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Proposed Rule2022-14631

Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program.

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Published

July 13, 2022

Issuing agencies

Education Department

Abstract

This notice of proposed rulemaking (NPRM) covers student loans and affordability issues. This rulemaking specifically discusses issues involving loans under the William D. Ford Direct Loan (Direct Loan) Program, the Federal Perkins Loan (Perkins) Program, and the Federal Family Education Loan (FFEL) Program. The Secretary proposes to amend the regulations governing seven topics related to student loans administered by the U.S. Department of Education. First, we propose to amend the regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to establish a new Federal standard and process for determining whether a borrower has a defense to repayment on a loan. We also propose to prohibit the use of certain contractual provisions regarding dispute resolution processes by participating institutions, and to require certain notifications and disclosures by institutions regarding their use of arbitration. Additionally, we propose to amend the Perkins, Direct Loan, and FFEL Program regulations to improve the process for granting total and permanent disability (TPD) discharges by eliminating the income monitoring period and expanding allowable documentation allowing additional health care professionals to provide a certification that a borrower is totally and permanently disabled. We further propose to amend the closed school discharge provisions in the Perkins Loan, Direct Loan, and FFEL programs to expand borrower eligibility for automatic discharges and eliminate provisions pertaining to reenrollment in a comparable program. We further propose to amend the Direct Loan and FFEL regulations to streamline the regulations governing false certification discharges. We propose to amend the Direct Loan regulations to eliminate interest capitalization in instances where it is not required by statute. Finally, we propose to amend regulations governing Public Service Loan Forgiveness (PSLF) in the Direct Loan program to improve the application process, and to clarify and expand definitions for full-time employment, qualifying employers, and qualifying monthly payments. The proposed changes would bring greater transparency and clarity and improve the administration of Federal student financial aid programs to assist and protect students, participating institutions, and taxpayers.

Full Text

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<title>Federal Register, Volume 87 Issue 133 (Wednesday, July 13, 2022)</title>
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[Federal Register Volume 87, Number 133 (Wednesday, July 13, 2022)]
[Proposed Rules]
[Pages 41878-42010]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-14631]

[[Page 41877]]

Vol. 87

Wednesday,

No. 133

July 13, 2022

Part II

Department of Education

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34 CFR Parts 600, 668, 674, 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. 87 , No. 133 / Wednesday, July 13, 2022 /
Proposed Rules

[[Page 41878]]

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DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, 674, 682, and 685

[Docket ID ED-2021-OPE-0077]
RIN 1840-AD53, 1840-AD59, 1840-AD70, 1840-AD71

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.

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SUMMARY: This notice of proposed rulemaking (NPRM) covers student loans
and affordability issues. This rulemaking specifically discusses issues
involving loans under the William D. Ford Direct Loan (Direct Loan)
Program, the Federal Perkins Loan (Perkins) Program, and the Federal
Family Education Loan (FFEL) Program. The Secretary proposes to amend
the regulations governing seven topics related to student loans
administered by the U.S. Department of Education. First, we propose to
amend the regulations governing the William D. Ford Federal Direct Loan
(Direct Loan) Program to establish a new Federal standard and process
for determining whether a borrower has a defense to repayment on a
loan. We also propose to prohibit the use of certain contractual
provisions regarding dispute resolution processes by participating
institutions, and to require certain notifications and disclosures by
institutions regarding their use of arbitration. Additionally, we
propose to amend the Perkins, Direct Loan, and FFEL Program regulations
to improve the process for granting total and permanent disability
(TPD) discharges by eliminating the income monitoring period and
expanding allowable documentation allowing additional health care
professionals to provide a certification that a borrower is totally and
permanently disabled. We further propose to amend the closed school
discharge provisions in the Perkins Loan, Direct Loan, and FFEL
programs to expand borrower eligibility for automatic discharges and
eliminate provisions pertaining to reenrollment in a comparable
program. We further propose to amend the Direct Loan and FFEL
regulations to streamline the regulations governing false certification
discharges. We propose to amend the Direct Loan regulations to
eliminate interest capitalization in instances where it is not required
by statute. Finally, we propose to amend regulations governing Public
Service Loan Forgiveness (PSLF) in the Direct Loan program to improve
the application process, and to clarify and expand definitions for
full-time employment, qualifying employers, and qualifying monthly
payments. The proposed changes would bring greater transparency and
clarity and improve the administration of Federal student financial aid
programs to assist and protect students, participating institutions,
and taxpayers.

DATES: We must receive your comments on or before August 12, 2022.

ADDRESSES: For more information regarding submittal of comments, please
see SUPPLEMENTARY INFORMATION. Comments must be submitted via the
Federal eRulemaking Portal at <a href="http://Regulations.gov">Regulations.gov</a>. However, if you require
an accommodation or cannot otherwise submit your comments via
<a href="http://Regulations.gov">Regulations.gov</a>, please contact Mr. Jean-Didier Gaina, U.S. Department
of Education, 400 Maryland Ave. SW, Room 2C172, Washington, DC 20202 or
by phone at (202) 453-7551 or by email at <a href="/cdn-cgi/l/email-protection#e78d828689ca838e838e8295c980868e8986a78283c9808891">[email&#160;protected]</a>.
Federal eRulemaking Portal: Please go to <a href="http://www.regulations.gov">www.regulations.gov</a> to
submit your comments electronically. Information on using
<a href="http://Regulations.gov">Regulations.gov</a>, including instructions for finding a rule on the site
and submitting comments, is available on the site under ``FAQ.''

FOR FURTHER INFORMATION CONTACT: For assistance to individuals with
disabilities for reviewing the rulemaking record, contact Valerie Lefor
at (202) 453-7724 or <a href="/cdn-cgi/l/email-protection#394f58555c4b505c17555c5f564b795c5d175e564f">[email&#160;protected]</a>. For further information
related to interest capitalization, contact Vanessa Freeman at (202)
453-7378 or by email at <a href="/cdn-cgi/l/email-protection#1a6c7b747f69697b347c687f7f777b745a7f7e347d756c">[email&#160;protected]</a>. For further information
related to borrower defenses or pre-dispute arbitration, contact Rene
Tiongquico at (202) 453-7513 or by email at <a href="/cdn-cgi/l/email-protection#5123343f347f25383e3f36202438323e1134357f363e27">[email&#160;protected]</a>. For
further information related to TPD, closed school, and false
certification discharges, contact Brian Smith at (202) 453-7440 or by
email at <a href="/cdn-cgi/l/email-protection#6a0818030b04441907031e022a0f0e440d051c">[email&#160;protected]</a>. For further information related to PSLF,
contact Tamy Abernathy at (202) 453-5970 or by email at
<a href="/cdn-cgi/l/email-protection#80f4e1edf9aee1e2e5f2eee1f4e8f9c0e5e4aee7eff6">[email&#160;protected]</a>.
If you are deaf, hard of hearing, or have a speech disability and
wish to access telecommunications relay services, please dial 7-1-1.

SUPPLEMENTARY INFORMATION:

Submission of Comments

The Department will not accept comments submitted by fax or by
email or those submitted after the comment period. To ensure that the
Department does not receive duplicate copies, please submit your
comments only once. Additionally, please include the Docket ID at the
top of your comments.
The Department strongly encourages you to submit any comments or
attachments in Microsoft Word format. If you must submit a comment in
Adobe Portable Document Format (PDF), the Department strongly
encourages 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 to assist in the rulemaking process.
Privacy Note: The Department's policy is to make all comments
received from members of the public available for public viewing in
their entirety on the Federal eRulemaking Portal at
<a href="http://www.regulations.gov">www.regulations.gov</a>. Commenters should not include in their comments
any information that identifies other individuals or that permits
readers to identify other individuals. If, for example, your comment
describes an experience of someone other than yourself, please do not
identify that individual or include information that would allow
readers to identify that individual. The Department will not make
comments that contain personally identifiable information (PII) about
someone other than the commenter publicly available on
<a href="http://www.regulations.gov">www.regulations.gov</a> for privacy reasons. This may include comments
where the commenter refers to a third-party individual without using
their name if the Department determines that the comment provides
enough detail that could allow one or more readers to link the
information to the third party. If your comment refers to a third-party
individual, to help ensure that your comment is posted, please consider
submitting your comment anonymously to reduce the chance that
information in your comment about a third party could be linked to the
third party. The Department will also not make comments that contain
threats of harm to another person or to oneself available on
<a href="http://www.regulations.gov">www.regulations.gov</a>. Therefore, commenters should be careful to include
in their comments only information that they wish to make publicly
available.

Executive Summary

Purpose of This Regulatory Action: College affordability and
student loan debt have been significant challenges for many Americans.
Student loan debt has

[[Page 41879]]

risen over the past 10 years as student loan repayment has slowed,
while the inability to repay student loan debt has been cited as a
major obstacle to entry into the middle class.\1\
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\1\ R. Chakrabarti, N. Gorton, and W. van der Klaauw, ``Diplomas
to Doorsteps: Education, Student Debt, and Homeownership,'' Federal
Reserve Bank of New York Liberty Street Economics (blog), April 3,
2017, <a href="http://libertystreeteconomics.newyorkfed.org/2017/04/diplomas-to-doorsteps-education-student-debt-and-homeownership.html">http://libertystreeteconomics.newyorkfed.org/2017/04/diplomas-to-doorsteps-education-student-debt-and-homeownership.html</a>.
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This NPRM proposes several significant improvements to existing
programs authorized under the Higher Education Act of 1965 (HEA), 20
U.S.C. 1001, et seq., that grant discharges to borrowers who meet
specific eligibility conditions. Despite the presence of these
discharge authorities for years, if not decades, the Department is
concerned that too many borrowers have been unable to access loan
relief through these opportunities. In some situations, this has been
due to regulatory requirements that have created unnecessary or unfair
burdens for borrowers.
These proposed changes relate to discharges available to borrowers
in the three major Federal student loan programs: Direct Loans, Federal
Family Education Loan (FFEL), and Perkins Loans. The most significant
effects would be in the Direct Loan program, which has been the
predominant source of all Federal student loans since 2010. In this
program the Department makes loans directly to the borrower and then
contracts with private companies known as student loan servicers to
manage the borrower's repayment experience on behalf of the Department.
Several of the components of these proposed regulations, such as
interest capitalization, borrower defense to repayment, the ban on the
use of mandatory pre-dispute arbitration, the prohibition on class
action waivers, and the Public Service Loan Forgiveness program are
only related to Direct Loans. Other provisions, such as closed school
discharge, total and permanent disability discharges, and false
certification discharges, would affect Direct Loans as well as loans
previously issued under the FFEL Program and the Perkins Loan
Program.\2\ In the FFEL program, private lenders issue Federal student
loans using their own funds, then receive both a Government guarantee
against most of the losses in the case of default and quarterly Federal
subsidies. In the Perkins program, institutions of higher education
(institutions) issue Federal student loans using a combination of
Federal and institutional funds.
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\2\ No new student loans are currently issued under either the
FFEL and Perkins Loan programs. There have been no new FFEL loans
issued since June 30, 2010, and the Perkins Loan program stopped
issuing new loans on September 30, 2017.
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Borrower Defense to Repayment, Arbitration, and Class Action Waivers

The proposed regulations for the borrower defense to repayment
program, which applies only for Direct Loan borrowers, would expand the
current basis for a borrower to receive a discharge for loans obtained
to attend a particular institution. As proposed, a borrower defense
discharge would occur when the Department determines an institution
engaged in substantial misrepresentations or substantial omissions of
fact, breached a loan contract, engaged in aggressive academic
recruitment, or was subject to a judgment based on Federal or State law
in a court or administrative tribunal of competent jurisdiction for any
of the above behaviors. The proposed changes to the regulations
governing borrower defense discharges are designed to further protect
student loan borrowers from the financial effects of certain predatory
practices. Where a borrower defense discharge is warranted, the
proposed regulations would also enhance the Department's recoupment
authorities, making it easier for the Department to hold institutions
accountable for costs, reducing the financial impact to taxpayers. It
would also include a process for the Department to recoup the cost of
these discharges from institutions. The proposed changes are in direct
response to numerous instances observed by the Department over time in
which students borrow to attend an institution only to find that the
institution's promises were untrue, leaving the borrower with a loan
for a substandard education and often lacking the ability to obtain the
employment they were promised. The proposed changes to the borrower
defense regulations would apply to both public and private
institutions. To date, much of the concerning evidence of unacceptable
institutional practices comes from private for-profit colleges and
universities; a large share of whose enrollment is Black students,
Latino students, students who are older, students who are working full-
time while enrolled in college, and students who did not enroll in
postsecondary education directly from high school. However, the
regulations would not be limited to only private for-profit schools but
would cover conduct at public and private nonprofit institutions as
well.
As proposed, the regulations would also prevent institutions
wishing to participate in title IV programs from requiring either the
use of mandatory arbitration or waiver of class action lawsuits,
including prohibiting putting such requirements within the loan
contract for a Direct Loan.

Interest Capitalization

The proposed regulations would eliminate most interest
capitalization on Direct Loans by removing the current regulatory
provisions that require capitalization under circumstances when
capitalization is not required by statute.\3\ As proposed, accrued
interest would no longer be capitalized when: a borrower enters
repayment; upon the expiration of a period of forbearance; annually
after periods of negative amortization under the alternative repayment
plan or the ICR plan; when a borrower defaults on a loan; when a
borrower who is repaying under the income-driven repayment Pay as You
Earn (PAYE) plan fails to recertify income or chooses to leave the
plan; and when a borrower who is repaying under another income-driven
repayment the Revised Pay As You Earn (REPAYE) plan fails to recertify
income or leaves the plan. These proposed changes would decrease the
rate at which a borrower's principal loan balance grows over time.
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\3\ Currently, accrued interest is added to the outstanding
principal balance and the new principal balance is used for future
accumulation of interest.
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Public Service Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program authorizes
Direct Loan borrowers engaged in public service to receive a discharge
of remaining loan balances after making the equivalent of 10 years of
qualifying payments.\4\ The Department, however, is concerned that the
current regulations around this program are too restrictive,
particularly in the requirements for a payment to qualify toward
forgiveness. For instance, the Limited PSLF Waiver announced in October
2021 has helped more than 1 million borrowers receive on average an
additional year of credit toward PSLF by addressing many of the same
challenges in regulations that these proposed regulations would seek to
fix. Accordingly, the regulations propose to improve the PSLF
application process and allow borrowers to receive credit toward PSLF
for months during which they are in certain deferment and forbearance
periods while working for a qualified employer.
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\4\ Section 455(m) of the HEA.

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[[Page 41880]]

Total and Permanent Disability Discharges

The Higher Education Act provides for borrowers to receive a
student loan discharge if they have a total and permanent disability.
The proposed regulations would allow more borrowers who meet the
statutory requirements for one of these discharges to receive a
discharge by allowing additional categories of disability
determinations by the Social Security Administration to qualify for a
discharge. They would also allow additional types of medical
professionals to certify that a borrower has a total and permanent
disability. The regulations would also allow more borrowers who
received a discharge to avoid having their loans reinstated by removing
the 3-year income monitoring period that currently exists in
regulation. The net effect of these changes would be a program that is
simpler for eligible borrowers to access and navigate.

Closed School Discharges

Borrowers whose college closes while they are enrolled or shortly
after they have left can receive a closed school discharge so long as
they have not graduated. The Department proposes to clarify and
streamline the eligibility requirements for closed school discharges by
providing more automatic discharges for borrowers within one year of
their college closing. The proposed regulations would also clarify
existing rules that limit discharges for borrowers who enroll in a
comparable program to only apply in instances where a borrower accepts
and completes an approved teach-out program.

False Certification Discharges

Borrowers are eligible for a false certification discharge under
the HEA if the institution that certifies the borrower's eligibility
for the loan does so under false pretenses, such as when the borrower
did not have a high school diploma or equivalent and did not meet
alternative criteria; when the borrower had a status that disqualified
them from meeting legal requirements for employment in the occupation
for which they are training; or if the institution signed the
borrower's name without authorization. A confusing web of regulations
has established different standards and processes for false
certification discharges depending on when the loan was disbursed.
Furthermore, some borrowers who may be eligible for a discharge have
not received it because the requirements are difficult to navigate. The
proposed regulations would streamline the false certification discharge
process for student loan borrowers by establishing standards that apply
to all claims, regardless of when the loan was first disbursed, and
providing for a group discharge process.

