PROPOSED DEFENSE TO REPAYMENT REGULATIONS 

PROTECT STUDENTS FROM MISLEADING AND DECEITFUL PRACTICES

The Obama Administration is proposing new protections for borrowers and taxpayers against fraud, 

deception, and other misconduct by postsecondary institutions. The proposed regulations would create

a clear, consistent, and transparent process for borrowers who have been harmed by their school’s 

misconduct to seek debt relief, along with new warnings to help students steer clear of poorly 

performing proprietary schools. The proposed regulations would also protect taxpayers by requiring 

schools to provide greater financial protection to the Federal government based upon early indicators of 

school financial distress. In addition, the proposed regulations include measures that would end the use 

of both so-called “pre-dispute, mandatory arbitration agreements” and of class action bans that prevent 

students from having their day in court. 

Corinthian Colleges Collapse Highlights the Need for New Rules of the Road

In May 2015, Corinthian Colleges, Inc. (Corinthian), a publicly traded company operating numerous 

postsecondary schools that in 2014 had enrolled over 70,000 students at more than 100 campuses 

nationwide, filed for bankruptcy. Corinthian collapsed under the weight of deteriorating finances and 

multiple federal and state investigations, one of which resulted in a finding by the Department that the 

college had misrepresented its job placement rates. After the closure of Corinthian, which included 

Everest Institute, Wyotech, and Heald College, the Department received thousands of claims for student 

loan debt relief from former Corinthian students. The Department is committed to ensuring that 

students harmed by Corinthian’s fraudulent practices receive the relief to which they are entitled under 

existing closed school and borrower defense regulations, which is why the Department appointed a 

Special Master in June of 2015 to create and oversee a process to provide debt relief to Corinthian 

borrowers who apply for Federal student loan discharges based on claims against their schools. An 

updated report from the Special Master on progress under that process will be released later this 

month.

The current Direct Loan borrower defense regulation has existed since 1995 but had rarely been used

prior to the collapse of Corinthian. As the Department applied the regulation to address the Corinthian 

claims, it became clear that significant changes were needed to better protect students and taxpayers. 

Accordingly, last September, the Department began a negotiated rulemaking process to clarify how 

Direct Loan borrowers who have claims against their institutions can seek relief and to strengthen 

provisions that will hold colleges accountable for their wrongdoing. Today, the Department is continuing 

that process by releasing proposed regulations to protect student loan borrowers from misleading, 

deceitful and predatory practices of, and failures to fulfill contractual promises by, institutions 

participating in the Federal student aid programs.

The Federal student aid programs are intended to provide all students with access to a high-quality 

postsecondary education that equips them with new knowledge and skills and prepares them for their 

careers. However, when postsecondary institutions make false and misleading statements to students 

or prospective students about their programs, such as student career outcomes or financing needed to 

pay for those programs, or fail to fulfill their promises, student loan borrowers affected by those actions 

may be eligible for discharge of their Federal loans. Current provisions in Federal law and regulations,

called "defenses to repayment" or "borrower defense," allow Federal student loan borrowers to receive 

a discharge of their Direct Loans if their colleges’ acts or omissions give rise to a State law cause of 

action. The regulations proposed today would simplify and strengthen those provisions.
The proposed regulations would: 

 Give borrowers access to clear, fair, and transparent processes to seek debt relief;

 Provide debt relief to borrowers without requiring individual applications in instances of 

widespread misrepresentations;

 Protect taxpayers by ensuring that financially risky institutions are prepared to take financial 

responsibility for government discharges of Federal student loans;

 Ensure that proprietary schools where students have poor repayment outcomes provide 

students with warnings, in plain language approved by the Department, so that students can 

make more informed enrollment and financing decisions;

 Ensure affected borrowers have information about and access to closed school discharge when 

schools close; and

 End the practice of schools forcing arbitration and preventing class actions.

Since taking office, the Obama Administration has worked to ensure that every qualified student in 

America has access to a quality, affordable college education that leads to a meaningful degree. Today’s 

proposal is the latest in a series of steps the Administration has taken to hold institutions accountable

and ensure students do not graduate with unmanageable debt. Among others, those efforts include 

issuing the landmark Gainful Employment regulations ending Federal student aid eligibility for career 

colleges that are not paying off for their students, establishing tougher regulations targeting misleading 

claims by colleges and incentives that drove sales people to enroll students through dubious promises, 

requiring States to step up their oversight through the state authorization regulation, creating a new 

Enforcement Unit to protect students and taxpayers from unscrupulous colleges, and pushing 

accreditors to take responsibility for ensuring quality student outcomes. In addition, the Administration 

has made historic investments to keep college within reach and to ensure that all student loan 

borrowers can cap their monthly payments at 10 percent of their income.

