Issue Briefs

Borrower Defense

Under the Higher Education Act (HEA), a student loan may be forgiven under certain circumstances to include a borrower’s death or disability; closure of the school the borrower attended; public service over time; false certification by the institution the borrower attended; and certain institutional misconduct harmful to the student. The last of these is referred to as a borrower defense to repayment (borrower defense).

The ability of a student to submit a claim to the Department of Education if they believe, and have proof, that the institution they attended engaged in harmful misconduct can be found in Section 455(h) of the HEA. While the borrower defense provision had only been used a handful of times between 1995 and 2015, the collapse of Corinthian College, which harmed thousands of students, and the patchwork of state consumer protection laws gave the Department reason to establish more explicit borrower defense regulations. Prior regulations permitted a borrower defense based only on an act or omission of the institution that would give rise to a cause of action under applicable state law.

After holding a series of negotiated rulemaking sessions, the Department, under the Obama Administration, published an expanded final rule regarding borrower defense on November 1, 2016.  These final regulations were scheduled to be implemented on July 1, 2017.
 
However, the Department, under the Trump Administration, delayed the final regulations and began a new negotiated rulemaking process in an effort to rewrite the regulations to better align the policy with the Trump Administration’s vision. Initial public hearings were held in July 2017, and negotiated rulemaking panels were convened from November through February 2018.  Of particular note, the Department heeded NAICU's call to convene a subcommittee of specialists dedicated to reexamining the financial responsibility standards, as currently constructed.  The Subcommittee on Financial Responsibility met concurrent to the broader negotiated rulemaking panel leading to modest changes in the Financial Responsibility Standards to align with new accounting rules.

The Department released a Notice of Proposed Rulemaking (NPRM) on July 31, 2018. The Department received over 30,000 comments in response to the NPRM, but the process was halted due to court actions.  This delay meant the Trump Administration had to temporarily implement the final regulations from the Obama Administration on March 19, 2019.

Shortly after the Obama regulations went into effect, the Trump Administration pushed forward with releasing a new regulation on September 23, 2019.  This new Trump Administration rule went into effect on July 1, 2020.
 
As a result of this back and forth, the 2019 Trump Administration regulations apply to borrowers who took out a loan on or after July 1, 2020, while the 2016 Obama Administration regulations apply to borrowers who took out a loan on or after July 1, 2017, and before July 1, 2020. Previous borrowers live by earlier rules.  So, there are now three different sets of borrower defense regulations for various cohorts of borrowers (pre-2016 final regulations, 2016 final regulations, and 2019 final regulations).

Under the 2016 final regulations, borrower defense cases are based on "an act or omission of the school 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," under any of three mechanisms: (1) a judgment against the school; (2) a breach of contract with the student; or (3) substantial misrepresentation. Under the 2019 final regulations, borrower defense cases are based on: (1) a misrepresentation on the behalf of the institution attended by the borrower on which the borrower relied upon “in deciding to obtain a Direct Loan, or a loan repaid by the Direct Consolidation Loan” that directly relates to enrollment and educational services and (2) financial harm caused by the misrepresentation.

NAICU is generally supportive of the need for more explicit regulations to protect borrowers, but expressed concern about the 2016 final regulations that aspects of the then-proposed rule were too broad, especially pertaining to misrepresentation.  NAICU is committed to monitoring the impact of the 2019 final regulation on student loan borrowers and private, nonprofit institutions of higher education to ensure the equal and fair treatment of both parties. The Department is in the process of reviewing the current regulations regarding borrower defense through a negotiated rulemaking process, and is expected to issue a final regulation before November 1, 2022. 

About

Borrower defense is a long-existing, but previously rarely used, provision of law that enables students who have been defrauded by an institution to have their federal student loans forgiven.  Following the collapse of Corinthian College, borrower defense was implemented on a larger scale for the first time, forcing the Department of Education to develop more detailed regulations, including establishing a mechanism for seeking reimbursement from the institutions the borrowers whose loans were forgiven attended.  After a contentious rulemaking process, the Department issued proposed regulations in June 2016. The final regulation was published on November 1, 2016, with a July 1, 2017 implementation date scheduled by the Obama Administration. The Trump Administration delayed the implementation of the 2016 final regulations and issued a new set of final regulations that went into effect on July 1, 2020. 
 

History

Although a basis for borrower defenses has been in statute since the mid-1990s, until recently, only a handful of cases were brought for this reason and detailed regulations for implementation were never written.  The prior regulation stated only that a borrower may raise a defense to loan repayment because of an act or omission of the institution that would give rise to a cause of action under applicable state law. The need for detailed regulations on borrower defenses to loan repayment, however, became evident after Corinthian College collapsed in 2015, following a protracted dispute with the Department of Education over employment statistics required to be provided by the college. Thousands of students were adversely affected. With the assistance of consumer advocacy groups, applications for loan forgiveness for these students flooded the Department. In the absence of detailed regulations, the Department coped with this onslaught by appointing a “Special Master,” who reviewed applications individually, a slow and cumbersome process.  More recently, the Department established a Federal Student Aid Enforcement Office with duties that include the consideration of borrower defense claims. 

As a prelude to the regulations, negotiated rulemaking sessions were held in 2016.  These negotiations did not reach consensus, and thus the Department was able to write its own provisions.  In June 2016, the Department published the notice of proposed rulemaking (NPRM) and, after reviewing 10,000 comments, issued the final rule on November 1, 2016. The Trump Administration delayed the implementation of the 2016 final regulations and issued a new set of final regulations that went into effect on July 1, 2020. 

As of June 2021, the Department released quarterly report data indicating that more than 370,000 borrower defense to repayment applications have been submitted. Of those applications, 34% are pending a decision, including over 73,000 applications that are awaiting adjudication and over 54,000 applications that are pending notification. More than 94,000 applications were deemed eligible for borrower defense to repayment, a little over 137,000 applications were deemed ineligible, and the remaining applications were closed for other reasons.

  • Review areas of potential liability under the final borrower defense rules, including all campus recruitment and enrollment materials, for accuracy of claims in such areas as employment outcomes.
  •  Be aware of the financial responsibility triggers, especially those that could result in recalculation of an institution's financial responsibility composite score.

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