Summary of the Major Provisions of This Regulatory Action

The proposed regulations would--
<bullet> Amend the Direct Loan regulations to establish a new
Federal standard for borrower defense claims applicable to applications
received on or after July 1, 2023. Applications pending before the
Secretary on July 1, 2023 would also be considered under the proposed
new standard. In addition, the NPRM would expand the existing
definition of misrepresentation, provide an additional basis for a
borrower defense claim based on aggressive and deceptive recruitment
practices, and allow claims based on State law standards.
<bullet> Establish processes for group borrower defense claims that
may be formed in response to evidence provided by State requestors or
based on prior Secretarial Final Actions identifying conduct that could
lead to an approved borrower defense claim under the Department's
regulations if application were made. Secretarial Final Actions would
include, but not be limited to, program reviews, suspension, or
termination actions.
<bullet> Stop interest accrual on borrowers' loans 180 days from
the initial grant of forbearance or stopped collections if the
Department does not make a determination on the borrower defense claim
within certain timeframes. Interest accrual would resume once a
decision on the claim is made.
<bullet> Establish a reconsideration process for review of denied
borrower defense claims.
<bullet> Require schools to disclose publicly and notify the
Secretary of judicial and arbitration filings and awards pertaining to
a borrower defense claim.
<bullet> Prohibit schools that wish to participate in title IV
programs from requiring borrowers to agree to mandatory pre-dispute
arbitration agreements or waiver of class action lawsuits.
<bullet> Eliminate interest capitalization on Direct Loans where
such capitalization is not required by statute to address growth in
principal balances.
<bullet> Modify the Perkins, FFEL, and Direct Loan regulations to
streamline the application process for a TPD discharge by expanding the
Department's use of Social Security Administration (SSA) codes beyond
``Medical Improvement Not Expected'' when deciding if a borrower
qualifies for TPD discharge.
<bullet> Revise the Perkins, FFEL, and Direct Loan regulations to
eliminate the 3-year post-discharge income monitoring period for
borrowers eligible for TPD discharge to allow borrowers to retain their
discharges to retain their discharges without unnecessary paperwork
burden.
<bullet> Allow borrowers to receive a TPD discharge if the onset of
their disability as determined by SSA was at least 5 years prior to the
application to better align the regulations with statutory requirements
for a TPD discharge.
<bullet> Expand the list of health professionals who may certify
that a borrower is totally and permanently disabled to include licensed
nurse practitioners (NPs), physician's assistants (PAs), and clinical
psychologists to help borrowers more easily complete the application
for a TPD discharge.
<bullet> Amend the Perkins, FFEL, and Direct Loan regulations to
simplify the closed school discharge process by expanding access to
automatic discharges and eliminating the requirement that borrowers who
reenroll in a comparable program lose eligibility for a discharge.
<bullet> Streamline the FFEL and Direct Loan false certification
regulations to provide one set of regulatory standards that would cover
all false certification discharge claims.
<bullet> Clarify that the Department would rely on the borrower's
status at the time the loan was originated for a Direct Loan, and at
the time the loan was certified for a FFEL loan, to determine
eligibility for a false certification discharge.
<bullet> Revise the regulations for PSLF to improve the application
process, expand what counts as an eligible monthly payment, expand the
definition of ``full-time'' employment, and provide additional
clarifying definitions of public service employment to reduce confusion
and to clearly establish the definitions of qualifying employment for
borrowers.
Please refer to the Summary of Proposed Changes section of this
NPRM for more details on the above proposals.
Costs and Benefits: As further detailed in the Regulatory Impact
Analysis, the benefits of the proposed regulations include: (1) a
clarified process for borrower defense discharge applications assisted
by the creation of a single upfront Federal standard to streamline the
Department's consideration of applications, while affording
institutions an opportunity to respond to allegations contained in
borrower

[[Page 41881]]

defense claims; (2) increased opportunities for borrowers to seek
relief from institutional misconduct by prohibiting the use of
mandatory pre-dispute arbitration and class action waivers; (3)
improved school conduct and reduced cost to taxpayers, by holding
individual institutions financially accountable for borrower defense
discharges and deterring misconduct; (4) increased automated discharges
for borrowers and additional flexibilities in establishing eligibility
for PSLF and other loan discharges; and (5) improved access to and
expanded eligibility for, where appropriate, closed school, TPD, and
false certification discharges.
Costs to taxpayers in the form of transfers include borrower
defense claims that are not reimbursed by institutions; additional
relief through closed school, PSLF, TPD, and false certification
discharges to borrowers through programs to which they are legally
entitled in the HEA; and the foregone interest where capitalizing
interest is not required. The paperwork burden associated with
reporting and disclosure necessary to ensure compliance with the
proposed regulations represents an additional cost to institutions.
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 clearly
identify the specific section or sections of the proposed regulations
that each of your comments addresses and to arrange your comments in
the same order as the proposed regulations.
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 these proposed regulations by accessing
<a href="http://Regulations.gov">Regulations.gov</a>.
Assistance to Individuals With Disabilities in Reviewing the
Rulemaking Record: On request we will provide a reasonable
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 these proposed regulations. If you want to
schedule an appointment for this type of accommodation or auxiliary
aid, please contact the person listed under FOR FURTHER INFORMATION
CONTACT.

Background

The Department seeks to address longstanding concerns regarding
Federal student loan debt by improving, streamlining, expanding, and
strengthening regulations governing the title IV, HEA programs.
Specifically, we propose to modify the regulations for loan discharge
programs to strengthen institutional accountability, expand program
access for eligible borrowers, and provide more efficient and borrower-
friendly processes overall. After analyzing the public's input provided
during public hearings and written comments submitted in response to
the notice of our intent to establish negotiated rulemaking committees,
the Department identified 12 issues for consideration by a negotiated
rulemaking committee. These 12 issues are: improving the process for
TPD discharges, improving borrower access to closed school discharges,
eliminating interest capitalization where it is not required by
statute, improving the PSLF application process, clarifying employer
eligibility and full-time employment under PSLF, improving the borrower
defense adjudication process, strengthening borrower defense post-
adjudication processes, ensuring accountability by recovering borrower
defense claims from institutions, prohibiting institutional use of pre-
dispute mandatory arbitration clauses or class action waivers,
improving borrower access to false certification discharges, creating a
new income-driven repayment plan, and establishing regulations for
institutions to maintain a prison education program. Proposed
regulations addressing 10 of the 12 issues listed above are included in
this NPRM. Proposed regulations relating to a new income-driven
repayment plan and to establish Pell Grant eligibility for incarcerated
individuals enrolled in qualifying prison education programs will be
published in a future NPRM or NPRMs.
Throughout this NPRM, the Department is proposing changes that
would allow the Secretary to use automated application processes for
granting discharges as well as leverage other information available to
the Secretary, consistent with regulations and statute governing the
use and sharing of borrower data. The proposed regulations would also
result in more borrowers receiving discharges for which they are
eligible by eliminating the need for individual applications where
possible, expand eligibility categories for TPD discharges, authorize
use of additional documentation for TPD and false certification
discharges, clarify eligibility requirements for PSLF and closed school
discharges, and expand and clarify ways in which a borrower can
establish a borrower defense claim. Increased discharges reduce
repayments from borrowers, resulting in a transfer from taxpayers to
the affected borrowers. For some discharges, especially borrower
defense and closed school discharges, the Department will seek to
recover funds from the institutions involved, but that is not expected
to reimburse the full amount. Increased discharges are expected to
increase the cost of the student loan programs to taxpayers, as
detailed in the Regulatory Impact Analysis. Despite these increased
costs in the form of transfers, the Department believes the benefits of
these changes exceed the costs. The discharge programs addressed by
these proposed regulations were all authorized by Congress. The
Department does not believe it would be reasonable to presume that when
Congress created those programs, it intended to limit the cost of those
programs through the types of operational and administrative barriers
the Department is proposing to remove in this notice of proposed
rulemaking. The proposed changes would thus make these discharge
programs more successful at delivering promised benefits under the HEA.

Public Participation

The Department engaged the public in developing this NPRM through
analysis of written comments submitted by the public outside of this
NPRM comment solicitation, three public hearings, and three negotiated
rulemaking sessions.
On May 26, 2021, the Department published a notice in the Federal
Register (86 FR 28299) announcing our intent to establish multiple
negotiated rulemaking committees to prepare proposed regulations on the
affordability of postsecondary education, Federal student loans, and
institutional accountability.
The Department developed a list of proposed regulatory provisions
for the Affordability and Student Loans Committee (Committee) from
advice and recommendations submitted by individuals and organizations
in testimony at three virtual public hearings held by the Department on
June 21, June 23, and June 24, 2021. Transcripts of the public hearings
are

[[Page 41882]]

available at <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html">https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html</a>?src=rn.
In addition to oral testimony, the Department accepted written
comments on possible regulatory provisions from interested parties and
organizations. You may view the written comments submitted in response
to the May 26, 2021 Federal Register notice on the Federal eRulemaking
Portal at <a href="http://www.regulations.gov">www.regulations.gov</a>, within docket ID ED-2021-OPE-0077.
Instructions for finding comments are also available on the site under
``FAQ.''

Negotiated Rulemaking

Section 492 of the HEA requires the Secretary to involve the public
in the development of proposed regulations prior to publication for
programs authorized by title IV of the HEA. After obtaining advice and
recommendations from the public, including individuals and
representatives of groups involved in the Federal student financial
assistance programs, the Secretary must establish a negotiated
rulemaking committee and subject the proposed regulations to a
negotiated rulemaking process. All proposed regulations that the
Department publishes on which the negotiators reached consensus must
conform to final agreements resulting from that process, unless the
Secretary reopens the process or provides a written explanation to the
participants stating why the Secretary has decided to depart from the
agreements. Further information on the negotiated rulemaking process
can be found at: <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html">https://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html</a>.
On August 10, 2021, the Department published a notice in the
Federal Register (86 FR 43609) announcing its intention to establish
the Committee to prepare proposed regulations for the title IV, HEA
programs. The notice set forth a schedule for the Committee meetings
and requested nominations for individual negotiators to serve on the
Committee. In the notice, the Department announced the topics that the
Committee would address.
The Committee included the following members representing their
respective constituencies:
<bullet> Accrediting Agencies: Heather Perfetti, Middle States
Commission on Higher Education, and Michale McComis (alternate),
Accrediting Commission of Career Schools and Colleges.
<bullet> Dependent Students: Dixie Samaniego, California State
University, and Greg Norwood (alternate), Young Invincibles.
<bullet> Departments of Corrections: Anne L. Precythe, Missouri
Department of Corrections.
<bullet> Federal Family Education Loan Lenders and/or Guaranty
Agencies: Jaye O'Connell, Vermont Student Assistance Corporation, and
Will Shaffner (alternate), Higher Education Loan Authority of the State
of Missouri.
<bullet> Financial Aid Administrators at Postsecondary
Institutions: Daniel Barkowitz, Valencia College, and Alyssa A. Dobson
(alternate), Slippery Rock University.
<bullet> Four-Year Public Institutions: Marjorie Dorime-Williams,
University of Missouri, and Rachelle Feldman (alternate), University of
North Carolina at Chapel Hill.
<bullet> Independent Students: Michaela Martin, University of La
Verne, and Stanley Andrisse (alternate), Howard University.
<bullet> Individuals with Disabilities or Groups Representing Them:
Bethany Lilly, The Arc of the United States, and John Whitelaw,
(alternate) Community Legal Aid Society.
<bullet> Legal Assistance Organizations that Represent Students
and/or Borrowers: Persis Yu, National Consumer Law Center, and Joshua
Rovenger (alternate), Legal Aid Society of Cleveland.
<bullet> Minority-serving Institutions: Noelia Gonzalez, California
State University.
<bullet> Private Nonprofit Institutions: Misty Sabouneh, Southern
New Hampshire University, and Terrence S. McTier, Jr. (alternate),
Washington University.
<bullet> Proprietary Institutions: Jessica Barry, The Modern
College of Design in Kettering, Ohio, and Carol Colvin (alternate),
South College.
<bullet> State Attorneys General: Joseph Sanders, Illinois Board of
Higher Education, and Eric Apar (alternate), New Jersey Department of
Consumer Affairs.
<bullet> State Higher Education Executive Officers, State
Authorizing Agencies, and/or State Regulators: David Tandberg, State
Higher Education Executive Officers Association, and Suzanne Martindale
(alternate), California Department of Financial Protection and
Innovation.
<bullet> Student Loan Borrowers: Jeri O'Bryan-Losee, United
University Professions, and Jennifer Cardenas (alternate), Young
Invincibles.
<bullet> Two-year Public Institutions: Robert Ayala, Southwest
Texas Junior College, and Christina Tangalakis (alternate), Glendale
Community College.
<bullet> U.S. Military Service Members and Veterans or Groups
Representing Them: Justin Hauschild, Student Veterans of America, and
Emily DeVito (alternate), The Veterans of Foreign Wars.
<bullet> Federal Negotiator: Jennifer M. Hong, U.S. Department of
Education.
The Committee agreed to add an additional constituency for
Departments of Corrections during its second session and approved the
membership of Anne L. Precythe of the Missouri Department of
Corrections. In addition, there were two non-voting advisors available
during the negotiations: Rajeev Darolia, advisor on Economic and/or
Higher Education Data, University of Kentucky, and Heather Jarvis,
advisor on PSLF Issues, co-founder of FosterUs.
The Committee met to develop proposed regulations during the months
of October, November, and December 2021.
At its first meeting, the Committee reached agreement on its
protocols and reviewed the 12 issues on the agenda. The facilitators
reminded the Committee that consensus means that there is no dissent by
any member of the Committee and that consensus checks would be taken
issue-by-issue.
At its final meeting in December 2021, the Committee reached
consensus on the proposed regulations addressing four of the 12 issues
on its agenda: eliminating nonstatutory interest capitalizing events,
improving the process for TPD discharges, streamlining the processes
for false certification discharges, and establishing a framework for
Pell Grant Eligibility for Prison Education Programs. This NPRM
includes proposed regulations on the first three of these consensus
items, as well as the remaining seven items on the Committee's agenda,
summarized generally above. Proposed regulations for the fourth item on
which consensus was reached, Pell Grant Eligibility for Prison
Education Programs will be included in a later NPRM. We will also
include Income-Driven repayment, on which consensus was not reached, in
a future NPRM.
The proposed regulations also include technical changes to the
regulations that are needed to reflect recent amendments to the HEA and
to correct certain technical errors. These types of changes are not
normally subject to the statutory requirements for negotiated
rulemaking and public notice and comment. However, since these changes
affect the proposed regulations, the Secretary included them in the
material considered by the Committee to ensure that the Committee
evaluated the full scope of the proposed changes.
More information on the work of the Committee can be found at:
https://

[[Page 41883]]

www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html?src=rn.

Summary of Proposed Regulations

We group major issues according to subject, with appropriate
sections of the proposed regulations referenced in parentheses. We
discuss other 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. Any such change not explicitly mentioned in this summary
remains open for public comment.

1. Borrower Defense to Repayment

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
(i.e., a borrower defense). 20 U.S.C. 1087e(h).
The Department first issued borrower defense regulations in 1994,
which went into effect in 1995. The 1994 borrower defense regulation at
Sec. 685.206(c) provided that any act or omission of the institution
attended by the student that relates to the making of a Direct Loan for
enrollment at the school or the provision of educational services for
which the loan was provided, giving rise to a cause of action against
the institution under applicable State law (the ``State law
standard''), is a ``borrower defense.''
In response to the precipitous closure of Corinthian Colleges, Inc.
(Corinthian) in 2015 and the related influx of borrower defense claims
submitted by individuals who attended institutions owned by Corinthian,
the Department realized the need to update the borrower defense
regulations. The Department developed new borrower defense regulations
in 2016 that were supposed to take effect in 2017 to establish a more
accessible and consistent borrower defense standard (the ``Federal
standard''). We issued the final regulations on November 1, 2016, and
those final regulations generally applied to borrowers with new loans
that were made on or after July 1, 2017. 81 FR 75926 (Nov. 1, 2016).
The new Federal standard clarified and streamlined the borrower defense
claim process. While the Federal standard only applied to loans issued
after July 1, 2017, the borrower defense claim process applied to loans
regardless of their disbursement date. The 2016 regulation also
enhanced protections for borrowers and improved the Department's
ability to hold institutions financially accountable for their actions
and omissions that resulted in loan discharges.
In accordance with the master calendar, the 2016 borrower defense
regulations were originally scheduled to be effective on July 1, 2017.
However, these regulations did not take effect on their original
effective date. After a legal challenge was filed, the Department took
several actions to delay the effective date. See, e.g., 82 FR 27621
(June 16, 2017). In addition, the Department initiated a new negotiated
rulemaking process to develop new regulations, and on July 31, 2018,
the Department published a NPRM (2018 NPRM). 83 FR 37242 (July 31,
2018). Soon thereafter, in September 2018, a Federal court invalidated
the Department's actions delaying implementation of the 2016
regulations, and the 2016 regulation went into effect in October 2018.
Bauer v. DeVos, 325 F. Supp. 3d 74 (D.D.C. 2018). See California Ass'n
of Private Postsecondary Schs. v. DeVos, 344 F. Supp. 3d 158 (D.D.C.
2018). Meanwhile, the Department did not withdraw the 2018 NPRM and on
September 23, 2019, following consideration of public comments on the
2018 NPRM, the Department published new final borrower defense
regulations that applied to loans made on or after July 1, 2020. 84 FR
49788 (Sept. 23, 2019). Those regulations became effective on July 1,
2020, for loans disbursed on or after that date.
The 2019 regulations established a more limited Federal standard
for borrower defense claims by (1) requiring borrowers to prove that
the institution engaged in a misrepresentation that was made with
knowledge of its false, misleading, or deceptive nature or with a
reckless disregard for the truth, (2) eliminating the possibility of
using common evidence to adjudicate claims on a group basis, (3)
requiring the borrower to document the amount of harm suffered, and (4)
setting a 3-year limitation period on filing a claim.\5\ The 2019
regulations do not include a reconsideration process. The 2019
regulations only applied to loans first disbursed on or after July 1,
2020.
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\5\ In New York Legal Assistance Group (``NYLAG'') v. Cardona,
Case No. 20-CV-1414 (S.D.N.Y. Mar. 17, 2021), the District Court
found that the Department did not comply with rulemaking standards
in promulgating the 3-year statute of limitations for affirmative
claims and remanded consideration of that rule to the Department for
further consideration.
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The three borrower defense regulations are hereinafter referred to
as ``1994 regulation,'' ``2016 regulation,'' and ``2019 regulation''
after the respective years in which the final regulations were issued.
The Department believes that the more restrictive standard for
approving a borrower defense claim and the relatively narrow statute of
limitations for filing claims under the 2019 regulations created a
standard that placed burdens on borrowers to obtain relief that were
far more onerous than any State standard, and went far beyond
evidentiary requirements and argumentation that a reasonable borrower
could be expected to provide. In particular, the Department is
concerned that expecting a borrower to independently document and
corroborate the misrepresentation and specifically show the amount of
financial harm they suffered in the manner contemplated in the 2019
regulations would require borrowers to possess a level of data and
knowledge about local and national labor market trends that would be
unrealistic for an individual to possess, and would result in overly
subjective judgments by the Department into how a borrower should
conduct a search for employment. Moreover, without being able to rely
upon evidence generated from in-depth investigations that other
oversight bodies possess, including the ability to demand documents,
borrowers face unreasonable set of requirements. The result would be
that many borrowers who were subject to misrepresentations or other
wrongdoing by their institutions would fail to receive an approved
claim and discharge because they were being judged under an
unreasonably high standard. The Department's experience reviewing
borrower defense applications shows that many of the schools'
substantial misrepresentations are made orally, and/or relate to high
pressure sales tactics. Additionally, many schools do not provide
enrolling or enrolled students with written evidence of the
misrepresentations, which could result in the Department denying
borrowers' claims due to a lack of documentation, despite the fact that
many borrowers do not and cannot keep such documents over years. When
the Department issued the 2019 regulations, the Regulatory Impact
Analysis with that rule estimated that only 7.5 percent of the volume
of borrower defense claims would ultimately be approved. This was a
decline from 65 percent under the 2016 regulation. The Department
believes that such a significant change in approval amounts suggests
that the 2019 regulation would result in denials for too many claims
that should have a reasonable prospect of being meritorious