Summary of Major Provisions

Clear, Transparent Processes for Borrowers

These proposed regulations would put in place a borrower defense process that is clear,

understandable, and easily accessible for borrowers; that facilitates collection and review of evidence 

for deciding claims; and that ensures claims are processed efficiently, transparently, and fairly. The 

regulations would replace a complicated, uneven, and burdensome standard based on the application of 

the laws and procedures of the various States with a new Federal standard that would make relief 

available when there is:

 A breach of contractual promises between a school and its students;

 A favorable non-default contested State or Federal court judgment against a school related to 

the loan or the educational services for which the loan was made; 

 A substantial misrepresentation by the school about the nature of the educational program, the 

nature of financial charges, or the employability of graduates. The proposed regulations specify 

factors that, if present in conjunction with a misrepresentation on the part of the school, would 

likely elevate that misrepresentation to a substantial misrepresentation. Such factors would 

include:

o Demanding that the borrower make enrollment or loan-related decisions immediately;
o Placing an unreasonable emphasis on unfavorable consequences of delay;

o Discouraging the borrower from consulting an adviser, a family member, or other 

resource;

o Failing to respond to the borrower’s requests for more information, including about the 

cost of the program and the nature of any financial aid; or 

o Otherwise unreasonably pressuring the borrower or taking advantage of the borrower’s 

distress or lack of knowledge or sophistication. 

Opportunity for Group-wide Discharges

The proposed regulations would establish an important process for resolving claims based on conduct 

that harmed a group of borrowers. The Secretary could identify and provide relief to a group of 

borrowers from individually filed applications or from any other source of information, and could

include borrowers who may not have filed an application for relief, in the event that common facts and 

claims exist that apply to the group of borrowers. 

Student and Taxpayer Protections

Putting Financially Risky Colleges on the Hook for their Behavior

When colleges get into financial trouble or take actions that harm students they should be the ones held 

responsible for losses that arise on Federal student loans – not American taxpayers. The proposed

regulations would hold institutions accountable so that taxpayers are protected against schools at risk of 

financial failure. These provisions would help to mitigate the effects of a large-scale closure akin to the 

demise of Corinthian. Specifically, the proposed regulations would establish a number of triggering and 

early-warning events, many of which would automatically require schools to put up funds, in the form of 

letters of credit (LOCs), that total at least 10 percent of the amount of Title IV funds received by the 

school over the previous year. These funds could be used to cover the costs of borrower defense and 

related claims in the event they arise. Those triggers would include instances in which:

 A state or federal government entity such as an attorney general, the CFPB, or the FTC brings a 

major suit against the school;

 The school has a substantial number of outstanding borrower defense claims;

 The school defaults on its own debt obligations;

 The school fails the 90/10 non-Federal revenue requirement; 

 The school has more than half of its Gainful Employment students enrolled in programs that are 

not passing ED standards; 

 The school’s accreditor take an action that could result in the school losing its accreditation; or

 Other additional indicators of significant financial risk.

Early Warnings for Students

Institutions that set off the triggers described above would be required to warn their prospective and 

enrolled students that they’ve been required to provide this financial protection to the Department.

Additionally, proprietary institutions would be required to warn prospective and- enrolled students,

individually and through promotional materials, if their students have very poor loan repayment 

outcomes. Proprietary institutions are far more likely to have poor repayment rates, along with lower 

post-college earnings and higher default rates, than public or non-profit institutions, and pose the 

greatest risk to students and taxpayers. Therefore, proprietary institutions where the typical borrower 
has not paid down a single dollar of his or her loan balance within five years after leaving school, would 

have to warn students before they make significant decisions about college enrollment or borrowing.

Increased Access to Closed School Discharges

Many borrowers eligible for a closed school discharge do not apply. The Department is concerned that 

borrowers are unaware, as a result of insufficient outreach and information, that they may be eligible

for student loan debt relief. In some instances, the closing school might inform borrowers of the option 

to complete their program through a teach-out, but fail to advise them of the option for a closed school 

discharge. 

Currently, the Department sends those borrowers it identifies as potentially eligible for this relief an 

application and an explanation of the qualifications and procedures to obtain a closed school discharge. 

The proposed regulations would provide such information to borrowers earlier in the process, and 

would help to ensure that the borrowers receive accurate and complete information with regard to their 

eligibility for a closed school discharge, as well as provide for an automatic discharge for students who 

do not subsequently re-enroll at another school. With these changes:

 The Department would send closed school discharge applications and information to borrowers 

a second time, when their first loan payments are due;

 Schools with teach-out plans must also provide the application, as well as information on 

borrowers’ right to opt-out of the teach-out and instead receive a discharge; and

 Borrowers who were enrolled at a closing school and who have not re-enrolled at another

school within three years of that closure will automatically have their loans discharged.

