
are worth the risk of a potentially successful defense to repayment
applications. However, now that institutions have the ability to
present evidence as borrowers' applications are considered, there may
be a decrease in frivolous and unsubstantiated defense to repayment
applications that, under current practice, could be approved.
Several process changes contribute to the reduction in the Borrower
Percent compared to the PB2019 baseline assumption. A separate
assumption for the defensive claims provision was explicitly included
so it could be varied in sensitivity runs or in response to comments.
Another significant factor is the emphasis on determinations of
individual applications and the lack of an explicit process for
aggregating like applications. The Department will be able to group
like applications against an institution for more efficient processing,
but, even if there is a finding that covers multiple borrowers, relief
will be determined on an individual basis and be related to the level
of financial harm proven by the borrower. Additionally, while there is
no statute of limitations on borrowers' ability to submit a defense to
repayment application in response to collection activities, borrowers
will have to inform the Department of their intent to raise a defense
to repayment within the timeframe specified for requesting a hearing in
their notice of collection activity to guarantee their filing will be
reviewed. The timeframes vary from 30 days for consumer reporting and
wage garnishment to 65 days for Federal salary offset and tax refund
offset. Together, these changes could require more effort on the part
of individual borrowers to submit a borrower defense application, which
is reflected in the change in the Borrower Percent assumption.
The net budget impact of the emphasis on other avenues for relief
is complicated by the potential for amounts received in lawsuits,
arbitration, or agency actions to reduce the amount borrowers would be
eligible to receive through a defense to repayment filing. While it
would be prudent for borrowers to use any funds received with respect
to the Federal loans in such proceedings to pay off the loans, there is
no mechanism in the proposed regulations to require this. This offset
of funds received in other actions was also a feature in the 2016 final
regulations, but the majority of applications processed did not have
offsetting funds to consider due to the precipitous closure of two
large institutions. Accordingly, we are not assuming a budgetary impact
resulting from prepayments attributable to the possible availability of
funds from judgments or settlement of claims related to Federal student
loans. Another factor that could affect the number of defense
applications presented is the role of State Attorneys General or State
agencies in pursuing actions or settlements with institutions about
which they receive complaints. The level of attention paid to this area
of consumer protection could alert borrowers in a position to apply for
a defense to repayment and result in a
[[Page 37300]]
different number of applications than the Department anticipates.
Evidence developed in such proceedings could be used by borrowers to
support their individual applications.
The Department has used data available on defense to repayment
applications, associated loan volumes, Departmental expertise, the
discussions at negotiated rulemaking, information about past
investigations into the type of institutional acts or omissions that
would give rise to defense to repayment applications, and decisions of
the Department to create new sanctions and apply them to institutions
thus instigating precipitous closures to develop the main estimate and
sensitivity scenarios that we believe will capture the range of net
budget impacts associated with the defense to repayment regulations.
c. Additional Scenarios
The Department recognizes the uncertainty associated with the
factors contributing to the main budget assumption presented in Table
5. The uncertainty in the defense to repayment estimate, given the
unknown level of future school conduct that could give rise to claims;
institutions' reaction to the regulations to eliminate such activities;
the impact of allowing institutions to present evidence in response to
borrowers' applications; the extent of full versus partial relief
granted; and the level of State activity, is reflected in additional
analyses that demonstrate the effect of changes in the specific
assumption being tested.
The Department designed the following scenarios to isolate the
assumption being evaluated and adjust it in the direction that would
increase costs, increasing the Defensive Applications or Borrower
Percent and decreasing the recovery percent. The first scenario the
Department considered is that the Defensive Applications Percent will
increase by 15 percent (Def15). This could occur if economic conditions
or strategic behavior by borrowers increase defaults. The second
scenario the Department increased the Borrower Percent by 20 percent
(Bor20) to reflect the possibility that outreach, model applications,
or other efforts by students may increase the percent of loan volume
associated with successful defense to repayment applications. As the
gross borrower defense claims are generated by multiplying the
estimated volumes by the Conduct Percent, Defensive Claims Percent, and
the Borrower Percent, the scenarios capture the impact of a 15 percent
or 20 percent change in any one of those assumptions. The Recovery
Percentage is applied to the gross claims to generate the net claims,
so the RECS scenario reduces recoveries by approximately 36 percent to
demonstrate the impact of that assumption. The Department also
estimated the effect of allowing affirmative claims by removing the
Defensive Claims Percent (Affirmative Claims Allowed scenario) which
reduced savings by approximately $960 million when estimated on top of
the other changes in the proposed regulations. The net budget impacts
of the various additional scenarios compared to the PB2019 baseline
range from $-9,528 billion to $-10,452 billion and are presented in
Table 6.