[[Page 41884]]

upon consideration of evidence from additional oversight entities.
Moreover, the anticipated low approval rate is an added concern because
the 2019 regulations did not contain a reconsideration process, meaning
that any borrower whose claim was unfairly denied, including through an
administrative or technical error, would have to go to court to have
their claim properly addressed.
While the 2019 regulations went into effect for new loans disbursed
on or after July 1, 2020, the Department has yet to adjudicate any
claims under the 2019 regulations. This is due to several factors.
First, the Department is still in the process of adjudicating
significant numbers of claims covered by the 1994 and 2016 regulations,
which represent a larger share of currently pending claims. Second,
repayment of and interest accrual on all Federal loans held by the
Department have been paused since March 2020, so borrowers who may have
been subject to conduct that may give rise to a borrower defense claim
may not have felt the need to apply yet because they do not currently
have to make loan payments.
Over the last several years, the Department has gained significant
experience and expertise through its adjudication of claims and review
of evidence. Doing so has put the Department in the best position to
understand how to manage the borrower defense program efficiently. This
includes identifying areas for improvement and refinement that would
not have been apparent in prior rulemakings when the Department had not
had as much experience reviewing claims.
In this current NPRM, the Department proposes to build upon the
lessons learned from implementation of those previous borrower defense
regulations and a review of the 2019 regulation to construct a borrower
defense process that is simpler and fairer for all affected parties.
This process would maintain what was available to borrowers during the
more than two decades between the 1994 and 2016 regulations; build on
the clearer processes in the 2016 regulation to ensure more consistency
for borrowers; and, incorporate some further refinements of elements
from the 2019 regulation such as including institutional responses and
clarifying certain types of allegations that would not lead to a valid
borrower defense claim. The proposed process would be simpler by
establishing a single upfront Federal standard so that borrowers are
not subject to differential treatment, varying from a full discharge to
a complete denial, for enrollment at the same institution depending
solely on the date their loans were issued. The proposed process also
would be fairer by establishing claim approval requirements that
recognize all possible sources of evidence, including information
gleaned from State attorneys general, rather than relying on the
borrower to prove their entire case on their own.
While the Department has modified the regulations several times in
recent years, based on our ongoing and growing experience reviewing and
adjudicating borrower defense claims, we have determined that the
current 2019 rules are too limiting to fairly and accurately adjudicate
claims, and that further regulations are needed to address issues that
have continued to arise during the Department's claim review. The
current rules require evidence that is highly unlikely to be available
to the borrower, especially within the timeframes following their
departure from the institution that the borrower must meet to have
their claim considered. The current rules also exclude evidence of
school activity in the Department's possession, gleaned from other
Department activity, that would support borrowers' claims. These
proposed regulations would incorporate additional information about the
nature of claims that the Department receives, the types of evidence
received from borrowers, and procedural improvements to help ensure
timely decisions for borrowers. They would also more clearly establish
the importance of the institutional response process and leverage
existing procedures used for establishing and collecting liabilities to
seek recoupment from institutions.
To achieve these goals, the Department proposes to streamline
multiple regulatory requirements, establish a new Federal standard for
the initial adjudication of a borrower defense claim that would be
easier for borrowers and affected parties to understand, and clarify
the conduct that could result in an approved borrower defense claim.
The Department believes that this approach, and the proposed use of
common evidence, would facilitate a clearer and faster process for
adjudication of group claims. The Department also proposes to clarify
how discharge amounts will be determined for approved claims, including
establishing a rebuttable presumption of full discharge; designing a
structured process for reconsidering decisions; eliminating the
limitations period for borrowers; and adopting a revised limitations
period for institutional recoupment. These proposed regulations would
incorporate additional information about the nature of claims that the
Department receives, the types of evidence received from borrowers, and
procedural improvements to help ensure timely decisions for borrowers.
They would also more clearly establish the importance of the
institutional response process and leverage existing procedures used
for establishing and collecting liabilities to seek recoupment from
institutions.
Finally, to protect the title IV programs and ensure
accountability, the Department believes it is critical that borrower
defense regulations contain a process for the Department to recover the
cost to the taxpayer caused by discharging all or a portion of loans
associated with approved claims from institutions, separate and apart
from the borrower claim adjudication process. The Department proposes
to administer this recoupment process through its existing procedures
for collecting other institutional liabilities. Separating the
recoupment process from the borrower defense approval process also
ensures that institutions will not face financial consequences from
claim approvals tied to loans issued prior to July 1, 2023, unless the
claim would have been approved under the borrower defense regulation in
effect at the time the loans were issued.
The recoupment efforts described above complement other executive
and regulatory actions contemplated by the Department to increase
institutional accountability. The Department anticipates that efforts
to dissuade institutions from harmful behavior as well as increases in
other forms of oversight would result in a reduction in future conduct
that could lead to a borrower defense approval, thus reducing instances
in which the Federal taxpayers would assume the costs of discharging
loans. These action items include reinstating the Office of Enforcement
within the Department's Federal Student Aid office and changes
announced earlier this year to increase the frequency with which
entities that own institutions are required to sign Program
Participation Agreements and thus potentially face financial
consequences if there are liabilities against the institution.\6\ The
Department is also currently in the process of proposing new
regulations around the 90/10 rule to implement a requirement included
in the American Rescue Plan that proprietary institutions derive at

[[Page 41885]]

least 10 percent of their revenue from non-Federal sources.\7\ This is
a change from previous requirements, which allowed Federal money for
veterans and servicemembers to count toward the 10 percent revenue
minimum. The inclusion of those benefits had in turn been a
contributing factor toward aggressive recruitment of veterans and
servicemembers.
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\6\ <a href="https://www.ed.gov/news/press-releases/us-department-education-announces-steps-hold-institutions-accountable-taxpayer-losses-0">https://www.ed.gov/news/press-releases/us-department-education-announces-steps-hold-institutions-accountable-taxpayer-losses-0</a>.
\7\ See 90/10 resources under ``Institutional and Programmatic
Eligibility Committee'' <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html">https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html</a>.
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During the public hearings and negotiated rulemaking sessions in
2021, the Department heard from a broad range of constituencies on the
elements of an appropriate borrower defense framework. At the
negotiated rulemaking sessions, negotiators expressed interest in
developing a regulation that would provide for fair treatment of
borrowers who had been harmed by an institution's act(s) or
omission(s). Some negotiators expressed support for reviving the group
claims process and establishing a reconsideration process that is fair
for all affected parties.
One negotiator expressed concern about the potential reputational
harm to institutions from frivolous and unsubstantiated borrower
defense claims. This negotiator also did not support recovering funds
from institutions when a borrower defense claim is successful.
Areas proposed for negotiation during the negotiated rulemaking
sessions included the Federal standard under which a borrower may
assert a defense to repayment; the applicable evidentiary standard;
creating a group process for the adjudication of borrower defense
claims; consideration of adverse Department actions against an
institution as grounds for a group borrower defense claim; the ability
of individuals to bring borrower defense claims; the borrower's status
during adjudication of a claim, including a pause on interest accrual
for a borrower with an individual application after 180 days if the
Department fails to make a decision on the claim by that time; a
defined limitations period for bringing borrower defense claims; an
opportunity for the institution to respond to borrower defense claims
filed against it; the time frames associated with adjudicating a claim;
and issues pertaining to loans made under the FFEL Program.
In the first session, the Department reviewed the issue papers with
negotiators and provided a high-level summary of borrower defense
issues with proposed solutions. In the second session, the Department
provided proposed regulatory text to negotiators. In the final session,
the Department provided revised and additional regulatory text based on
negotiator feedback and explained the substantive changes made between
sessions two and three. By the end of the negotiated rulemaking
sessions, most negotiators expressed general support for the proposed
changes to the borrower defense regulations. At the final consensus
check, 16 negotiators indicated they would agree to the proposed
borrower defense regulations, while one negotiator dissented. Because
the committee's protocols required agreement from all negotiators,
consensus was not reached. Materials from the borrower defense
negotiated rulemaking sessions may be found on the Department's website
at: <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html">https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/index.html</a>.

Borrower Defense to Repayment--Adjudication (Sec. Sec. 685.206,
685.222)

Statute: Section 455(h) of the HEA (20 U.S.C. 1087e(h)) requires
the Secretary to specify in regulations which acts or omissions of an
institution a borrower may assert as a defense to repayment of a Direct
Loan, except that the borrower may not recover from the Secretary more
than the amount the borrower has repaid on the loan.
Current Regulations: The current borrower defense regulations
provide different acts or omissions that could lead to an approved
borrower defense claim, depending on when a borrower's loan was first
disbursed:
<bullet> Claims pertaining to loans first disbursed before July 1,
2017, are adjudicated according to the substantive standard set forth
in the 1994 borrower defense regulations in Sec. 685.206(c), and use
the State law standard. The 1994 borrower defense regulations do not
contain a definitions section.
<bullet> Claims pertaining to loans first disbursed between July 1,
2017, through June 30, 2020, are adjudicated according to the
substantive standard set forth in the 2016 borrower defense regulations
in Sec. 685.222 and uses the regulatory process for claims pertaining
to loans first disbursed prior to July 1, 2017. These claims use
definitions in Sec. 685.222, which defines the terms ``borrower'' and
``borrower defense,'' and apply the Federal standard.
<bullet> Claims pertaining to loans first disbursed after July 1,
2020, are adjudicated under the borrower defense regulations in Sec.
685.206(e), using definitions set forth in Sec. 685.206(e)(1).
Proposed Regulations: Proposed 34 CFR part 685, subpart D would
establish a framework for uniform borrower defense discharges based on
applications received following, or already pending with the Secretary
on, the effective date of these regulations, rather than based on a
loan's disbursement date. Under the proposed rules, institutions would
not face recoupment for conduct approved solely under the new Federal
standard if the conduct occurred prior to July 1, 2023. Nor would they
face larger amounts of recoupment if the amount of a discharge is
greater than it would have been under the applicable prior regulation.
The scope and purpose section of proposed subpart D is in proposed
Sec. 685.400 and would set forth the provisions under which a borrower
defense could be asserted. Subpart D would apply to borrower defense
applications received on or after July 1, 2023, and to borrower defense
applications pending with the Secretary on July 1, 2023. These are the
dates the regulation would become effective under the master calendar
requirements in the HEA.
Proposed Sec. 685.401 contains the general definitions applicable
to subpart D, including definitions for the following terms:
``borrower,'' ``borrower defense to repayment,'' ``Department
official,'' ``Direct Loan,'' ``school/institution,'' and ``State
requestor.''
Proposed subpart D also includes regulations regarding the
adjudication of a borrower defense claim, which are described in
greater detail below.
Finally, Sec. Sec. 685.109 and 685.499 would make clear that, if
any part of the proposed regulations is held invalid by a court, the
remainder would still be in effect.
Reasons: The Department heard from representatives of a broad range
of constituencies, including the non-Federal negotiators in the
negotiated rulemaking meetings, on what they thought was an appropriate
basis for a borrower defense. The Department believes a general
definitions section to this new subpart D is critical to ensure clarity
in these proposed regulations. For these proposed regulations, the
Department incorporates the following terms wholly or in part as those
in the 2019 regulations: ``borrower,'' ``borrower defense to
repayment,'' and, ``Direct Loan.'' Because these proposed regulations
envision a new borrower defense framework, it is necessary to develop
some additional new terms. The Department first proposes a definition
of ``Department official,'' which would be a senior Department official
or their designee to administer

[[Page 41886]]

the borrower defense process. The Department also proposes to expand
upon the definition of ``school/institution'' to include principals of
the institution, or of an institution under common ownership, who
exercised substantial control over the institution. Finally, the
Department proposes a definition of ``State requestor'' to clarify
which entities may suggest the formation of a group claim as described
in other sections of this NPRM.

Direct Loans and FFEL

Section 455(h) of the HEA provides that the Secretary may discharge
a loan pursuant to a borrower defense for a loan made ``under this
part,'' a reference to the Direct Loan Program. This includes Direct
Consolidation Loans made under Sec. 455(g) of the HEA. Under the
statute, borrowers may not recover more than they have repaid. During
negotiated rulemaking, the Department received inquiries about whether
the borrower defense process applies to FFEL Program loans, in which
private lenders issued Federal loans using their own funds and receive
a Federal guarantee against most losses in the case of default as well
as quarterly Federal subsidies. FFEL Program loans are authorized in a
different part of the HEA. As the Department noted in the preamble of
the 2016 regulations, the HEA generally requires that Direct Loans be
made under the same ``terms, conditions, and benefits'' as FFEL Program
loans. 20 U.S.C. 1087a(b)(2), 1087e(a)(1). See 81 FR at 75930. In 1995,
the Department clarified the relationship between Direct and FFEL
Program loans in a Dear Colleague Letter:

Congress intended that schools participating in either FFEL or
Direct Loan programs should receive parallel treatment on important
issues, and the Department has already committed during negotiated
rulemaking to apply the same borrower defense provisions to [both]
the Direct Loan and FFEL programs. Therefore, schools that cause
injury to student borrowers that give rise to legitimate claims
should and, under these proposals, will bear the risk of loss,
regardless of whether the loans are from the Direct Loan or FFEL
Program.

Dear Colleague Letter GEN-95-8 (Jan. 1, 1995).\8\
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\8\ See <a href="https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/1995-01-01/gen-95-08-direct-loan-program-schools-will-not-face-greater-potential-liabilities-ffelp-schools">https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/1995-01-01/gen-95-08-direct-loan-program-schools-will-not-face-greater-potential-liabilities-ffelp-schools</a>.
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In the 2016 and 2019 regulations, the Department took the position
that a FFEL borrower could raise a defense to repayment claim and have
that claim reviewed and approved, but that receiving any relief tied to
an approval of such a claim would require the borrower to consolidate
any FFEL Program loans associated with the approved claim into a Direct
Consolidation Loan. However, the time limits on filing a claim in the
2019 regulation plus the terms of the new consolidation loans
determining the applicable borrower defense regulation meant that it
would be almost impossible for FFEL borrowers to receive any borrower
defense relief after July 1, 2020, regardless of when they originally
borrowed. For instance, under the 2019 regulation, a FFEL borrower who
took out a loan in 2009 and left school in 2010 could have a claim
approved today under the standards of the 1994 regulation but would
have no way to access the associated relief under that regulation
because as soon as they consolidate their claim, they would fall under
the 2019 regulation and be denied under the three-year limitations
period. The Department is concerned that the 2019 regulation results in
the application of a stricter regulation to their claim that was not in
effect at the time their original loans were disbursed. Applying the
standard proposed in these regulations regardless of disbursement date
would both solve this problem going forward and address the inequitable
situation that would otherwise exist for FFEL borrowers from July 1,
2020 through June 30, 2023.
The Department is also proposing sub-regulatory improvements beyond
the regulations that would help FFEL borrowers more easily receive a
discharge for approved borrower defense claims, further streamlining
and simplifying the process for borrowers. The Department has the
authority to make Direct Consolidation Loans under Sec. Sec. 451 and
455(g) of the HEA. FFEL borrowers must consolidate their loans into a
Direct Consolidation loan to obtain a borrower defense discharge;
however, the Department would allow FFEL borrowers to file and receive
a decision on their borrower defense applications before their loans
are consolidated. The 1994 and 2016 regulations allow borrowers with
FFEL Program loans to have their claims reviewed and approved by the
Department, but they must consolidate their FFEL Program loans into a
Direct Loan through a separate process to receive the benefit of any
loan discharges associated with an approved claim. The Department has
heard, both from borrowers and from their representatives at negotiated
rulemaking, that the separate consolidation requirement creates
confusion and roadblocks for borrowers. The requirement also results in
unequal treatment for borrowers with different types of loans. To
address this concern, the Department proposes to streamline the
borrower defense application process by having the application for
borrower defense also serve as a Direct Loan consolidation application
for borrowers with FFEL and Perkins loans, which would only be executed
if the borrower's claim is approved, giving the borrower a streamlined
process for receiving discharge of their loans.

