Department of Education borrower has a defense to repayment on a loan

This Rule document was issued by the Department of Education (ED)

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Action

Final regulations.

Summary

The Secretary establishes new regulations governing the William D. Ford Federal Direct Loan (Direct Loan) Program to establish a new Federal standard and a process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school. We also amend the Direct Loan Program regulations to prohibit participating schools from using certain contractual provisions regarding dispute resolution processes, such as predispute arbitration agreements or class action waivers, and to require certain notifications and disclosures by schools regarding their use of arbitration. We amend the Direct Loan Program regulations to codify our current policy regarding the impact that discharges have on the 150 percent Direct Subsidized Loan Limit. We amend the Student Assistance General Provisions regulations to revise the financial responsibility standards and add disclosure requirements for schools. Finally, we amend the discharge provisions in the Federal Perkins Loan (Perkins Loan), Direct Loan, Federal Family Education Loan (FFEL), and Teacher Education Assistance for College and Higher Education (TEACH) Grant programs. The changes will provide transparency, clarity, and ease of administration to current and new regulations and protect students, the Federal government, and taxpayers against potential school liabilities resulting from borrower defenses.

Dates

These regulations are effective July 1, 2017. Implementation date: For the implementation dates of the included regulatory provisions, see the Implementation Date of These Regulations section of this document.

For Further Information Contact

For further information related to borrower defenses,

Barbara Hoblitzell at (202) 453-7583 or by email at: Barbara.Hoblitzell@ed.gov.

For further information related to false certification and closed school loan discharges,

Brian Smith at (202) 453-7440 or by email at: Brian.Smith@ed.gov.

For further information regarding institutional accountability,

John Kolotos or Greg Martin at (202) 453-7646 or (202) 453-7535 or by email at: John.Kolotos@ed.gov or Gregory.Martin@ed.gov.

If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.

PROTECTING STUDENT BORROWERS

On October 28, the Department announced final regulations to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct.  The agency began the negotiated rulemaking process after it received an unprecedented influx of borrower defense claims following the closure of Corinthian Colleges.  Previous regulations, promulgated in 1995, provided little detail on how borrowers could submit and how the Department would adjudicate claims.

The new regulations will protect borrowers and taxpayers and hold institutions accountable by:

  • giving borrowers access to clear, consistent, fair, and transparent processes to file claims;
  • empowering the Secretary to provide debt relief to borrowers without requiring individual applications in cases of widespread misrepresentations;
  • safeguarding taxpayers by ensuring financially troubled institutions provide the government with protection against the risks they create and holding institutions whose actions lead to discharges of federal student loans responsible;
  • helping students make more informed decisions by requiring proprietary schools with poor loan repayment outcomes to include a plain-language warning in their advertising and promotional materials;
  • making sure affected borrowers have information about loan discharge when institutions close and access to an automated process; and
  • banning institutions from inducing students to sign pre-dispute arbitration agreements waiving their rights to go to court and bring class action lawsuits based on borrower defense claims.

All provisions of the regulations (summary), with the exception of those the agency opts to designate for early implementation, will take effect on July 1, 2017 (press release).

Following requests from bipartisan members of Congress, the Department also announced its plans to restore semesters of Pell Grant eligibility for qualified students who were unable to complete their programs because their institution closed.  This initiative is important because students have a limited number of semesters in which they can receive Pell Grants to continue and complete their education.  In 2012, Congress reduced the maximum lifetime eligibility to 12 semesters — and applied it to all students.

Additionally, the Department’s Borrower Defense Unit published its first periodic report, taking over responsibilities that had previously been assigned to a special master.  The report provides updated data on borrower defense claims received and announces the approval of more than 11,000 new claims based on agency findings concerning Corinthian Colleges’ misleading job placement claims.  To date, over 15,000 claims have been approved, with a combined outstanding loan balance of more than $247 million.

In other news, the Department’s Office of Federal Student Aid (FSA) issued the next phase of its procurement to acquire a single servicing platform to support the management of loan repayment for borrowers with student loan debt serviced by the agency.  The solicitation outlines the specific requirements the selected contractor must fulfill when developing the servicing platform.  The new system will lay the foundation for upcoming contract actions.  A July servicing memo has been updated to clarify that customer service providers should be allocated borrowers accounts that reside on the single platform based on performance as evaluated against specific outcomes measures.  Upon full implementation of the vision, no single vendor will be responsible for performing every aspect of student loan servicing (press release).

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