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DEPARTMENT OF EDUCATION 

34 CFR Parts 30, 668, 674, 682, 685, and 686 

RIN 1840-AD19 

[Docket ID ED-2015-OPE-0103]

Student Assistance General Provisions, Federal Perkins Loan 

Program, Federal Family Education Loan Program, William D. 

Ford Federal Direct Loan Program, and Teacher Education 

Assistance for College And Higher Education Grant Program 

AGENCY: Office of Postsecondary Education, Department of 

Education. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Secretary proposes to amend the 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 propose to also amend the Direct Loan Program 

regulations by prohibiting participating schools from using 

certain contractual provisions regarding dispute resolution 

processes, such as mandatory pre-dispute arbitration 

agreements or class action waivers, and to require certain 

notifications and disclosures by schools regarding their

use of arbitration. We propose to also amend the Direct 

Loan Program regulations to codify our current policy 

Note: The official version of this document is the document published in the Federal Register. 

This document will be published in the Federal Register on June 16, 2016.
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regarding the impact that discharges have on the 150 

percent Direct Subsidized Loan Limit. We also propose to 

amend the Student Assistance General Provisions regulations 

to revise the financial responsibility standards and add 

disclosure requirements for schools. Finally, we propose 

to 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 proposed 

changes would 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: We must receive your comments on or before [INSERT 

DATE 45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL 

REGISTER].

ADDRESSES: Submit your comments through the Federal 

eRulemaking Portal or via postal mail, commercial delivery, 

or hand delivery. We will not accept comments submitted by 

fax or by email or those submitted after the comment 

period. To ensure that we do not receive duplicate copies, 

please submit your comments only once. In addition, please 

include the Docket ID at the top of your comments. 
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If you are submitting comments electronically, we 

strongly encourage you to submit any comments or 

attachments in Microsoft Word format. If you must submit a 

comment in Portable Document Format (PDF), we strongly 

encourage 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 U.S. 

Department of Education (the Department) to electronically 

search and copy certain portions of your submissions.

• Federal eRulemaking Portal: Go to 

www.regulations.gov to submit your comments electronically. 

Information on using Regulations.gov, including 

instructions for accessing agency documents, submitting 

comments, and viewing the docket, is available on the site 

under “Help.”

• Postal Mail, Commercial Delivery, or Hand Delivery: 

The Department strongly encourages commenters to submit 

their comments electronically. However, if you mail or 

deliver your comments about the proposed regulations, 

address them to Jean-Didier Gaina, U.S. Department of 

Education, 400 Maryland Ave., SW, room 6W232B, Washington, 

DC 20202. 
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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 www.regulations.gov. Therefore, commenters 

should be careful to include in their comments only 

information that they wish to make publicly available. 

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. 

SUPPLEMENTARY INFORMATION: 

Executive Summary:

 Purpose of This Regulatory Action: 

The purpose of the borrower defense regulation is to 

protect student loan borrowers from misleading, deceitful,
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and predatory practices of, and failures to fulfill 

contractual promises by, institutions participating in the 

Department’s student aid programs. Most postsecondary 

institutions provide a high-quality education that equips

students 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 school or career 

outcomes or financing needed to pay for those programs, or 

fail to fulfill specific contractual promises regarding 

program offerings or educational services, student loan 

borrowers may be eligible for discharge of their Federal 

loans. 

The proposed regulations would give students access to 

consistent, clear, fair, and transparent processes to seek 

debt relief; protect taxpayers by requiring that 

financially risky institutions are prepared to take 

responsibility for losses to the government for discharges 

of and repayments for Federal student loans; provide due 

process for students and institutions; and warn students, 

using plain language issued by the Department, about 

proprietary schools at which the typical student 

experiences poor loan repayment outcomes--defined in these 

proposed regulations as a proprietary school with a loan
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repayment rate that is less than or equal to zero percent, 

which means that the typical borrower has not paid down at 

least a dollar on his or her loans--so that students can 

make more informed enrollment and financing decisions.

Section 455(h) of the Higher Education Act of 1965, as 

amended (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. Current regulations at 

§685.206(c) governing defenses to repayment have been in 

place since 1995 but, until recently, rarely used. Those

regulations specify that a borrower may assert as a defense 

to repayment any “act or omission of the school attended by 

the student that would give rise to a cause of action 

against the school under applicable State law.” 

In response to the collapse of Corinthian Colleges

(Corinthian) and the flood of borrower defense claims 

submitted by Corinthian students stemming from the school’s 

misconduct, the Secretary announced in June 2015 that the 

Department would develop new regulations to establish a 

more accessible and consistent borrower defense standard 

and clarify and streamline the borrower defense process to

protect borrowers and improve the Department’s ability to
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hold schools accountable for actions and omissions that 

result in loan discharges. 