State Requestor

State requestors, such as State attorneys general, have been a
significant and important source of evidence for many of the
Department's approvals of borrower defense claims and the Department
anticipates they will continue to be an important source of evidence.
For example, while investigating student complaints, State attorneys
general may find institutions engaging in patterns of
misrepresentation. The Department believes State partners are critical
in providing evidence that--as part of an independent assessment by the
Department that also includes evidence in its possession, submissions
from borrowers, responses from institutions under proposed 485.405, and
other relevant sources--could result in approving borrower defense
claims. Because this evidence often includes information about
widespread institutional policies or practice, evidence from State
requestors could be particularly beneficial for decisions around
whether to form and/or approve a group borrower defense claim, which is
when the Department makes a decision about whether to approve borrower
defense relief for a set of similarly situated borrowers, including
those who have not applied. These State requestors have fostered, and
could continue to foster, a more efficient borrower defense
adjudication process by supplying needed evidence to support the
potential approval of claims or expanding the Department's ability to
quickly develop the facts in cases by identifying systemic issues at an
institution resulting in several borrowers potentially being eligible
for relief.
To give these State requestors regulatory recognition in the
consideration of whether to establish a group process, the Department
proposes to define ``State requestors'' to include States, State
attorneys general, or State oversight or regulatory agencies with
authority from the State (such as a State consumer financial protection
agency with civil investigative demand

[[Page 41887]]

authority from that State). The Department proposes limiting requestors
only to State requestors based on the Department's experience that
State parties have been the sources of the highest-quality evidence in
past adjudications of borrower defense applications. Additionally, the
Department believes that inviting States to share information is
consistent with the HEA's expectation that States, accrediting
agencies, and the Department will conduct shared oversight through the
program integrity ``triad.'' Already, States and the Department share
considerable information about institutions through oversight and
enforcement work; these established relationships have yielded critical
support for the Department's work to ensure institutions comply with
Federal laws and regulations, including those that could give rise to
borrower defense claims for discharges of Federal student loans.
The proposed position is a change from the Department's conclusions
in the 2019 regulation and is based upon the agency's experience in
continuing to review and approve borrower defense applications. In
2019, the Department dismissed the importance of State enforcement
actions on the grounds that they cover broader issues than what may be
allowed under borrower defense. This conclusion discounted the role of
evidence from State parties in processing borrower defense claims. The
evidence generated from State investigations and enforcement actions
has repeatedly given the Department important information to conduct a
thorough and rigorous review of borrower defense claims against
institutions such as Corinthian Colleges, Inc., ITT Technical
Institute, the Court Reporting Institute, Minnesota School of Business
and Globe University, and Westwood College.\9\ In several of these
instances the Department received from State attorneys general internal
company documents, presentations, emails, and memos that assisted in
establishing that these institutions engaged in misrepresentations. In
all these instances, the Department is not proposing to simply accept
the State-offered evidence unquestioned and issue approvals based on
it. It is recognizing the importance of considering evidence from all
available sources and creating a simpler process for receiving such
information from States.
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\9\ See U.S. Department of Education press releases: <a href="https://www.ed.gov/news/press-releases/department-education-announces-approval-new-categories-borrower-defense-claims-totaling-500-million-loan-relief-18000-borrowers">https://www.ed.gov/news/press-releases/department-education-announces-approval-new-categories-borrower-defense-claims-totaling-500-million-loan-relief-18000-borrowers</a>; <a href="https://www.ed.gov/news/press-releases/education-department-approves-415-million-borrower-defense-claims-including-former-devry-university-students">https://www.ed.gov/news/press-releases/education-department-approves-415-million-borrower-defense-claims-including-former-devry-university-students</a>; <a href="https://www.ed.gov/news/press-releases/department-education-approves-borrower-defense-claims-related-three-additional-institutions">https://www.ed.gov/news/press-releases/department-education-approves-borrower-defense-claims-related-three-additional-institutions</a>.
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Effective Date of Regulations, Claims Covered Under Proposed
Regulations

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. Section 410 of the General Education Provisions Act (GEPA)
provides the Secretary with authority to make, promulgate, issue,
rescind, and amend rules and regulations governing the manner of
operations of, and governing the applicable programs administered by,
the Department. 20 U.S.C. 1221e-3. Under Section 414 of the Department
of Education Organization Act, the Secretary is authorized to prescribe
such rules and regulations as the Secretary determines necessary or
appropriate to administer and manage the functions of the Secretary or
the Department. 20 U.S.C. 3474.
Current Regulations: The ``1994 regulations'' at 34 CFR 685.206(c)
cover loans first disbursed before July 1, 2017 and became effective
July 1, 1995 (see 59 FR 61664, December 1, 1994); the ``2016
regulations'' at 34 CFR 685.222 cover loans first disbursed on or after
July 1, 2017 and before July 1, 2020 and became effective July 1, 2017
(see 81 FR 75926, November 1, 2016); and, the ``2019 regulations'' at
34 CFR 685.206(e) cover loans first disbursed on or after July 1, 2020
and became effective July 1, 2020 (see 84 FR 49788, September 23,
2019).
Proposed Regulations: Proposed 34 CFR part 685, subpart D would
establish a framework for uniform borrower defense discharges based on
applications received following or already pending with the Secretary
on the effective date of these regulations, rather than based on a
loan's disbursement date. However, institutions would not be subject to
recoupment actions for applications that are granted based upon this
regulation that would not have been approved under the standard
applicable based upon the loan's disbursement date, which could be the
1994, 2016, or 2019 regulations. Institutions would also not be subject
to recoupment for amounts greater than what would have been approved
under the applicable regulation at the time the loans were disbursed.
Reasons: Tying the applicability of borrower defense regulations to
the date of a loan's disbursement can create significant complexity for
administering the program and create inconsistent outcomes for
borrowers. With regulations tied to a loan's disbursement date, it is
possible for a single borrower to submit a single borrower defense to
repayment claim that is covered by all three sets of regulations,
despite involving the same act or omission at the same institution. The
confusion is further exacerbated if a borrower consolidates their
loans, since borrowers may have had original loans disbursed under one
set of regulations, but the Department treats the date of the
consolidation loan as the one used to determine what regulation their
claim should be adjudicated under.
To streamline and simplify the process, the proposed regulations
provide uniform borrower defense regulations for applications pending
with the Secretary on or after the effective date of these regulations.
This approach would ensure that all borrowers whose claims are filed or
pending within this timeframe are subject to the same regulatory
framework. In promulgating the prior borrower defense regulations, the
Department did not choose to apply this single standard because it
would have changed the types of claims that could be approved in ways
that might have left some borrowers worse off than the regulation in
place at the time they took out their loan. For example, borrowers with
loans issued prior to July 1, 2017 could bring a claim under a State
law standard, which includes some instances where a borrower might not
have to show they relied upon a misrepresentation depending on the
relevant State law being applied. The 2016 regulation, however,
included a requirement that a borrower demonstrate reliance on the
misrepresentation without a presumption of reasonable reliance for an
individual claim. Applying that standard to those prior loans would
thus be more restrictive in certain circumstances. The same is true of
the 2019 regulation and its effect on loans issued on or after July 1,
2020. That regulation requires borrowers to produce a more
individualized documentation of harm and eliminates the prospect of
adjudicating similarly situated claims as a group, in contrast to what
is available under the 2016 regulation. It would thus not have been
feasible to have the 2016 regulation cover claims from loans that would
have previously been associated with the 1994 regulation, nor would the
2019 regulation have been able to cover

[[Page 41888]]

claims previously associated with either the 1994 or the 2016
regulations. This proposed regulation would permit borrowers to bring
claims under a series of acts or omissions that not only encompasses
what would have been available to them under any of the three prior
applicable regulations, but also under some additional circumstances.
The result is that no borrower would be worse off under this regulation
than they would be under the regulation in place at the time they
borrowed. Given that, the Department believes it is appropriate to
adopt a single standard that applies to all claims pending with the
Secretary or submitted on or after July 1, 2023. As discussed in
greater detail in the Recovery from Institutions section, the
Department does not propose to apply this single framework for the
purposes of institutional recoupment in all cases. The Department does
not think it would be appropriate to hold an institution financially
liable when the standard in place at the time the loan was disbursed
would not have resulted in an approved claim, since the institution
would not have had a way of knowing that certain types of conduct could
later lead to financial consequences. The Department believes that this
approach would also protect against any concerns institutions might
raise related to the reputational consequences of an approved borrower
defense claim. The approval of a borrower defense claim concerns the
legal interaction between the Department and the borrower, not the
institution. Moreover, the Department is unaware of any evidence
demonstrating reputational harm to institutions that are still
operating resulting from approved borrower defense claims. Given that
lack of evidence, the Department believes whatever reputational harms
to the institution might occur based on this regulatory change are
outweighed by the benefits to the borrower. This is because this
proposed change makes the borrower defense program more administrable
and therefore overall better able to serve both borrowers and
institutions through more efficient and effective adjudication.
While the proposed coverage of this regulation could lead to some
increased costs to the Federal Government in the form of greater
transfers to borrowers, the Department notes that this regulation is
just one component of a larger set of executive and regulatory efforts
aimed at increasing institutional oversight and accountability that
should deter future conduct that could lead to approved borrower
defense claims. These efforts include the re-establishment of an Office
of Enforcement within Federal Student Aid, which is tasked with
conducting in-depth investigations of institutions. Releasing the
results of investigations will teach institutions what types of risky
conduct to avoid in the future. The Department also announced earlier
in 2022 that it would start increasing the number of entities that sign
Program Participation Agreements to include more outside owners of
institutions. Doing so will make more entities and individuals
responsible for liabilities against an institution, further deterring
harmful behavior. The Department is also currently conducting separate
rulemaking efforts to implement a statutory change included in the 2021
American Rescue Plan to require private for-profit institutions to
derive 10 percent of their revenue from non-Federal sources, not just
Federal student aid programs administered by the Department. That
change will reduce incentives for institutions to aggressively pursue
veterans and service members in particular, which had been a source of
aggressive recruitment in the past.

Federal Standard (Sec. Sec. 685.206, 685.222, & Part 668)

Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution a
borrower may assert as a defense to repayment of a Direct Loan, except
that a borrower may not recover from the Secretary an amount in excess
of the amount that the borrower has repaid.
Current Regulations: In the current regulations, three different
regulatory standards and limitations periods apply, depending on when a
borrower's loan was first disbursed:
<bullet> Loans first disbursed prior to July 1, 2017, are addressed
under the 1994 borrower defense regulations in Sec. 685.206(c). That
section provides that a borrower may assert a defense to repayment
under applicable State law. The borrower may bring a claim at any point
during the period in which the loan is being collected.
<bullet> Loans disbursed between July 1, 2017, and June 30, 2020,
are adjudicated under the 2016 borrower defense regulations in Sec.
685.222, which explains the acts or omissions that could give rise to a
borrower defense claim are judgments against the institution, breaches
of contract, and substantial misrepresentation. Further, the borrower
may bring such a claim at any time but may only assert a right to
recover amounts previously collected by the Secretary on the grounds of
that same breach of contract or substantial misrepresentation within 6
years of the alleged breach or of the date on which the substantial
misrepresentation reasonably could have been discovered.
<bullet> Loans disbursed on or after July 1, 2020, are adjudicated
under the 2019 borrower defense regulations in Sec. 685.206(e), which
allow a borrower to assert a defense to repayment if the institution at
which the borrower enrolled made a misrepresentation of material fact
upon which the borrower reasonably relied, and the borrower was
financially harmed by such misrepresentation. Claims adjudicated under
these regulations have three years from the date the student is no
longer enrolled at the institution to file a claim with the Department.
Proposed Regulations: In proposed Sec. 685.401(b), a claim could
be brought on any of five grounds:
<bullet> Substantial misrepresentation,
<bullet> Substantial omission of fact,
<bullet> Breach of contract,
<bullet> Aggressive and deceptive recruitment, or
<bullet> A Federal or State judgment or Departmental adverse action
against an institution that could give rise to a borrower defense
claim.
Also, as proposed, a violation of State law could form the basis
for a borrower defense claim, but only if the borrower or, in the case
of a group claim brought by a State requestor, that State requestor
requests reconsideration of the Secretary's denial of a claim. Each is
discussed further below. Borrowers would not be subject to a
limitations period.
The proposed Federal standard in Sec. 685.401(b) would incorporate
the existing description of misrepresentation in part 668, subpart F,
which currently defines and sets forth three categories of
misrepresentation, each containing examples of violative conduct.
However, the Department proposes to expand the examples in those
categories, relating to the nature of educational programs, the nature
of financial charges, and the employability of graduates. Proposed
Sec. 668.75 also would establish a new misrepresentation category in
the regulations that separately would give rise to a borrower defense
claim under the Federal standard: ``omission of fact.''
Proposed Sec. 668.79 would make clear that, if any part of the
proposed regulations is held invalid by a court, the remainder would
still be in effect.
We propose to add a new subpart R to part 668, which would define
and prohibit aggressive and deceptive recruitment tactics or conduct

[[Page 41889]]

(aggressive recruitment). As proposed, aggressive recruitment would be
one of five types of acts or omissions that comprise the Federal
standard for borrower defense claims such as: obtaining the borrower's
contact information through websites that falsely present themselves as
providing assistance with finding a job or obtaining government
benefits, falsely claiming that enrollment spots are limited, taking
advantage of a student's lack of understanding to pressure the student
to enroll, pressuring the student to make an immediate loan decision,
discouraging the student or prospective student from consulting with an
independent party prior to signing documents, failing to respond to a
student's request for additional substantive information on enrollment
or loan obligations, using threatening or abusive language, or engaging
in repeated unsolicited contact.
Finally, proposed Sec. 668.509 would make clear that, if any part
of the proposed regulations is held invalid by a court, the remainder
would still be in effect.
Reasons: The Department has issued three different sets of
regulations in the past on borrower defense: 1994, 2016, and 2019.
Those regulations include different acts and omissions as the basis for
borrower defense claims and included different processes. Even where
some similarities appear to exist across the three regulatory
structures--for example, all generally list misrepresentation as a
basis for a borrower defense--the regulations set different
requirements for what a borrower must prove to have their application
approved. For example, in the 1994 regulations, a borrower could have
their application approved because their State had a standard for
misrepresentation that did not require a demonstration of reliance.
That same borrower under the 2016 regulation could also receive an
approval due to a misrepresentation but would have to show that they
relied upon that misrepresentation in making the decision to enroll.
For both the 1994 and 2016 regulations, the borrower's claim could be
supported by common evidence in the Department's possession, such as
records from a college obtained by a State attorney general and shared
with the Department. Under the 2019 regulation, that borrower not only
has to show they relied upon the misrepresentation but that the
institution had knowledge the misrepresentation was false, misleading,
or deceptive, or acted with reckless disregard for the truth. The
borrower must also document the specific amount of financial harm
suffered. As a consequence, an identical misrepresentation by the same
institution could yield different outcomes solely based upon the loan's
disbursement date.
In reviewing the hundreds of thousands of claims received from
borrowers across the country, as well as different State laws that
could be applied to bring a defense to repayment application under the
1994 regulations, the Department has identified other categories of
improper actions that it believes should give rise to a defense to
repayment, and examples of the types of common misrepresentations that
fall within those categories.
As listed above, the proposed Federal standard identifies five
categories of acts or omissions as bases for a borrower defense claim:
(1) substantial misrepresentation, (2) substantial omission of fact,
(3) breach of contract, (4) aggressive recruitment, and (5) State or
Federal judgment or Departmental adverse action against an institution
that could give rise to a borrower defense claim. For substantial
misrepresentations and substantial omissions of fact, the Department
proposes to use a presumption of reasonable reliance for both an
individual and group claim.
Each element of the proposed Federal standard is discussed in
greater detail below.

Substantial Misrepresentation and Omission of Fact

The Department proposes returning to the 2016 regulations' use of
substantial misrepresentation where a misrepresentation is defined in
34 CFR 668, subpart F, instead of a standalone definition in the
borrower defense regulation. But, as part of adopting that framework
from the 2016 regulation, we also propose adopting a presumption of
reasonable reliance for all borrowers.
Misrepresentation was a component in both the 2016 and 2019
regulations and has been a common source for approving claims under the
1994 regulation. Substantial misrepresentations constitute most of the
claims that the Department has approved to date and have consistently
served as a basis for borrower defense discharges across the several
sets of regulations.
The Department believes requiring borrowers to prove a substantial
misrepresentation occurred is a more reasonable standard to use than
the stricter one required in the 2019 regulation that also required a
borrower to show that an institution's misrepresentation was made with
knowledge that it was false, misleading, or deceptive or with reckless
disregard for the truth. In constructing the proposed standard, the
Department considered what evidence it sees borrowers regularly
provide, based upon its review of hundreds of thousands of claims. This
allows the Department to gauge what is a reasonable expectation of
borrowers and what types of information that most claims are likely to
include. Those reviews demonstrate that even the most detailed and
extensive information provided by borrowers rarely if ever includes
information on whether an institution had knowledge that a
misrepresentation was false or misleading, nor an ability to gauge if
the institution acted with a reckless disregard for the truth.
When the Department obtains such information, it generally comes
through internal company records that require the authority to require
institutions to turn over documents, such as through a civil
investigation demand, a lawsuit, or a request by a Federal agency. The
use of such a strict standard for a borrower thus exceeds what even the
most detailed individual applications received to date are able to
include. While the Department has in the past indicated that this
standard could be met by showing information provided by employees does
not match information in formal marketing materials, the Department is
concerned that such an approach does not provide a reasonable path for
a borrower subject to the more common situation the Department has
found in which the official placement rates are themselves false or
calculated in a way that produces a misleading result.
Moreover, the Department does not believe the intent of the
institution is relevant when determining whether to provide the
borrower with relief due to a misrepresentation. Intentional or not,
the actions by the institution have resulted in harm to the borrower
and the Department's obligation is to provide relief to ameliorate that
harm when the evidence warrants. Issues related to institutional
knowledge are better suited for considerations about the extent of the
school's liability. As between the school and the borrower, the school
is better equipped to prevent, and, where appropriate, to bear the cost
of, a misrepresentation that turns out to be inadvertent.
To meet this proposed substantial misrepresentation threshold, the
borrower would have to articulate to the Department the
misrepresentation made by the institution (e.g., they were told credits
would transfer and they did not, they were guaranteed to get a job,
they