Protections against Forced Arbitration

Recent history demonstrates the need to address bans by postsecondary institutions on both class

actions and individual lawsuits by borrowers that prevent them from having their day in court. Some 

schools have limited students’ ability to sue a school for wrongdoing by requiring students to agree to 

mandatory, pre-dispute arbitration as part of their enrollment agreements, or as a part of other 

agreements or documents. Corinthian included explicit class-action waiver provisions in enrollment 

agreements, and used those provisions, with mandatory pre-dispute arbitration clauses, to avoid class 

actions and individual lawsuits by students. If student class actions against Corinthian had been able to 

proceed, those actions could have compelled Corinthian to provide financial relief to the students and to 

change its practices while Corinthian was still a viable entity. Instead, affected borrowers with Direct 

Loans from attendance at any of the Corinthian schools are now only able to obtain relief by raising the 

schools’ misconduct as a defense to their Federal loans through the Department’s current borrower 

defense process.

The Department’s proposed regulations include measures to protect students from signing away their 

ability to sue. The proposal would end some of the most common abuses by:

Forbidding Schools from Forcing Students to Go It Alone

Unfair practices by colleges don’t just harm one student; they may well harm a large group. Class actions 

often offer the only feasible legal means for individuals to address wrongdoing given the cost of 

litigation and the small dollar amounts of individual students’ claims, but many schools require students 

to agree not to bring class claims. Under the proposal, schools will no longer be able to forbid class 

actions. 
Ending Day-in-Court Denials

The Obama Administration wants to empower students to seek relief directly from schools that break

the law. Some schools tuck clauses into enrollment agreements that block students from ever taking the 

school to court and instead force them to arbitrate their claims. The proposed rules allow students to 

pursue their claims in arbitration, but only if they choose to – not if they’re forced. 

Prohibiting Gag Rules 

College enrollment agreements can also be laden with other restrictions that silence students from 

voicing their concerns to authorities. The Department is concerned that some schools require students 

to first pursue an internal process before contacting accreditors and regulators about potential 

violations of the law. The proposal would bar this practice, while also providing more transparency on

the outcomes of arbitration by requiring schools to notify the Secretary when arbitration and judicial

claims are filed and the decisions and awards issued in arbitration and in court proceedings.

Other Provisions

Ensuring All Federal Student Loan Borrowers Have Access to Borrower Defense 

The proposed regulations would recognize Federal Family Education Loan (FFEL) and Perkins loan 

borrowers’ ability to receive borrower defense relief through Direct Consolidation Loans. The proposed 

regulations would also ensure that borrowers with FFEL Loans will have the same access to 

administrative forbearance as Direct Loan borrowers while their borrower defense claim is being 

evaluated. The proposed regulations would require lenders to grant a mandatory administrative 

forbearance for borrowers who have filed a borrower defense claim with the Secretary. 

False Certification

To provide loan discharge relief in instances where schools falsely certify their students’ high school 

diploma status, the proposed regulations would specify that a borrower qualifies for a false certification 

discharge if the borrower reported not having a high school diploma or its equivalent and did not satisfy 

applicable alternative to graduation from high school requirements. In these situations, the borrower 

would qualify for a false certification discharge if the school:

 Falsified the borrower’s high school graduation status; 

 Falsified the borrower’s high school diploma; or 

 Referred the borrower to a third party to obtain a falsified high school diploma. 

In addition, the proposed regulations would amend the regulatory provisions granting a false 

certification discharge without an application to include cases in which the Department has information 

in its possession showing that the school has falsified the Satisfactory Academic Progress (SAP) of its 

students.

The proposed regulations would also: 

 Expand the types of documentation that may be used for the granting of a discharge based on 

the death of the borrower (“death discharge”) in the Perkins, FFEL, Direct Loan, and TEACH 

Grant programs;

 Codify the conditions under which the discharge of a Direct Subsidized Loan will lead to the 

elimination or recalculation of a Subsidized Usage Period under the 150 Percent Direct 

Subsidized Loan Limit or the restoration of interest subsidy;
 Make technical corrections to the regulation that describes the authority of the Department to 

compromise, or suspend or terminate collection of, debts; 

 Make technical corrections to the regulations governing the Pay as You Earn (PAYE) and Revised

Pay as You Earn (REPAYE) repayment plans; 

 Allow for the consolidation of Nurse Faculty Loans; 

 Allow borrowers to obtain a Direct Consolidation Loan if the borrower consolidates at least one 

eligible loan; and 

 Clarify the conditions under which the capitalization of interest by FFEL Program loan holders is 

permitted. 

Public Comment Period

The 45-day public comment period for these proposed regulations will begin once they are published in 

the Federal Register.