Department of Education issues notice of proposed rulemaking to provide borrower defense provisions

Lending Department of Education Student Lending

On July 25, the U.S. Department of Education (Department) issued a press release announcing a notice of proposed rulemaking that would apply to students who qualify for loan discharges in circumstances where a borrower was significantly misled or defrauded by the higher education institution they attended. Provisions under the proposed Institutional Accountability regulations include:

• instituting a “borrower defense to repayment adjudication process that is clear, consistent and fair to borrowers who were harmed by institutional misconduct”;
• replacing the existing state standard for adjudicating claims with a federal standard to provide a more expeditious review of student claims;
• encouraging students to seek remedies directly from institutions when misrepresentation has occurred;
• expanding the “closed school loan discharge” eligibility time period to 180 days from 120 days for students who have left an institution prior to its closure;
• ensuring that any mandatory arbitration requirements or class action lawsuits restrictions are explained in plain language to enable students to make informed enrollment decisions; and
• preventing guaranty agencies from charging borrowers a fee on defaulted loans if the loan goes into repayment within 60 days.

The Department also seeks public comment on whether borrower defense to repayment claims should be limited only to students in default instead of also allowing students to apply for forgiveness who remain in good financial standing. Additionally, the Department seeks comments on whether students should be held to a higher standard through the showing of “clear and convincing” evidence, rather than the lower legal “preponderance of the evidence” standard. The new plan would affect students who take out loans beginning July 1, 2019. Comments on the proposal are due 30 days after publication in the Federal Register.