[[Page 41890]]

were told the job placement rate was 90 percent, etc.). That
misrepresentation would then have to be one that they would have relied
upon to make the decision to take out a Direct Loan. A borrower can
achieve that goal by relaying with some detail the story of their
recruitment experience or some other interaction with the school.
The Department similarly proposes to remove the requirement that a
borrower demonstrate individualized harm from the definition of a
misrepresentation and instead to require that the borrower demonstrate
that the misrepresentation caused the borrower to take out a loan to
their detriment. The Department is concerned that the requirements to
demonstrate financial harm in the 2019 regulation created a requirement
far beyond what a reasonable borrower should have to do. This concern
outweighs the taxpayers' risk that a borrower could receive relief even
without significant financial harm, particularly given the Department's
statutory obligation to provide access to defenses to repayment for
borrowers affected by the acts or omissions of the institutions in
which they enroll. For instance, the 2019 regulation requires borrowers
to prove that they could not get a job for reasons besides local or
national recessions, or the borrower would have to document the quality
of their job search and subsequent inability to find employment. The
Department does not believe it is reasonable for a borrower to have to
act as a labor economist to show they were harmed by an institution's
misrepresentations. Moreover, the approach of individualized harm
required in the 2019 regulations has the unintended effect of
potentially penalizing a borrower who succeeds despite their program.
The Department has received many borrower defense applications from
individuals who asserted under penalty of perjury that they were more
likely to find employment when removing the institution they attended
from their resume. Under the 2019 regulations, these individuals would
risk having a claim not approved because they did obtain a job, even if
the institution was a hindering factor in their ability to do so.
Reliance is the final component of the substantial
misrepresentation standard. This requires a borrower to show that they
were not only subject to the misrepresentation but that they relied
upon it in their decision to take out a Direct Loan. While the
Department believes reliance should be an element of a successful
borrower defense claim that alleges a misrepresentation, we are
concerned that an overly narrow view of what a borrower had to do in
order to demonstrate reliance could result in a borrower's application
being denied for lack of the use of specific phrasing. In particular,
we are worried that there could be instances where a borrower lays out
a misrepresentation that from the narrative provided by the borrower
was a key factor in their decision to take out a loan but because the
borrower did not directly specify they relied upon it their claim is
denied. To address this concern the Department proposes that if the
claimant does not demonstrate reliance, then the Department would find
reasonable reliance if a prudent person would believe and act upon the
misrepresentation if told it by another person.
The Department also proposes to use a similar presumption of
reasonable reliance for group borrower defense claims. The removal of
requirements for borrowers to demonstrate individualized harm and that
they could personally prove that an institution engaged in a
misrepresentation that the institution made with the knowledge that it
was false, misleading, or deceptive or made with reckless disregard for
the truth means that the Department can and should consider claims from
similarly situated borrowers who attended the same institution as a
group. Because the idea behind a group claim is that all the borrowers
in the group may have been affected by the same misrepresentation or
omission, the Department believes it is also reasonable to use an
assumption of reasonable reliance for group members.
The Department has determined based on reviews of claims that,
particularly where misrepresentations were especially widespread, the
benefits of reduction in burden by presuming reliance, rather than
individually determining it, exceed the costs. Efforts to individually
evaluate these claims have substantially delayed--by years, in some
cases--the provision of relief to borrowers. This has negative
ramifications for borrowers whose financial circumstances are affected
by their outstanding student loan debt in the meantime.
The Federal Trade Commission (FTC) follows a similar approach to
the Department's proposal to allow the Secretary to establish a
presumption of reliance, whereby it can establish a rebuttable
presumption that all purchasers relied on the defendant's material
misrepresentations or omissions if they were widely disseminated and
``were of a kind usually relied upon by reasonable prudent persons.''
FTC v. BlueHippo Funding, 762 F.3d 238 (2d Cir. 2014); FTC v.
Kuykendall, 371 F.3d 745, 765 (10th Cir. 2004); FTC v. Figgie Int'l,
Inc., 994 F.2d 595, 605-06 (9th Cir. 1993); FTC v. Sec. Rare Coin &
Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991). Once the FTC
establishes the presumption, courts typically accept the total revenue
from the sale of the good or service as the amount of monetary relief.
Accordingly, while the Department proposes a substantial
misrepresentation standard to bring a successful borrower defense
claim, the Department proposes to incorporate a presumption of
reasonable reliance into that standard to reflect natural consumer
behavior that the reasonable and prudent consumer would ``usually''
rely on.

Substantial Misrepresentation--Definitions

With regard to the specific types of actions that could be
considered a misrepresentation, the Department believes using the
definition of a misrepresentation in subpart F instead of a separate
definition of the term in borrower defense would reduce confusion for
both borrowers and institutions and ensure a more consistent approach.
In the 2019 regulation, the Department chose to include its own
definition of misrepresentation. However, it did so with a non-
exhaustive list of 11 items, many of which bear significant resemblance
to requirements that already exist in subpart F. This creates
unnecessary ambiguity for borrowers and institutions. Since the list in
the regulation is non-exhaustive it is unclear whether that would mean
anything else in subpart F might also still qualify as a
misrepresentation, providing other requirements are met. Using the
single consistent definition from subpart F thus removes that ambiguity
and ensures that there is a clear message to borrowers and institutions
how borrower defense and other oversight and enforcement activities can
interact.
In reviewing the definition of misrepresentation in subpart F, the
Department has identified other types of misrepresentations that it
believes should both serve as potential grounds for approving a
borrower defense application as well as possible future enforcement
actions. These changes address areas of concern the Department has
identified in the course of adjudicating borrower defense claims in
recent years.
The Department proposes to revise the regulations in Sec. 668.72,
which covers misrepresentation based on the nature of the educational
program or

[[Page 41891]]

institution. The Department proposes to amend the leading text by
adding the phrase ``which may be included in the institution's
marketing materials, website, or communications to students,'' to
clarify where misrepresentation could occur and to ensure congruence
with the other types of misrepresentation in Sec. 668.73 and Sec.
668.74. The Department also proposes to remove sub-section (h) in Sec.
668.72, which relates to misrepresentations of the nature and
availability of equipment needed for educational programs, because that
element is effectively incorporated into Sec. 668.72(f), which
addresses facilities and equipment. The Department proposes to remove
sub-section (j) in Sec. 668.72, related to the availability of
employment or other financial assistance, because that element would be
effectively covered in Sec. 668.73, which governs misrepresentations
related to the nature of financial charges.
In new Sec. 668.72(m), the Department proposes to add false,
erroneous, or misleading statements concerning institutional
selectivity rates or rankings as a form of misrepresentation, because
it has observed institutions leveraging false data reported to widely
recognized national rankings that result in a higher institutional or
program rank than they would otherwise have received, inducing
enrollment under false pretenses. Accordingly, the Department believes
it is in the public interest to include misrepresenting selectivity
rates or rankings or misrepresenting the data underlying the
selectivity rates or rankings, as a form of misrepresentation.
In new Sec. 668.72(n), the Department proposes to add
misrepresenting the classification of the institution as nonprofit,
public, or proprietary for purposes of its participation in the title
IV programs as another basis for a borrower defense claim. An
institution would be deemed to misrepresent its classification if it
leads students or parents to believe that its status for purposes of
title IV participation is something other than the institution's
official classification on file with the Department for purposes of the
title IV programs. The Department believes that obfuscating the
classification of the institution for purposes of the title IV programs
should be considered a misrepresentation because there are meaningful
distinctions between the governance and treatment of revenue in excess
of expenses at for-profit and nonprofit businesses. A student who
chooses a college that markets itself as nonprofit may believe they are
entering into a transaction in which additional revenue will be
reinvested in the college and that those leading the institution do not
have a direct financial stake in it. Institutions may not represent to
students that they are a nonprofit institution for purposes of title IV
when they have not met the applicable legal standards for nonprofit
status. This also would apply to institutions that are in the process
of converting from for-profit to nonprofit status; such an institution
may not represent itself as nonprofit until the Department has
confirmed it meets the standards for a nonprofit institution and
memorialized that determination in the classification on file with the
Department. An institution that acts inconsistently with this
requirement would have misrepresented its classification for purposes
of a borrower defense claim.
In new Sec. 668.72(o), the Department proposes to add
misrepresenting the existence of certifications or other approvals for
the institution and/or its programs that were not actually obtained,
and the institution's failure to remove such certifications or
approvals from marketing materials after they are revoked or withdrawn.
These certifications and other approvals include approvals from the
State to offer certain programs, such as approval to offer a nursing
program. They also include certifications for occupations such as
medical assisting where a license may not be required but there are
certifications that carry greater labor market value. The Department
has observed that some institutions lagged in updating their marketing
materials with the latest certifications or approvals or promised
students that they would obtain certain certifications or approvals by
the time the student graduated but where the institution never in fact
obtained these items. The result is that when the student went to find
employment, they discovered they were either unable to find a job or
would be less competitive in the workforce than they expected to be
when they enrolled in the program.
Similarly, the Department proposes to add new Sec. 668.72(p),
which would address misrepresentations about student externships or
other similar opportunities, because the Department has observed that
some institutions have made false promises about the availability of
externships for their students or falsely represented that they held
contracts with externship sites. The Department has observed that
students relied on these marketing materials to inform their decision
about whether to enroll at the institution.
The last two proposed changes to Sec. 668.72 are new Sec.
668.72(q), misrepresentation about the institution offering assistance
to obtain a high school diploma or General Education Development
certificate (GED), and new Sec. 668.72(r), misrepresentation about the
pace of completing the program or the time it would take to complete
the program contrary to the stated length of the educational program.
With the rise of eligible career pathway programs and use of ``ability
to benefit'' mechanisms to provide for title IV aid eligibility for
qualifying students without a high school diploma or its recognized
equivalent, the Department has observed an increase in the number of
institutions making false promises of assistance to obtain a high
school diploma or GED, including through program reviews and other
oversight mechanisms in which a large number of students at the
institution make similar allegations. Finally, the Department has seen
that some institutions engage in widespread substantial
misrepresentations about the time it would take to complete an
educational program, including misrepresentations related to programs
that require completion of an externship or similar program, and
programs that are self-paced and rarely completed in the advertised
time. These institutions wrongly characterize the necessary pace or
time commitment, such as presenting program cost over four years when
it takes 5 years to finish under the schedule set by the institution.
Accordingly, the Department believes it is in the public interest to
include these additional misrepresentation elements because greater
enforcement and oversight of institutions' unlawful practices would
both ensure such behavior is investigated and ended more quickly and
provide borrowers with clearer regulations governing the borrower
defense discharge standards and, at least in some cases, better
evidence. Including these misrepresentations in the regulations would
also ensure that borrowers have more accurate information about the
costs of their programs.
We also propose changes to Sec. 668.74. In the course of
adjudicating borrower defense claims, the Department has persistently
seen misrepresentations about the employability of graduates. These
include job placement rate (JPR) misrepresentations, which are
reflected in Sec. 668.74. The Department is explicitly including, as a
form of JPR misrepresentation, placement rates that are inflated
through manipulation of data inputs. This would help ensure that
students have access to accurate information about the employability of
graduates and provide access to relief

[[Page 41892]]

when they do not. These additions highlight the Department's concerns
about how institutions calculate job placement rates, which students
often rely on in making an informed decision about enrolling in an
institution or program.
The Department sought input from negotiators as to whether our
proposed language addressed known examples of JPR manipulation and how
the proposed language could interact with existing placement rate
requirements used by accreditors and/or States. One negotiator
supported a required disclosure of information regarding graduate
employability but expressed concern that there is no standardized
metric for institutions to use. To be clear, the Department does not
propose to create a standardized JPR metric. Instead, we outline
examples of past problematic institutional JPR calculations because
they were misleading to students. These include institutions that, for
example, excluded students who were searching for work from the
denominator of the placement rate calculation if those students did not
conduct a job search in the exact manner set by the institution, or
published a JPR that included large numbers of students who obtained
employment well before graduating from the institution, many of whom
likely found such employment or were already employed even before
enrolling. These also include institutions that disclosed an employment
rate, as required by their State or accreditor, but calculated the rate
in a manner inconsistent with the applicable State or accreditor
methodology. Proposed Sec. 668.74 also contains a provision that
allows the Department to verify that an institution correctly
calculated its JPR; an institution must furnish to the Secretary
documentation and other data that was used to calculate the
institution's employment rate calculations.

Substantial Omission of Fact

The 2019 and 2016 regulations included an omission of fact as a
component within the definition of misrepresentation, meaning that
either false information provided or true information omitted could
give rise to an approved borrower defense claim.
The Department proposes to continue allowing omissions to give rise
to a borrower defense claim, but to expressly provide it in a separate
category by adding Sec. 668.75 to address substantial omissions of
fact. Doing so recognizes that omissions of fact have the same
misleading effect on borrowers as other forms of misrepresentation,
except that it occurs through the absence of information that would
otherwise have affected the borrower's decision to enroll or take out
loans. The Department proposes to list it separately from
misrepresentation to assist borrowers and institutions in better
understanding the Federal standard for initial adjudication, but
because it would remain closely tied to misrepresentation, we propose
adding it within subpart F.
The addition of more text to clarify an omission of fact allows the
Department to provide borrowers and institutions greater clarity about
what must be disclosed to avoid an omission of fact. The Department
proposes moving to ``substantial omission of fact'' in place of the
2019 treatment of omission of fact for the same reasons we are
proposing to shift from misrepresentation to substantial
misrepresentation as outlined above. Similar to substantial
misrepresentation, an omission of fact would be substantial if a
borrower would not have otherwise enrolled at the institution, obtained
a loan, or chosen that program. We believe that omissions of fact
should include a reliance requirement to identify whether an omission
is serious enough to have influenced a borrower's decision to enroll.
As with substantial misrepresentations, we propose to include a
presumption of reasonable reliance, which ensures that claims by
borrowers--who relied in fact on the omission--are not denied simply
because their applications fail to include the specific statement that
the borrower relied upon the omission. We propose to apply this
presumption of reasonable reliance to both individual and group claims.
The Department derives its definition of omission of fact, in part,
from the 2016 amendments to Sec. 668.71(c), where the Department
refers explicitly to the ways in which omissions are considered in the
regulations. See 81 FR at 76072. The Department also sought feedback
last year from negotiators on the parameters of omission of fact,
including a review of States' unfair, deceptive, and abusive acts or
practices (UDAP) laws. The Department also consulted with the FTC and
thoroughly analyzed Federal laws on UDAP that could help inform the
Department's formation of a definition of an omission of fact. The
Department consulted with FTC because of that agency's long-standing
enforcement work regarding unfair and deceptive acts and practices
under Sec. 5 of the Federal Trade Commission Act (FTC Act). After
considering the States' use of omission of fact in consumer protection
contexts, and the FTC's authorizing statute under the FTC Act, the
Department is proposing to adopt language that appears in similar forms
in Delaware, Illinois, Iowa, and New Jersey consumer laws. These States
have the most comprehensive language related to omission and state that
the ``concealment, suppression, or omission of any material fact with
intent that others rely upon such concealment, suppression, or
omission'' is an unlawful act.\10\ We propose to adopt, in part, that
concept of omission of fact, but without the elements of ``intent,''
which appears in all the states' statutes cited above; or ``knowing,''
which is only included in New Jersey's statute. As discussed earlier in
justifying the movement away from the 2019 definition of
misrepresentation that included a requirement that the borrower show
the institution had knowledge that a misrepresentation was false,
deceptive, or misleading or given with a reckless disregard for the
truth, the Department is concerned that it is unreasonable to expect a
borrower to be able to document the intent or knowledge possessed by an
institution. While there are circumstances where a borrower could
potentially meet this bar if the information provided by a recruiter,
such as placement rates, is different from information provided in
other public materials, the Department has seen to date that most
circumstances where an institution misrepresents student outcomes such
as placement rates it does so in such a way that all the public numbers
used are wrong and only the private internal numbers reflect the actual
results. That type of information would only be obtainable through some
way of accessing institutional employees or records, which is something
that takes years of work by Federal and State regulators to acquire.
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\10\ This language is taken from Delaware's definition of an
unlawful practice, but the phrasing is similar for the other states
with minor wording changes. Delaware Code Ann. Title 6, Sec. 2513
<a href="https://delcode.delaware.gov/title6/c025/sc02/index.html">https://delcode.delaware.gov/title6/c025/sc02/index.html</a>; 815
Illinois Comp. Stat. Ann. Sec. 505/2), from Ch. 121 1/2, par. 262,
<a href="https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2356&ChapterID=67">https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2356&ChapterID=67</a>; Iowa Code Sec. 714.16, et seq.
<a href="https://www.legis.iowa.gov/docs/code/714.16.pdf">https://www.legis.iowa.gov/docs/code/714.16.pdf</a>; New Jersey's
Consumer Fraud Act, New Jersey Statutes Annotated. 56:8-2 et seq.
<a href="https://www.njconsumeraffairs.gov/Statutes/Consumer-Fraud-Act.pdf">https://www.njconsumeraffairs.gov/Statutes/Consumer-Fraud-Act.pdf</a>.
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The 2019 regulations required that misrepresentations were those
``made with knowledge of its false, misleading, or deceptive nature or
with a reckless disregard for the truth'' (see 34 CFR 685.206(e)(3)).
Upon further consideration of these policies and their

[[Page 41893]]

implications both for borrowers and taxpayers, the Department does not
believe that misrepresentations or omissions that are made without
knowledge or a reckless disregard should be exempt from the
Department's oversight. Borrowers who relied on such
misrepresentations, even if they were made unintentionally, may still
have experienced the harm of attending a particular institution or
borrowing Federal student loans on the basis of untruths or omissions.
Similarly, institutions are not permitted under Section 487(c)(3) of
the HEA to make misrepresentations, even if unintentional. And an
unintentional omission of fact still can result in harm for the
borrower.
As proposed, the definition of omission of fact would include a
non-exhaustive list of examples that could amount to an omission of
fact in the borrower defense context. Examples include, but are not
limited to, concealing, suppressing, or failing to provide material
information regarding the entity that is actually providing the
educational instruction; the availability of slots, or requirements for
obtaining admission, in a program where the institution places students
in a preprogram at the time of enrollment; and factors that would
prevent an applicant, for reasons such as a prior criminal record or
preexisting medical condition, from qualifying to meet requirements
that are generally needed to be employed in the field for which the
training is provided. In its oversight and compliance work, the
Department has found some institutions omitted material information
about the nature of their educational programs that, if disclosed
upfront, could have resulted in a different outcome for the student and
forgone the need for a defense to repayment. The Department invites
comments on this proposed definition and whether the proposed
definition is sufficiently expansive to address known types of
omissions in which some institutions engage.
Finally, the Department believes that each of the proposed borrower
defense provisions discussed in this NPRM pertaining to
misrepresentation serves one or more important, related, but distinct,
purposes. Each of the requirements provides value to students,
prospective students, and their families; to the public, taxpayers, and
the Government; and to institutions separate from, and in addition to,
the value provided by the other requirements. In particular, we believe
that including more examples of misrepresentations in the regulations
would more accurately reflect the Department's experiences in
overseeing institutions; and would inform institutions about their
obligations, as well as provide clearer indications to borrowers about
what may constitute a borrower defense claim. If the Department is able
to cite to these additional regulatory provisions in its enforcement
work, it will also be able to protect taxpayer interests and end
unlawful behavior more quickly and effectively. To best serve these
purposes, we propose including an administrative provision in the
regulations to make clear that the regulations are designed to operate
independently of each other and to convey the Department's intent that
the potential invalidity of one provision should not affect the
remainder of the provisions.