Table 6--Budget Estimates for Additional Borrower Defense Scenarios
------------------------------------------------------------------------
Estimated
costs for
cohorts 2019-
Scenario 2028 (outlays
in $mns)
------------------------------------------------------------------------
Main Estimate........................................... $-10,487
Def15................................................... -10,452
Bor20................................................... -10,445
Recs.................................................... -10,459
Affirmative Claims Allowed.............................. -9,528
------------------------------------------------------------------------
The transfers among the Federal government, affected borrowers, and
institutions associated with each scenario above are included in Table
7, with the difference in amounts transferred to borrowers and received
from institutions generating the budget impact in Table 6. The amounts
in Table 6 assume the Federal Government will recover from institutions
some portion of amounts discharged. In the absence of any recovery from
institutions, taxpayers would bear the full cost of approved defense to
repayment applications. For the primary budget estimate, the annualized
costs with no recovery are approximately $635.7 million at a 3 percent
discount rate and $693.9 million at a 7 percent discount rate. This
potential increase in costs demonstrates the effect that recoveries
from institutions have on the net budget impact of the proposed defense
to repayment regulations.
The Department may revise its model related to these provisions as
more data become available over time. We welcome comments on the
Defense to Repayment Discharge model, its assumptions, and its
conclusions; the Department may incorporate well-documented comments
into this model as we develop the final regulations.
2. Closed School Discharges
In addition to the provisions previously discussed, the proposed
regulations also would make three changes to the closed school
discharge process that are expected to have an estimated net budget
impact of -$2.227 billion, of which -$359 million is a modification to
cohorts 2014-2018 related to the elimination of the automatic 3-year
discharge. The combined effect of the elimination of the 3-year
automatic discharge, the limitation to students not offered a teach-out
opportunity approved by the school's accrediting agency and the
school's State authorizing agency, and the expansion of the eligibility
window to 180 days is -$1.868 billion for cohorts 2019-2028. As with
the estimates related to the borrower defense to repayment provisions,
the net budget impact estimates for the closed school discharge
provisions are developed from the PB2019 budget baseline that accounted
for the delayed implementation of the 2016 final regulations and
assumed the 2016 final regulations would take effect on July 1, 2019.
While the Secretary will retain the discretion to approve closed
school discharges without applications, the standard path to such a
discharge will require borrowers to submit an application. The
Department does, however, plan to be more aggressive in informing
students who are eligible for closed school discharges of their rights.
In CY2015 to CY2017, closed school discharges excluding Corinthian and
ITT ranged from 24.2 million to $69.9 million annually. Therefore, the
savings from eliminating the 3-year automatic closed school discharge
provisions offset the costs of expanding the eligibility window to 180
days for cohorts 2019-2028. The precise interaction between the two
effects is uncertain as outreach and better information for borrowers
about the closed school discharge process may increase the rate of
borrowers who submit applications. In estimating the effect of the 2016
final regulations, the Department looked at all Direct Loan borrowers
at schools that closed from 2008-2011 to see the percentage loan volume
associated with borrowers that had not received a closed school
discharge and had no NSLDS record of title-IV aided enrollment in the
three years following their school's closure and found it was
approximately double the amount of those who received a discharge. This
could be because the students received a teach-out or transferred
credits and completed
[[Page 37301]]
without additional title IV aid, or it could be that the students did
not apply for the discharge because of a lack of awareness or other
reasons. Whatever the reason, in estimating the potential cost of the
3-year automatic discharge provision in the PB2019 baseline, the
Department applied this increase to the closed school discharge rate.
For these proposed regulations, we have reversed the increase
attributed to the 3-year automatic discharge.
The volume of additional discharges that might result from the
expansion of the window is also difficult to predict. The Department
analyzed borrowers who were enrolled within 180 days of the closure
date for institutions that closed between July 1, 2011 and February 13,
2018 and found that borrowers who withdrew within the 121 to 180 day
time frame would increase loan volumes eligible for discharge by
approximately nine percent. However, it is possible that some borrowers
who complete their programs in that window or the current 120 day
window for eligibility would choose to withdraw and pursue a closed
school discharge instead of completing if the school closure is known
in advance. The likelihood of this is unclear as it might depend on the
relative length of the program, the time the borrower has remaining in
the program, and the borrower's perception of the value of the
credential versus the burden of starting the program over again as
compared to the prospect of debt relief. Further, if the student knows
that the school plans to close, it is likely because the school has
implemented a teach-out plan, which would negate the borrower's ability
to claim a closed school discharge if the institution fulfilled the
plan. For these reasons, and especially the potential effect of the
teach-out provision, the Department did not adjust for this factor in
estimating the impact of the expansion of the eligibility window, but
welcomes comments on the likelihood of its impacts and will consider
those comments in developing estimates of the impact of the final
regulations.