Breach of Contract

The 2019 regulations removed breach of contract as an element that
could give rise to an approved borrower defense to repayment
application even though it was included in the 2016 regulation. The
2019 regulation argued that the majority of defense to repayment
applications submitted to the Secretary did not allege breach of
contract, concluding that the borrower defense standard should be
tailored to the types of claims borrowers alleged. See 84 FR 49810-12.
The 2019 regulations further rationalized that a standard breach of
contract claim was potentially overbroad, and thus inappropriate as a
basis for relief since it is not necessarily limited to the provision
of educational services.
With the benefit of reviewing additional borrower defense claims,
and considering additional input from negotiators, including a request
from a negotiator to be more definitive as to what constitutes breach
of contract,\11\ for the reasons discussed below the Department
believes that breach of contract should be restored as a part of the
Federal borrower defense standard. As an initial matter, the 2019
concern with overbreadth is inapplicable, because the Department
proposes to clarify in new Sec. 685.401(a) (the definition of
``borrower defense to repayment'') that an act or omission supporting a
borrower defense must be related to the making of a Direct Loan or the
provision of educational services for which the Direct Loan was
intended. With that appropriate qualification, inclusion of a breach of
contract is appropriate. As explained in 2016, breach of contract may
be an appropriate basis for borrower defense relief when an institution
fails to fulfill a specific contractual promise to provide certain
training or courses. 81 FR 39341 (June 16, 2016). Breach of other terms
of the contract that relate to the making of a Direct Loan or the
provision of educational services may also serve as an appropriate
basis for borrower defense relief. The Department would grant relief
commensurate with the specific contractual injury alleged. For example,
the Department is aware of students bringing loan-related breach of
contract claims against postsecondary institutions or for provisions of
educational services for which those loans were intended. See, e.g.,
Supplee v. Miller-Motte Bus. Coll., Inc., 768 S.E.2d 582 (N.C. Ct. App.
2015); Eckols et al. v. Earle et al., No. 2016CI18165 (37th Jud. Dist.,
Bexar County), Pltfs.' Orig. Pet., Applic. for TRO and Applic. for
Temp. Inj. at 10 (Oct. 18, 2016). This type of claim would clearly be
appropriate for borrower defense adjudication if the breach is related
to the making or provision of educational services intended for the
Direct Loan but may not fall under the other four elements of the
Federal standard depending on the nature of the contract and its
breach. Moreover, even if there is some overlap between the types of
conduct that would constitute a breach of contract and would otherwise
constitute a basis for a borrower defense claim, in some instances,
borrowers may be able to allege breach of contract claims more readily.
The Department would investigate and adjudicate claims related to
breaches of contract to determine whether a claim meets the
requirements for a defense to repayment.
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\11\ <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/nov3pm.pdf">https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/nov3pm.pdf</a>.
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Aggressive Recruitment

The Department is also proposing to add a new category related to
aggressive and deceptive recruitment to capture other types of acts it
believes should serve as a basis for a borrower defense claim. While
this category was not included in the 2019 regulation, the Department
considered aggressive recruitment as a factor in the 2016 regulations
in determining whether a misrepresentation was substantial enough to
merit approval. It was not, however, conduct that could lead to
approval on its own in that regulation. In other words, the conduct had
to be a substantial misrepresentation in the form of aggressive
recruitment to qualify for relief pursuant to the 2016 rule.
The Department first raised the proposal for aggressive and
deceptive recruitment during negotiated rulemaking. Some negotiators
agreed

[[Page 41894]]

with including aggressive recruitment as a basis of a borrower defense
claim and indicated that some institutions aggressively recruit certain
specific groups of vulnerable students, such as students who are older,
are the first in their families to attend postsecondary education, are
attending while working full-time and or caring for families, or who
come from low-income backgrounds. To date, the Department has received
applications from well over 100,000 borrowers who have made allegations
relating to admissions and urgency to enroll. This includes allegations
that institutions recruited students who lack the basic tools needed to
succeed in their courses, such as recruiting students for online
programs who have no access to the internet because they are homeless.
The Department has also seen institutions discourage students from
consulting family and friends for additional information if they raise
concerns about enrolling by calling them ``dreamkillers.'' And, it has
received allegations detailing situations where recruiters tried to
shame borrowers into enrolling by criticizing them for not providing
more for their families.
Because many existing State consumer protection laws include this
sort of claim in different forms, the Department reasoned that
including it in the Federal standard would ensure a more comprehensive
Federal standard and ensure equitable treatment for borrowers
regardless of where they live.
In developing its proposed definition of aggressive recruitment,
the Department incorporated negotiators' proposals and language from
the 2016 regulations. The Department also consulted with the FTC and
thoroughly analyzed Federal laws on UDAP. The Department consulted with
FTC because of that agency's long-standing enforcement work regarding
UDAP under Sec. 5 of the FTC Act. Similar to the Consumer Financial
Protection Bureau (CFPB) and other Federal banking regulators, the
Department remains convinced that UDAP can cause significant financial
injury to consumers, erode consumer confidence, and undermine the
financial marketplace. The FTC Act has also helped other Federal
banking regulators in crafting their oversight and enforcement
activities over UDAP. Thus, the Department believes that consulting
with the FTC which has applied its standards through case law, official
policy statements, guidance, examination procedures, and enforcement--
actions could help inform the Department's work regarding UDAP, to
include elements of aggressive recruitment.
Most negotiators supported the idea of including aggressive
recruitment in the Federal standard. Some negotiators, however,
expressed concern with the potential subjectivity of the concept and
the risk of sweeping in innocuous encouragement or other similar
recruiting contact by admissions representatives, enrollment management
professionals, or other contractors engaged by an institution. These
negotiators indicated that in the course of an admissions
representative's day-to-day work, contact with prospective students may
include something as simple as reminding them of a May 1 enrollment
deadline, and there was some concern that such a reminder may be
considered a form of aggressive recruitment. The Department believes
the clarity of this definition demonstrates that isolated instances of
well-intentioned recruiter behavior would not result in an approved
claim. Rather, this definition would capture the types of sustained and
aggressive behavior the Department has seen across more than 100,000
borrower defense applications.
The Department is proposing to include aggressive and deceptive
recruitment as its own category that could lead to an approved borrower
defense claim because it captures an important type of behavior that
the Department has seen institutions engage in where the way a borrower
is coerced into enrolling is so aggressive that even if the information
presented to them was accurate and without omissions the borrower is
not able to make a full and informed choice. The result of that is
often a borrower enrolling in a program that is not providing them what
they were expecting--such as a certificate in an allied health field
when they wanted to become a nurse--or comes at a price that they
cannot possibly afford and did not freely and fairly take on. The
Department has seen instances, discussed above, where these aggressive
recruitment tactics prevented or strongly discouraged students from
being able to make an informed choice. Other Federal regulators have
also seen instances where students were affected by aggressive
recruitment practices that played a role in borrowers' decisions to
take out private educational loans.\12\ Borrowers were told not to
worry about concerns that they voiced, such as whether they would
graduate or get a job. They were pressured to enroll either through
artificial time constraints (such as falsely claiming there were a
limited number of seats or the only opportunity to enroll would expire
in just a few days) or by exploiting the borrower's lack of experience
with higher education. Because the recruiter has greater information at
their disposal than the potential borrower and is acting in a position
of authority and power, the recruiter is in a position to influence the
prospective student's decision to enroll. In these circumstances, even
absent a misrepresentation, such as a falsified job placement rate, the
entire recruitment experience can impede the ability of the borrower to
understand and appreciate what they are signing up for and the
financial and educational implications of their decision.
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\12\ <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-for-profit-college-chain-itt-for-predatory-lending/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-for-profit-college-chain-itt-for-predatory-lending/</a>.
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The Department also thinks it is important to include aggressive
recruitment in order to clarify the interaction between what a
recruiter may tell a prospective student who later enrolls, and the
information the student may receive in written form. All institutions
are required to disclose various information (see Sec. Sec. 668.41,
668.47, and 668.164, among others) providing students with disclosures
and information when they enroll, including through course catalogs.
These printed or digital materials may contain factually accurate
statements that differ from what prospective students have been told by
a recruiter--such as a more accurate presentation of job placement
rates, the role of accreditation, the ability to transfer credit, or
other issues that would be important to prospective students and their
families. In responding to the allegations in borrower defense claims,
some institutions have asserted that written statements, even if buried
in material provided to the students, are sufficient to correct
inaccurate information from recruiters. The Department disagrees with
this view. As a practical matter, the recruiter is providing personal
support to the borrower. The recruiter is often the borrower's first
interaction and gateway to apply for and eventually obtain Federal
student aid, including Federal student loans. Even if the borrower
examines the written disclosures closely before enrolling, the
information from the recruiter may overshadow the disclosures.\13\
Given the information asymmetry between the recruiter and the borrower,
and that perceived relationship of trust, the aggressive tactics of the
institution may

[[Page 41895]]

themselves constitute a valid claim for borrower defense.
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\13\ <a href="https://www.help.senate.gov/imo/media/for_profit_report/PartI-PartIII-SelectedAppendixes.pdf">https://www.help.senate.gov/imo/media/for_profit_report/PartI-PartIII-SelectedAppendixes.pdf</a>.
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Moreover, the Department acknowledges that the statutory ban on
incentive compensation for recruiters or admissions employees has not
fully achieved the intended result which was to protect students from
the harms of aggressive recruitment. The incentive compensation rule
bans incentive payments to recruiters based on their enrollment success
because such payments might lead recruiters to mislead students in
order to earn a financial bonus. 20 U.S.C. 1094(a)(20). Aggressive
recruitment continues to proliferate in institutions as the pressure
for increased enrollment, and in turn, receipt of Federal student
assistance, drives institutions' continued use of such tactics. The
Department believes enrollment that stems from such tactics should
provide a path to an approved borrower defense claim as a form of
aggressive recruitment.
The Department is aware of instances where institutions will,
either directly or through a third party, falsely appear to help
individuals seeking Federal, State or local benefits. For example, in
the FTC's action against Career Education Corporation (CEC), CEC
obtained individuals' contact information from websites where the
institution presented itself, through lead generators, as a portal for
receiving other government benefits, such as unemployment insurance, or
for job seeking.\14\ These individuals unwittingly provided their
personal information to the lead generator believing submission of
their information was a portal for government benefits. Those
individuals, in some cases, later enrolled at the institution after
providing their information under the guise that they would obtain
government benefits. An individual could not reasonably be expected to
understand that such websites were lead generators that the institution
used to increase their enrollments.
---------------------------------------------------------------------------

\14\ Federal Trade Comm. v. Career Educ. Corp., et al., Case No.
1:19-cv-05739 (N.D. Ill. Eastern Dist. Oct. 9, 2019).
---------------------------------------------------------------------------

The Department considered including an aggressive recruitment
provision in the 2016 regulations, but at that time was concerned about
the potential difficulty of developing clear, consistent standards for
aggressive conduct. 81 FR at 39343. The 2016 regulations did, however,
include aggressive recruitment as an aggravating factor in determining
whether a borrower relied, or reasonably would have relied, on a
misrepresentation, an indication of the Department's degree of concern
about such behavior and its likelihood that borrowers' decisions would
be affected by it. Id. After five more years of receiving borrower
defense claims, and addressing concerns raised by non-Federal
negotiators during negotiated rulemaking,\15\ the Department is
confident that an appropriate standard can be articulated and enforced
in the borrower defense context and that such an element is a necessary
addition to address gaps in the Federal standard. Additionally, as
described above and through program reviews, audits, and other
investigations, the Department has seen that institutions engage in
aggressive tactics. Such tactics include imposing pressure on potential
students to make enrollment or loan decisions immediately, taking
advantage of a student's lack of understanding of the process, stifling
efforts for the borrower to consult with a third party, persistent and
unsolicited contact with a prospective student, and other actions under
which an institution exerts unreasonable pressure to induce a student
to enroll or obtain Federal student financial aid. These abuses have
been well documented and result in findings against the institution
under State or Federal laws,\16\ but they currently do not meet the
standards for a borrower defense claim. In light of the Department's
discovery of extensive acts of aggressive recruitment and the harm to
students, the Department is proposing to include aggressive recruitment
in the Federal borrower defense standard.
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\15\ <a href="https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/transc103pm.pdf">https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/transc103pm.pdf</a>.
\16\ See, for example, <a href="https://www.ftc.gov/news-events/news/press-releases/2019/08/operator-colorado-technical-university-american-intercontinental-university-will-pay-30-million">https://www.ftc.gov/news-events/news/press-releases/2019/08/operator-colorado-technical-university-american-intercontinental-university-will-pay-30-million</a>.
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The Department modeled the proposed aggressive recruitment
provision in part 668, subpart R, after the misrepresentation
regulations in part 668, subpart F, because the subpart F framework was
the most logical structure already in place: it had a definitions
section and outlined a non-exhaustive list of factors that could lead
to a misrepresentation. In defining the types of aggressive recruitment
under the subpart, Sec. 668.501, the Department balanced the need to
establish specific guidelines to curb institutions' exertion of
unreasonable pressure on prospective students with the need for general
standards that broadly cover other forms of aggressive recruitment.
Placing the standard for aggressive recruitment in its own subpart
instead of within borrower defense also would ensure the Department
applies consistent standards for aggressive recruitment across its
other oversight and compliance work, which could in turn result in an
approved borrower defense claim. Additionally, this increased oversight
and compliance may help to deter such behavior from institutions going
forward, helping to ultimately reduce the need for borrowers to submit
defense to repayment claims.
To ensure that institutions and the public have clear standards for
what constitutes aggressive recruitment, for purposes of borrower
defense, the Department seeks the public's input on how the Department
can identify the extent to which an institution engages in any form of
aggressive recruitment and the means to document this misconduct
through program reviews and audits. Policies and procedures that law
enforcement uses to curb these actions would be especially helpful. The
Department also provides a non-exhaustive list of acts that could
warrant an aggressive recruitment claim in proposed Sec. 668.501.
Finally, the Department believes that each of the proposed
provisions discussed in this NPRM pertaining to aggressive recruitment
serves one or more important, related, but distinct, purposes. Each of
the requirements provides value to students, prospective students, and
their families; to the public, taxpayers, and the Government; and to
institutions separate from, and in addition to, the value provided by
the other requirements. To best serve these purposes, we would include
this administrative provision in the regulations to make clear that the
regulations are designed to operate independently of each other and to
convey the Department's intent that the potential invalidity of one
provision should not affect the remainder of the provisions.

Judgments Against Institutions and Department Actions

In the 2016 regulations, the Department included as a basis for a
borrower defense claim a nondefault, contested judgment obtained
against an institution based on any State or Federal law, whether
obtained in a court or in an administrative tribunal of competent
jurisdiction. Under those regulations, the borrower has a defense to
repayment if the borrower was personally affected by the judgment; that
is, the borrower must have been a party to the case in which the
judgment was entered, either individually or as a member of a class
that obtained the judgment in a class action lawsuit, and the act or
omission must have pertained to the making of a Direct Loan or the
provision of educational services to the borrower. The Department
believes retention of

[[Page 41896]]

this provision is in the public interest for the reasons discussed
below.
We believe the Department did not fully consider the importance of
the lawsuits students brought against institutions when it removed this
provision in the 2019 regulation. Although judgments are not as common
as allegations of misrepresentation, they are a clear finding by a
court that the institution engaged in misconduct. See, e.g., Supplee v.
Miller-Motte Bus. Coll., Inc., 768 S.E. 2d 582 (N.C. Ct. App. 2015).
In its rationale to include a judgment against an institution as
part of the Federal standard, in 2016 the Department stated that
including judgment against an institution would allow for recognition
of State law and other Federal law causes of action, but would also
reduce the burden on the Department and borrowers of having to make
determinations on the applicability and interpretation of those laws.
See 81 FR 39340-41. To ensure that the scope of the judgment relates
only to borrower defense claims, the favorable judgment against an
institution would still be required to relate to the making of a
Federal student loan.
Finally, the Department proposes to include Departmental final
actions as part of a judgment against an institution standard.
Institutions that participate in the title IV programs sign a Program
Participation Agreement (PPA) with the Secretary. If the Secretary or
auditor identifies through Final Program Review Determination (FPRD) or
Final Audit Determination (FAD), for example, that an institution
breached its PPA, a borrower who was impacted by that final action
could have a defense to repayment claim.
It is important for the Department to consider all information
available to it, including its own prior investigation and oversight
work, to reach findings. FPRDs are not only the result of the
Department's own findings, but schools would have also had an
opportunity to respond to the findings therein. But more importantly,
where the Department has evidence that schools have engaged in conduct
that constitutes the basis for a borrower defense, the Department would
act on its own evidence rather than requiring borrowers to
independently produce this information, which is not available to them.

State Law Standard (Sec. Sec. 685.206, 685.222)

Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution a
borrower may assert as a defense to repayment of a Direct Loan,
notwithstanding any other provision of State or Federal law, except
that a borrower may not recover more from the Secretary than the amount
that the borrower has repaid on the loan.
Current Regulations: In the current regulations, three different
regulatory standards and limitations periods apply, depending on when a
borrower's loan was first disbursed:
<bullet> Loans first disbursed prior to July 1, 2017, are addressed
under the former 1994 borrower defense regulations in Sec. 685.206(c).
That section provides that a borrower may assert a defense to repayment
under applicable State law.
<bullet> Loans disbursed between July 1, 2017, and June 30, 2020,
are adjudicated under the former 2016 borrower defense regulations in
Sec. 685.222, which does not provide for any adjudications under
applicable State law.
<bullet> Loans disbursed on or after July 1, 2020, are adjudicated
under the current borrower defense regulations in Sec. 685.206(e),
which does not allow any adjudications under applicable State law.
Proposed Regulations: In proposed Sec. 685.401(b), a violation of
State law could form the basis for a borrower defense claim, but only
if the borrower, or a State requestor in the case of a group claim
brought by a State requestor, requests reconsideration of the
Secretary's denial of a claim.
Reasons: Achieving the goal of a uniform Federal standard that
could be applied to all claims pending or filed after July 1, 2023
requires crafting a regulation that covers all borrower defense claims
that are pending as of that date and claims that could be filed in the
future. However, claims filed under the 1994 regulation are based upon
violations of State law. To ensure that no borrower risks losing access
to the State law standard as a result of the uniform Federal standard,
the Department proposes allowing borrowers to seek reconsideration of a
claim under a State law standard if their initial claim is denied or
approved only for a partial discharge. This approach covers the range
of acts or omissions that the Department has determined should form a
basis for a valid borrower defense to repayment application. It also
ensures institutions are not unfairly subject to the costs of approvals
for conduct that occurred prior to this regulation by indicating that
the Department may only seek to recoup the cost of claims that would
have been meritorious under the borrower defense regulation that would
have been in effect at the time of the conduct that led to the
approval.

Limitations Period (Sec. Sec. 685.206, 685.222, & Part 668)

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, except that a borrower may not receive more relief than
the borrower has repaid.
Current Regulations: In the current regulations, three different
limitations periods apply, depending on when a borrower's loan was
first disbursed:
<bullet> Loans first disbursed prior to July 1, 2017, are addressed
under the former 1994 borrower defense regulations in Sec. 685.206(c).
The borrower may bring a claim at any point during the period in which
the loan is being collected.
<bullet> Loans disbursed between July 1, 2017, and June 30, 2020,
are adjudicated under the former 2016 borrower defense regulations in
Sec. 685.222. The borrower may bring such a claim at any time but may
only assert a right to recover amounts previously collected by the
Secretary on the grounds of that same breach of contract or substantial
misrepresentation within 6 years of the alleged breach or of the date
on which the substantial misrepresentation reasonably could have been
discovered.
<bullet> Loans disbursed on or after July 1, 2020, are adjudicated
under the current borrower defense regulations in Sec. 685.206(e),
which require borrowers to file a claim within 3 years from the date
the student is no longer enrolled at the institution to file a claim
with the Department.
Proposed Regulations: The Department proposes that borrowers with
outstanding loans would not be subject to a limitations period.
Reasons: The Department proposes to remove the limitations period
for a borrower to assert a borrower defense claim under these
regulations or to receive refunds of amounts previously paid on loans
still outstanding. This is a change from the 2019 regulation, which
required borrowers to file claims within 3 years of the date the
borrower left the institution. The 2019 regulation imposed this limit
primarily because of the time period institutions would be expected to
keep records. However, the U.S. District Court for the Southern
District of New York held that the 3-year limitations period for claims
that were subject to a collections proceeding (referred to in the 2019
regulation as ``defensive claims'') was not a logical outgrowth of the
rulemaking and

[[Page 41897]]

remanded that provision to the Department.\17\
---------------------------------------------------------------------------

\17\ New York Legal Assistance Group (``NYLAG'') v. Cardona,
Case No. 20-CV-1414 (S.D.N.Y. Mar. 17, 2021).
---------------------------------------------------------------------------

The Department believes removing any limitations period on loans
that are still outstanding is appropriate for several reasons. First,
as discussed in the section on record retention, the records limitation
discussed by the Department in the 2019 regulation relates to specific
financial aid records that are unlikely to be relevant to the
allegations most borrowers raise based upon what the Department has
seen in applications for borrower defense to date. Most borrower
defense applications to date relate to allegations around what an
institution promised during the recruitment process and how that
aligned with either the education the borrower ultimately received,
such as whether they were able to get a job, if they could transfer
credits, or if key data provided during the recruitment process such as
job placement rates were accurate. The typical financial aid records
that have a three-year retention requirement would not have any bearing
on those allegations since they do not include records of recruitment
activities, but rather cover items like the disbursement record of aid.
Similarly, the Department does not believe it would be appropriate to
set statutes of limitations on loans that are still outstanding the way
many State laws do by tying them to the date that a borrower knew or
could reasonably have been expected to know the misconduct occurred. As
noted in the 2019 regulation, properly enforcing such a statute of
limitations is administratively burdensome. It would entail information
that may not be included in a borrower's application and could also
rely on other factors such as when a State opened an investigation or
publicized its findings. Moreover, the concept of limitations tied to
when a borrower could reasonably have known about misconduct would not
align with the Department's proposal to allow group claims. Since one
of the purposes of a group claim is to not require an individual
application, the Department would not be receiving information from a
borrower about when they knew about misconduct.
The Department also considered whether it would be appropriate to
establish separate statutes of limitations for forgiving balances that
are still outstanding versus refunding amounts previously paid on loans
that are still outstanding. The Department does not believe it would be
appropriate to place a limitation on discharging remaining loan
balances. Since there is no statutory time limit on repayment or
collections activity, the Department does not want to create a
situation where a borrower is still obligated to repay a loan on which
the Department has concluded that the borrower should have received a
discharge due to the institution's misconduct solely because the
individual did not fill out an application in time. Such an approach is
not in keeping with any of the Department's other discharge
authorities, such as closed school discharge, false certification
discharges, or total and permanent disability discharges, none of which
require borrowers to apply for a discharge within a set period of time.
Similarly, the Department does not believe it would be appropriate
to set a separate statute of limitations for refunding amounts
previously paid on loans that are still outstanding. None of the
Department's other discharges limit the refunding of amounts previously
paid based on when a borrower applies, and the statute does not specify
a separate treatment for borrower defense. There are no limitations on
the issuing of refunds when a borrower receives a closed school
discharge. Other discharges limit refunds to the point at which the
borrower became eligible for the discharge, which is also not tied to
applying within a certain period. For false certification, refunds are
limited to the point after the borrower meets the eligibility criteria
for a discharge, though in essentially all cases this means refunding
all payments since most borrowers meet the eligibility criteria for a
discharge prior to taking out a loan. Similarly, a borrower may receive
refunds when approved for a TPD disability discharge back to the date
the borrower's eligibility for a discharge was established. Refunds for
PSLF and Income-Driven Repayment, meanwhile, are provided for payments
made beyond the 120, 240, or 300 qualifying payment threshold,
depending on the program. Finally, applying a statute of limitations
only to refunds of amounts paid would create significant operational
challenges for the Department.

Exclusions

[[Page 41898]]

educational services. See 84 FR at 49802, 49824. The Department
emphasizes that, although the current regulations and the proposed
regulations exclude a violation of civil rights as a basis for alleging
a borrower defense to repayment, the Department's Office for Civil
Rights (OCR) enforces several Federal civil rights laws related to
education, including Title VI of the Civil Rights Act of 1964, Title IX
of the Education Amendments of 1972, Section 504 of the Rehabilitation
Act of 1973, and Title II of the Americans with Disabilities Act of
1990. Individuals who believe that a recipient of Federal funds or a
public entity that is subject to Title II has violated these Federal
civil rights laws can file a complaint with OCR. OCR's authority
includes obtaining reimbursement of tuition and other costs for injured
parties when appropriate. The availability of this form of relief
encourages individuals to file promptly with OCR. The Department
believes that OCR's enforcement authority is better suited to
addressing civil rights harms than including them as a new basis for a
borrower defense to repayment.
The proposed regulations reflect these positions.

Group Process and Group Timelines

Statute: Section 455(h) of the HEA authorizes the Secretary to
specify in regulation which acts or omissions of an institution a
borrower may assert as a defense to repayment of a Direct Loan, except
that a borrower may not receive more relief than has been repaid.
Current Regulations: The current borrower defense regulations under
Sec. 685.206 require an individualized review of every borrower
defense application and thus do not permit a group review process.
Under the 2016 standard, Sec. 685.222(f) outlined a process for
evaluation of a group claim. Upon consideration of factors including,
but not limited to, common facts and claims, fiscal impact, and the
promotion of compliance by the institution or other title IV, HEA
program participant, the Department could initiate a process to
determine whether a group of borrowers identified by the Secretary, has
a borrower defense. Members of the group may be identified from
individual applications or from any other source. The Department may
consolidate applications that have common facts and claims and resolve
the borrowers' claims as group claims. The Department established
separate group process procedures with respect to loans made by
institutions that have closed in Sec. 685.222(g) and for those that
remain open in Sec. 685.222(h). The 1994 regulations did not specify a
group process, though the Department did employ a group process using
those regulations, including in granting a group claim for students who
attended American Career Institute in early 2017.
Proposed Regulations: The Department proposes two processes for
pursuing group claims in new Sec. 685.402. Under the first process, in
proposed Sec. 685.402(a) and (b), the Department reserves the right to
determine if a group of borrowers it identifies have a common defense
to repayment at the same institution, including multiple campuses of
the same institution. Under such a Department-initiated group process,
the Department would have the discretion to create a group based on any
of the following borrower defense basis: actions by the Federal
Government, State attorneys general or other State agencies/officials
or law enforcement activities; class action lawsuits related to
educational programs at one institution; or State or Federal judgments
against institutions awarded to several borrowers for reasons related
that could give rise to a defense to repayment claim; or a group of
individual borrower defense claims.
Under the second process, in proposed Sec. 685.402(c), the
Department may initiate a group process upon request from a State
requestor, on the condition that the State requestor submit an
application and other required information to the Department to
determine if it should form a group. Such an application ensures the
Department has a consistent and clear process for addressing requests
to form a group but does not confer the ability of the State requestor
to otherwise represent the group during the Department's process of
reviewing and adjudicating the claims. The Secretary would further be
able to consolidate multiple group applications related to the same
institution or institutions. The proposed provision would require the
Department to respond to a materially complete State requestor's
submission within 365 days. That response would indicate whether the
Department decided to form the requested group and, if not, would
provide the State requestor an opportunity to seek reconsideration of
the group formation decision. In both group processes, the Department
would include any individual claims submitted by a borrower under new
proposed Sec. 685.403 if that borrower is deemed part of the group.
That borrower's claim would then be treated as part of the group claim,
including with respect to timelines for adjudication.
If the Department agrees to form a group under this proposed
section, the Department would designate a Department official to
adjudicate the borrower defense claim.
For group claims, the Department proposes placing those loans in
forbearance if they are in repayment and stopping collection activity
if they are in default. While every effort would be made to identify
the group members during the initial group formation stage, in some
cases that may not be possible. Any borrower who was not initially
identified \18\ could opt into the group, however, and would be granted
forbearance or stopped collection, as appropriate. The Department would
retroactively apply forbearance or stopped collections to the loans of
any such borrower, and no other consequences would apply to any
borrower that the Department adds to a group after the group's initial
formation.
---------------------------------------------------------------------------

\18\ It may not be possible to initially identify the full
number of borrowers in every potential group due to data
limitations. For example, the Department does not have reliable data
on program-level enrollment prior to the 2015-16 financial aid award
year. That means the Department would not be able to accurately
identify all members of a group claim based on enrollment in a
specific program prior to that year. In situations where data
quality prevents the Department from identifying all group members,
for example, the Department would make every effort to identify all
members of the group and would reserve the opportunity for
individuals who the Department could not initially identify to be
included in an opt-in basis.
---------------------------------------------------------------------------

Reasons: Upon its review of all three borrower defense regulations
the Department believes it is better to return to allowing group
processes, as was permissible for more than two decades under the 1994
regulation and explicitly allowed under the 2016 regulation. The 2019
regulation excluded the ability to conduct a group process on the
grounds that each borrower defense claim had to be subject to a highly
individualized review. This included requiring a borrower to prove that
a misrepresentation was made with the knowledge that the statement was
false, deceptive, or misleading, or made with reckless disregard for
the truth. It also required the borrower to make an individualized
showing of harm. As already discussed under the Substantial
Misrepresentation and Omission of Fact section, the Department is
proposing to remove both of those requirements for a misrepresentation
out of concerns that expecting a borrower to prove knowledge of a
misrepresentation's falsity or disregard for the truth sets a bar that
would be essentially impossible for any reasonable individual to meet
because they are not going to have inside knowledge of the way an
institution was operating. Similarly, the

[[Page 41899]]

Department is concerned that the harm documentation as required in the
2019 regulation risks penalizing borrowers for success achieved
regardless of their education or to prove a level of employment
analysis best reserved for labor economists.
Removing these two components of the definition of a
misrepresentation allows the Department to then determine the effects
of a misrepresentation across a group of borrowers as opposed to an
individual approach. While the Department does not believe that every
instance of an alleged type of behavior that may result in an approved
claim should be reviewed for a group of borrowers, the flexibility to
do so when appropriate would result in a process that is more efficient
for borrowers, institutions, and the Department.
As discussed in the 2016 final regulations, Congress authorized the
Department to determine subordinate questions of procedure for borrower
defense cases, including but not limited to the scope and nature of
alleged acts or omissions that satisfy borrower defense requirements,
how to process borrower claims, and whether claims should be heard
successively or as a group. See 81 FR at 75965 (generally citing FCC v.
Pottsville Broad. Co., 309 U.S. 134, 138 (1940)). The Department thus
has general authority to adjudicate claims as a group.
The Department believes that, where appropriate, the most efficient
way to evaluate borrower defense claims is to jointly adjudicate the
claims of similarly situated borrowers that are based on common
evidence. This is consistent with how the Department has adjudicated
and approved claims to date under the 1994 and 2016 regulations.
Considering the applications of similarly situated borrowers as a group
rather than reviewing all of them individually allows addressing the
conduct that is often pervasive and affects many borrowers at once. At
the same time, a group process may benefit the institution by allowing
it to present its response to the same allegations by a group of
borrowers once rather than having to respond to numerous individual
claims.
The Department is mindful of the privacy of borrowers' financial
information. Under these proposed regulations, information about a
borrower's individual financial circumstances would not be shared with
other borrowers that are part of the group claim. Many negotiators
supported the Department's creation of a new group process for
considering borrower defenses to repayment claims. They asserted that
groups of borrowers who were all subject to the same act or omission by
an institution should have their defenses considered as a group, and
that a group process would be more efficient and result in more
equitable treatment of similarly situated borrowers.
In the 2016 regulations, the Department reserved the sole right to
form groups for purposes of borrower defense adjudication. Although the
Department welcomed cooperation and information from non-Federal
partners, including State attorneys general and legal assistance
organizations, the Department did not extend the right to request group
formation to these external entities. The Department's recent
experience with borrower defense, however, particularly the influx of
individual borrower defense applications, has convinced the Department
that State partners can provide critical assistance in assessing
borrower defense claims. For instance, every set of approved borrower
defense to repayment findings to date except for those at Marinello
Schools of Beauty and DeVry University was based at least in part on
evidence provided by a State attorney general. The Department has also
found that allowing for the formation of a group process without a
formal process for applications has led to confusion where States are
not told what would be useful information to submit and are not given a
timeline for a response. The more structured process would address this
confusion and make it easier for the Department to successfully
administer the borrower defense program. For these reasons, the
Department proposes to create a framework where ``State requestors''
may request the formation of a group borrower defense claim. This
process would allow requestors to share their evidence with the
Department. The requestors however would not represent the group in
Department proceedings and the Department would retain the sole
responsibility to adjudicate the claim.
The Department initially considered allowing legal assistance
organizations to also submit a group request and would have referred to
this process as a ``third-party group request.'' However, on further
consideration, the Department believes that it is best to limit this
process to State requestors. The Department has consistently and
repeatedly received information from States that played a key role in
approving borrower defense applications. This evidence often comes from
multi-year investigations that included the State entity obtaining
internal institutional records through its investigatory tools. To
date, the investigatory authorities granted to State attorneys general
have yielded the type of high-quality evidence that the Department
needs to fully evaluate a claim. Limiting this process to State
requestors also ensures the Department would administer this process by
working with a more limited group of entities. However, nothing in this
approach precludes legal assistance organizations from working with
State requestors and the Department encourages them to collaborate and
share any additional evidence they may possess that could be of use for
a group request.
To further ensure the potential effectiveness of group claims, the
Department would require that all State requestor group process
applications include several items to be considered materially
complete. These items include the necessary identifying information to
define the group, such as the institution, campus or campuses involved,
the time period, and the type of allegation. The Department also
proposes requiring that any group application contain evidence beyond
sworn borrower statements. While borrower statements are a crucial form
of evidence, the Department has found that additional evidence brought
by third parties such as training materials, internal communication,
statements of former staff of the institution, or evidence of policies
and procedures have been among the most effective ways of demonstrating
that conduct was widespread.
In accepting these group claim applications from State requestors,
the Department changes the position it took in the 2019 regulation, in
which it suggested that State attorneys general should work with their
own State authorizing and regulatory entities when they are concerned
about an institution rather than coming to the Department. While the
Department agrees that State attorneys general should pursue matters
within their own States as appropriate, failing to accept evidence that
may assist the Department in its own efforts to administer the borrower
defense program would be an unnecessary limiting of the triad of the
Department, States, and accreditors. While each part of the triad has
its own unique area of responsibilities, the whole system is more
effective when it engages in collaboration and information sharing;
and, it would be a disservice to students, institutions, and taxpayers
for the Department to ignore evidence it could easily obtain that would
help it make fair and accurate

[[Page 41900]]

determinations as to the validity of a borrower defense application.
Finally, the Department proposes that any individual claim filed
under new Sec. 685.403 that is also part of a group claim be
adjudicated with the group claim, to allow the Department to more
easily apply any additional evidence used to form the group to that
individual borrower's claim. If the group claim is ultimately denied,
individual claims that were included in a group would then be
adjudicated as individual claims. Treating an individual claim as part
of a group until the group process is concluded ensures that borrowers
are not subject to multiple simultaneous processes and the Department
believes this approach would give borrowers a greater likelihood of
approval.