While the expansion of the eligibility window and the elimination
of the three-year automatic discharge provisions allow for borrower
decisions to affect the number of closed school discharges, the
proposal to add to the existing limitation on students who transferred
credits and completed the program at another institution limits the
availability of closed school discharges to borrowers not offered a
reasonable approved, teach-out opportunity and places key eligibility
factors in the hands of institutions. This makes closed school
discharges a form of relief for borrowers who were enrolled at an
institution that closed precipitously, decided implementation of a
teach-out plan was not practical or worth the expense for some or all
students, or failed to implement an approved plan. The Department's
requirements that accreditors review and evaluate teach-out plans that
must be submitted by institutions under certain circumstances
emphasizes the importance of teach-out plans in serving the best
interests of students. The Department expects that this proposed change
could further reduce closed school discharges, but our data do not
provide sufficient information to know if any of the past closed school
discharges were awarded to students who were also provided with a
reasonable teach-out opportunity. Students who took advantage of such
activities would have completed their program, and therefore would not
be eligible for a closed school discharge, including under the current
regulation. It could be that the number of closed school discharges is
relatively low (as compared with the potential pool of borrowers
eligible) because most institutions provide a teach-out opportunity
that allows the borrower to complete his or her program. To the extent
many borrowers are currently completing teach-outs, the cost impact of
the teach-out limitation may be minimal.
The proposed regulations provide incentives for institutions to
offer teach-outs so as to provide students the opportunity to complete
their programs. To capture this effect, the Department reduced baseline
closed school discharges by 65 percent. As is demonstrated by the
estimated net savings from the closed school discharge changes, the
removal of the three-year automatic discharge provisions and the change
in eligibility to those offered an approved teach-out plan are expected
to reduce the anticipated closed school discharge claims significantly
more than the expansion of the window to 180 days increases them. In
other words, the proposed regulations provide an incentive for
institutions rather than students or taxpayers to bear the cost and
burden of a closed school. In some scenarios, such as the precipitous
closure of large institutions, the expansion of the window to 180 days
could increase closed school discharges more than the other provisions
reduce them, but the Department does not consider such a scenario to be
likely. The Department welcomes comments on the assumptions used in
estimating the net budget impact of the closed school discharge
provisions, especially information on the frequency of teach-outs
offered.
3. Other Provisions
The proposed regulations will also make a number of changes that
are not estimated to have a significant net budget impact including
changes to the financial responsibility standards and treatment of
leases, false certification discharges, guaranty agency collection fees
and capitalization, and the calculation of the borrower's subsidized
usage period process. The false certification discharge changes update
the regulations to reflect current practices. The proposed regulations
would also provide that borrowers who provide a written attestation of
high school completion in place of an unavailable high school diploma
would be ineligible for a false certification discharge. In FY2017,
false certification discharges totaled approximately $7 million. As
before, we do not expect a significant change in false certification
discharge claims that would result in a significant budget impact from
this change in terms or use of an application that has been available
at least ten years in place of a sworn statement. False certification
discharges may decrease due to the ineligibility of borrowers who
submit a written attestation in place of a high school diploma, but
given the low level of false certification discharges in the baseline,
even if a large share were eliminated, it would not have a significant
net budget impact. Therefore, we do not expect an increase in false
certification discharge claims or their associated discharge value.
Some borrowers may be eligible for additional subsidized loans and
no longer be responsible for accrued interest on their subsidized loans
as a result of their subsidized usage period being eliminated or
recalculated because of a closed school, false certification, unpaid
refund, or defense to repayment discharge. As in the 2016 final
regulations, we believe the institutions primarily affected by the 150
percent subsidized usage regulation are not those expected to generate
many of the applicable discharges, so this reflection of current
practice is not expected to have a significant budget impact.
4. Accounting Statement
As required by OMB Circular A-4 we have prepared an accounting
statement showing the classification of the expenditures associated
with the provisions of these regulations (see Table 7). This table
provides our best
[[Page 37302]]
estimate of the changes in annual monetized transfers as a result of
these proposed regulations. The amounts presented in the Accounting
Statement are generated by discounting the change in cashflows related
to borrower discharges for cohorts 2019 to 2028 from the PB2019
baseline at 7 percent and 3 percent and annualizing them. This is a
different calculation than the one used to generate the subsidy cost
reflected in the net budget impact, which is focused on summarizing
costs at the cohort level. As the life of a cohort is estimated to last
40 years, the d