Evidentiary Standard

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, except that a borrower may not recover from the Secretary
an amount in excess of the amount that the borrower has repaid.
Current Regulations: Under both the 2016 and 2019 borrower defense
regulations, the Department uses a preponderance of the evidence
evidentiary standard. The 1994 regulations do not include an
evidentiary standard.
Proposed Regulations: Under the proposed regulations, the
Department would continue the practice in the 2019 and 2016 regulations
of using a preponderance of the evidence standard in resolving
individual and group borrower defense claims, as set forth in proposed
Sec. 685.401(b).
Reasons: The Department believes that it is appropriate to use the
preponderance of the evidence standard to adjudicate all borrower
defense claims pending or filed after July 1, 2023. The adoption of
this standard is consistent with both the 2016 and 2019 regulations, as
well as the Department's practice in other proceedings regarding
borrower debt issues. See Sec. 34.14(b), (c) (administrative wage
garnishment); Sec. 31.7(e) (Federal salary offset). During negotiated
rulemaking sessions, the Department proposed to continue using the
preponderance standard, and almost all negotiators expressed support
for this position. One negotiator believed that the Department should
use a stricter clear and convincing evidentiary standard. The
Department declined to accept this suggestion as it would be a higher
bar than the Department uses for any other similar process, including
what is used in the 2016 and 2019 regulations.

Forms of Evidence

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, except that the borrower may not recover from the
Secretary an amount in excess of the amount that the borrower has
repaid.
Current Regulations: The 1994 regulations do not specify the types
of evidence acceptable to the Secretary in order to adjudicate a claim.
The 2016 and 2019 borrower defense regulations specified some types of
evidence that could be considered but did not address whether borrower
defense applications themselves (attestations from the affected
borrower) would be considered evidence.
Proposed Regulations: As to evidence the Department official might
consider in adjudicating a group claim, Sec. 685.406(b)(1)
specifically would permit consideration of: evidence submitted as part
of the group application; evidence submitted in connection with
individual claims that are part of the group; evidence within the
Department's possession; evidence or other information from the
institution; and other relevant information. The Department official
would also consider the group and individual applications as evidence.
Reasons: Under the proposed regulations, the Department would
consider information on the application (and other information appended
to the application package) as a form of evidence to foster a more
uniform and fair adjudication process. Because each borrower defense
claim will depend on the circumstances, the Department does not want to
provide an explicit list that limits what could constitute evidence.
Doing so might inadvertently exclude some type of evidence that is
relevant in some applications. Instead, the proposed regulations make
clear that the application itself, including the borrower's sworn
statement, is a form of evidence. The proposed regulations also list
other items that could be considered evidence, such as information
about the institution in the possession of the Secretary that are
material to the borrower defense claim, evidence or other information
provided by the institution during the institutional response process,
and any other relevant information that the Department official may
obtain to adjudicate the claim. Using a broader definition of evidence
would take any unique circumstances into account and would avoid
concerns that prior rules were not sufficiently clear that a borrower's
sworn statements are a form of evidence. Borrowers may often have
first-hand knowledge of the alleged act or omission, and the
information they furnish through a borrower defense application may
provide supporting evidence in areas that the Department does not
regularly review in a routine program review or audit.
The Department proposes in this NPRM to allow institutions to
provide other relevant information for the Department official's
consideration during the adjudication of the borrower defense claim,
because other information from the institution could help the
Department official determine the veracity of the borrower defense
claim and to ensure a fair process. The only exception to this process
would be for claims approved based upon final Secretarial actions,
which are other oversight and enforcement actions taken by the
Department for conduct that also could support a borrower defense claim
such as findings in a final program review determination that an
institution engaged in misrepresentations, or other actions to fine,
limit, suspend, or terminate an institution, and other actions that
result in a loss of title IV eligibility. In those cases, the
institution would have already had an opportunity to provide its
evidence to the Department through the appropriate processes.

Institutional Response Process

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, except that a borrower may not recover from the Secretary
an amount in excess of the amount that the borrower has repaid.
Current Regulations: The 1994 borrower defense regulations do not
include a process for an institutional response to a borrower defense
claim.
Under the 2016 regulations, the Department designates a Department
official to conduct a fact-finding process to adjudicate the borrower
defense claim and considers any additional information, including any
response or submission from the institution. The Department official
notifies the institution of the borrower defense application and of any
opportunity for the institution to respond. Upon request, the
Department will provide the borrower any available information about
the borrower defense claim

[[Page 41901]]

(including information that the Department has about the institution).
The 2019 borrower defense regulations at Sec. 685.206(e)(10)
contain a more detailed process. Upon receipt of a borrower defense to
repayment application, the Department notifies the institution of the
pending application and provides the institution with a copy of the
borrower's request and any supporting documents, a copy of any evidence
otherwise in the possession of the Secretary, and a release of
information signed by the student permitting the institution to provide
the Department with information from the student's education record
relevant to the defense to repayment claim to the institution. The
institution is given at least 60 days to respond, and the borrower is
given at least 60 days to reply to the institution's response.
Proposed Regulations: In proposed Sec. 685.405, the Department
proposes to continue to provide for an institutional response process
but to clarify the role of an institutional response in the
adjudication of a borrower's claim, give institutions more time to
respond, and ensure institutional responses are held to the same
standards as what is expected of borrowers. Under the proposed
regulations, the Department official would notify the institution of
the borrower defense claim, and the institution would have 90 days to
respond. With its response, the institution would be required to
execute an affidavit confirming that the information contained in the
response is true and correct under penalty of perjury, the same
requirements that are placed on the borrower's application. If the
institution fails to respond, the Department would presume that the
institution does not contest the allegations in the borrower defense
claim. If the institution has closed, the Department would use the best
contact information it has for the former owners or operators to notify
the institution of the claim and give it a chance to respond; however,
the Department would not continue to notify former owners or operators
after repeated instances of nonresponse. As discussed further below,
the limitations period would not apply if the Department provided
notification to the institution of a claim prior to the end of the
limitations period (see Time Limit for Recovery from Institutions
section).
Reasons: The Department believes it is vital to give institutions
an opportunity to respond to allegations in a borrower defense claim.
An institutional response would give the Department a more complete
record on which to evaluate the borrower's application. At the same,
the Department is concerned that prior regulations that included an
institutional response process did not provide sufficient clarity about
how the response would factor into the Department's adjudication
process. Nor did those prior regulations specify that responses would
be held to the same standards as the submission made by the borrower.
To timely adjudicate a claim, the Department proposes to give
institutions 90 days to respond. The Department chose to give
institutions 30 days beyond what was afforded in the 2019 regulation to
align it with the maximum response time afforded to institutions in the
program review process. This is a similar situation in which the
Department seeks feedback from an institution in response to identified
issues with its administration of the Federal financial aid programs.
Before issuing a Final Program Review Determination (FPRD), the
Department affords institutions an opportunity to respond to the
Program Review Report (PRR) in writing within 30 to 90 days (see 6-2 of
the 2017 Program Review Guide).\19\ The program review process bears a
lot of similarities to the borrower defense process. In both
situations, the Department reviews evidence related to an institution.
In the case of borrower defense, this comes from applications by a
borrower or State requestor or evidence in the Department's possession.
In the case of program reviews, it is based upon the Department's
review of the institution's student records, policies, and procedures.
For program reviews, the Department then seeks a response from the
institution to clarify or challenge the findings reached by the
Department. The institutional response process here fulfills a similar
role in giving the institution an opportunity to review the borrower
defense claim and provide its own evidence to the contrary.
Accordingly, giving institutions the same amount of time to respond to
a borrower defense application that they receive at the maximum for a
program review is reasonable. In addition to this initial institutional
response, the Department may seek additional information from an
institution later if it deems it necessary. The institution would also
have a separate opportunity to respond to a claim during any recoupment
proceeding.
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\19\ <a href="https://fsapartners.ed.gov/sites/default/files/attachments/programrevguide/2017ProgramReviewGuide.pdf">https://fsapartners.ed.gov/sites/default/files/attachments/programrevguide/2017ProgramReviewGuide.pdf</a>.
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Process Based on Prior Secretarial Actions

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, except that a borrower may not recover from the Secretary
an amount in excess of the amount that the borrower has repaid.
Current Regulations: The 1994 and 2016 borrower defense regulations
do not specifically provide for a process for adjudicating borrower
defense claims based on prior Secretarial actions, which are other
oversight and enforcement actions taken by the Department for conduct
that also could support a borrower defense claim. These include FPRDs;
actions to fine, limit, suspend, or terminate an institution; and other
actions that result in a loss of title IV eligibility. The fact-finding
adjudication process in Sec. 685.222(e)(3)(i) that is applicable in
both sets of regulations includes consideration of Department records,
however, which could include prior Secretarial actions, and so these
changes make clearer the process for considering prior Secretarial
actions rather than adding a new basis for a borrower defense claim.
The 2019 borrower defense regulations, Sec. 685.206(e)(9)(ii),
permit the Department to consider information in its possession, which
could include prior Secretarial actions, if the institution and the
borrower have an opportunity to review the evidence and submit
additional evidence.
Proposed Regulations: Proposed Sec. 685.404 would establish a
process by which the Department could consider prior final Secretarial
actions against an institution in the context of determining whether to
form and approve a group borrower defense claim. Such final action
could include a FPRD or final audit determination (FAD); an
institution's failure to meet the administrative capability
requirements that relate to the provision of educational services; an
institution's loss of eligibility due to, for example, a high cohort
default rate (CDR); a fine, limitation, suspension, or emergency action
relating to an institution's misrepresentation or aggressive
recruitment; or other final Departmental actions. Because any action
the Department would consider in this context is already ``final,'' the
institution would not have another opportunity to provide an additional
response to the allegations, beyond the ample opportunities already
afforded it

[[Page 41902]]

in the prior context, before the Department makes a decision on the
group claim.
Reasons: The Department conducts a significant amount of oversight
and compliance work to ensure compliance by institutions with various
accountability provisions in the HEA. Some of these actions may uncover
or relate to acts or omissions that also would provide a basis
approving borrower defense claims. These oversight and compliance
processes include multiple opportunities for institutions to appeal or
challenge the findings. In the context of a program review, for
example, an institution may respond to program review findings before
the Department issues a final determination. Similarly, institutions
have options for appealing actions to fine them or otherwise limit,
suspend, or terminate their participation in the Federal student aid
programs.
The Department proposes in Sec. 685.404 to codify a process that
better integrates such oversight and compliance work with borrower
defense adjudication, by allowing findings generated in the course of
other Departmental action to directly lead to the approval of borrower
defense claims. Doing so minimizes duplication of work for the agency
as well as the need for the institution to respond multiple times to
the same set of findings. For example, if an FPRD or FAD reveals that
an institution misrepresented job placement rates to students in a
particular program, the Department may use those FPRD or FAD findings
to form a group and eventually grant borrower defense discharges to
affected borrowers assuming the findings also give the Department
grounds to presume reasonable reliance for the members of the group. In
the case of findings based upon a FPRD or FAD, the institution will
have already had opportunities to respond to the findings before they
are final, as well as appeal any liabilities to the Office of Hearings
and Appeals as well as the Secretary. Because of those existing
response and appeal opportunities the institution would not be given an
additional opportunity to respond during the adjudication process.
Note that the group process determination is distinct from the
process of collecting the amount of discharged loans from an
institution, which is discussed below. If the Department initiated an
action to collect the amount of the discharged loans from the
institution, the institution would have the opportunity to explain why
it should not be liable. As also noted below, an institution would only
be subject to a recoupment action if the claim would have been approved
under the borrower defense regulation in place at the time the loans
that are being approved were disbursed. That means an institution would
not be subject to a recoupment action for loans disbursed prior to July
1, 2023, under this section unless those claims also would have been
approved under the 1994, 2016, or 2019 regulations, as applicable.

Record Retention

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. Moreover, Section 443 of GEPA (20 U.S.C. 1232f) provides
that each recipient of Federal funds under a Department program is
required to keep records that disclose ``the amount and disposition of
those funds,'' and to ``maintain such records for three years after the
completion of the activity for which the funds are used.
Current Regulations: The three sets of borrower defense regulations
are silent as to record retention periods, but since all the loan
programs eligible for borrower defense claims are derived from title IV
regulations, the record retention regulations for purposes of title IV
apply. This means an institution must retain certain records related to
the management of its financial aid program in accordance with the
timeframes prescribed in Sec. 668.24, which is generally three years
unless otherwise directed by the Secretary.\20\ The same provision also
contemplates longer retention periods, as appropriate, for all records
involved in any loan, claim, or expenditure questioned in connection
with a title IV, HEA audit. Any such records must be retained until the
later of the record retention period or until the questioned claim has
been resolved.
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\20\ As provided in 20 U.S.C. 1232f, each recipient of Federal
funds under a Department program is required to keep records that
disclose ``the amount and disposition of those funds,'' and to
``maintain such records for three years after the completion of the
activity for which the funds are used.''
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Proposed Regulations: The Department does not propose new record
retention periods.
Reasons: The Department believes that existing record retention
provisions are adequate. During negotiated rulemaking, some negotiators
expressed concern about whether the three-year retention requirement in
Sec. 668.24 was compatible with the potentially longer timeframes
contemplated for borrowers to submit borrower defense claims.
Negotiators were concerned that, if an institution no longer has access
to student records, it might be unable to adequately defend itself from
a borrower defense claim.
Current regulations establish a minimum for records retention, not
a maximum period. And, the Secretary has the discretion to order a
longer time as appropriate. In circumstances involving open claims,
moreover, the regulations require institutions to retain records until
the claim is resolved.
Moreover, the records affected by the three-year limitations period
are unlikely to be the most relevant records to a defense to repayment
claim. To date, approved defense to repayment claims have centered on
evidence related to institutional promises made to borrowers about the
ability to transfer credits or obtain a job, or how many former
students were successfully placed. The records supporting these types
of claims would likely be based on administrative training manuals,
marketing materials, call logs between admissions representative and
borrowers, internal secret shopping programs, and other centralized
documentation rather than the financial aid records of individual
borrowers which are covered by Sec. 668.24.
Other elements of the proposed regulations would protect
institutions from concerns about a lack of relevant records to respond
to a borrower's claim. First, institutions would not be subject to any
recoupment activity not related to a Federal or State judgment that
occurs outside of the 6-year limitations period, which is discussed
elsewhere in this NPRM. That means the institution would be aware of
any claim for which it might have to repay the Department within 6
years after the borrower's last attendance at the institution. Because
institutions would receive formal notification of the claims against
them through the institutional response process, they would be informed
about the effects of the tolling of the limitations period. This formal
notification would provide institutions with sufficient notice to
retain pertinent records while protecting taxpayers and the
Department's ability to recuperate funds from an institution.
Second, as noted elsewhere in this document, the Department would
not conduct a recoupment process against an institution for any claims
approved under this regulation that would not have been approved by the
relevant borrower defense regulation that was in place at the time the
loans associated with the approved claim were disbursed. That further
limits the likelihood that the lack of relevant records would result in
financial consequences for the institution.

[[Page 41903]]

Borrower Status During Adjudication

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. Furthermore, Section 432(a)(6) of the HEA authorizes the
Secretary to enforce, pay, compromise, waive, or release any right,
title, claim, lien, or demand, however acquired, including any equity
or any right of redemption (settlement and compromise authority).
Current Regulations: When a borrower files a borrower defense
claim, the 1994 and 2016 regulations in Sec. 685.222(e), and the 2019
borrower defense regulations in Sec. 685.206(e)(8), provide for
forbearance on any of the borrower's nondefaulted loans that are
associated with the borrower defense claim. The 1994 and 2016
regulations, in addition, cease collection activity on defaulted loans
that are associated with the borrower defense claim. The 2019
regulations do not include a pause on collections activity for
defaulted loans on which a borrower has submitted a defense to
repayment application.
Proposed Regulations: Proposed Sec. Sec. 685.402(d)(2) and
685.403(c)(3) would provide that, during adjudication of a borrower
defense claim, all of the borrower's title IV nondefaulted loans would
be placed in forbearance and all title IV loans in default would be
placed in stopped collection status, regardless of whether they are
associated with the borrower defense claim.
Reasons: The proposal to pause all a borrower's loans instead of
just those associated with the claim would align the regulations with
the practice the Department has used for borrowers who apply for other
types of discharges or forgiveness that have been in place for years
without material consequences. While the 2016 and 2019 regulations only
require the Department to pause loans associated with the borrower
defense claim, the Department has found that there are significant
issues with data accuracy related to who owned different institutions
at various points in time, as well as ensuring that enrollment and loan
data align. Servicers would also have to manually pause relevant loans,
adding another opportunity for error. The Department can ensure it only
discharges appropriate loans w

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