Consistent with the Secretary’s commitment, we propose

regulations that would specify the conditions and processes

under which a borrower may assert a defense to repayment of 

a Direct Loan, also referred to as a “borrower defense,”

based on a new Federal standard. The current standard 

allows borrowers to assert a borrower defense if a cause of 

action would have arisen under applicable state law. In 

contrast, the new Federal standard would allow a borrower 

to assert a borrower defense on the basis of a substantial 

misrepresentation, a breach of contract, or a favorable, 

nondefault contested judgment against the school for its 

act or omission relating to the making of the borrower’s 

Direct Loan or the provision of educational services for 

which the loan was provided. The new standard would apply 

to loans made after the effective date of the proposed 

regulations. The proposed regulations would establish a 

process for borrowers to assert a borrower defense that 

would be implemented both for claims that fall under the 

existing standard and for later claims that fall under the 

new, proposed standard. In addition, the proposed 

regulations would establish the conditions or events upon 

which an institution is or may be required to provide to 
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the Department financial protection, such as a letter of 

credit, to help protect students, the Federal government, 

and taxpayers against potential institutional liabilities.

The Department also proposes a regulation that would 

prohibit a school participating in the Direct Loan Program 

from requiring, through the use of contractual provisions 

or other agreements, arbitration to resolve claims brought 

by a borrower against the school that could also form the 

basis of a borrower defense under the Department’s 

regulations. The proposed regulations also would prohibit 

a school participating in the Direct Loan Program from 

obtaining agreement, either in an arbitration agreement or 

in another form, that a borrower waive his or her right to 

initiate or participate in a class action lawsuit regarding 

such claims and from requiring students to engage in 

internal institutional complaint or grievance procedures 

before contacting accrediting or government agencies with 

authority over the school regarding such claims. The 

proposed regulations also would prohibit a school 

participating in the Direct Loan Program from requiring, 

through the use of contractual provisions or other 

agreements, arbitration to resolve claims brought by a 

borrower against the school that could also form the basis 

of a borrower defense under the Department’s regulations.
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The proposed regulations would also impose certain 

notification and disclosure requirements on a school 

regarding claims that are voluntarily submitted to 

arbitration after a dispute has arisen.

Summary of the Major Provisions of This Regulatory 

Action: For the Direct Loan Program, we propose new 

regulations governing borrower defenses that would--

 Clarify that borrowers with loans first disbursed 

prior to July 1, 2017, may assert a defense to repayment 

under the current borrower defense State law standard;

 Establish a new Federal standard for borrower 

defenses, and limitation periods applicable to the claims 

asserted under that standard, for borrowers with loans 

first disbursed on or after July 1, 2017;

 Establish a process for the assertion and 

resolution of borrower defense claims made by individuals;

 Establish a process for group borrower defense 

claims with respect to both open and closed schools, 

including the conditions under which the Secretary may 

allow a claim to proceed without receiving an application;

 Provide for remedial actions the Secretary may 

take to collect losses arising out of successful borrower 

defense claims for which an institution is liable; and
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 Add provisions to schools’ Direct Loan program 

participation agreements that, for claims that may form the 

basis for borrower defenses--

 Prevent schools from requiring that students 

first engage in a school’s internal complaint process 

before contacting accrediting and government agencies about 

the complaint; 

 Prohibit the use of mandatory pre-dispute 

arbitration agreements by schools;

 Prohibit the use of class action lawsuit waivers; 

and

 To the extent schools and borrowers engage in 

arbitration in a manner consistent with applicable law and 

regulation, require schools to disclose to and notify the 

Secretary of arbitration filings and awards.

The proposed regulations would also revise the Student 

Assistance General Provisions regulations to--

 Amend the definition of a misrepresentation to 

include omissions of information and statements with a 

likelihood or tendency to mislead under the circumstances. 

The definition would be amended for misrepresentations for 

which the Secretary may impose a fine, or limit, suspend, 

or terminate an institution’s participation in title IV,
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HEA programs. This definition is also adopted as a basis 

for alleging borrower defense claims for Direct Loans first 

disbursed after July 1, 2017;

 Clarify that a limitation may include a change in 

an institution’s participation status in title IV, HEA 

programs from fully certified to provisionally certified; 

 Amend the financial responsibility standards to 

include actions and events that would trigger a requirement 

that a school provide financial protection, such as a 

letter of credit, to insure against future borrower defense 

claims and other liabilities to the Department;

 Require proprietary schools with a student loan 

repayment rate that is less than or equal to zero percent 

to provide a Department-issued plain language warning to 

prospective and enrolled students and place the warning on 

its Web site and in all promotional materials and 

advertisements; and

 Require a school to disclose on its Web site and 

to prospective and enrolled students if it is required to 

provide financial protection, such as a letter of credit, 

to the Department.

The proposed regulations would also--
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 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;

 Revise the Perkins, FFEL, and Direct Loan closed 

school discharge regulations to ensure borrowers are aware 

of and able to benefit from their ability to receive the 

discharge;

 Expand the conditions under which a FFEL or 

Direct Loan borrower may qualify for a false certification 

discharge; 

 Codify the Department’s current policy regarding 

the impact that a discharge of a Direct Subsidized Loan has 

on the 150 Percent Direct Subsidized Loan Limit; and

 Make technical corrections to other provisions in 

the FFEL and Direct Loan Program regulations and to the 

regulations governing the Secretary’s debt compromise 

authority. 

Please refer to the Summary of Proposed Changes

section of this notice of proposed rulemaking (NPRM) for 

more details on the major provisions contained in this 

NPRM.
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Costs and Benefits: As further detailed in the 

Regulatory Impact Analysis, the benefits of the proposed 

regulations include: (1) an updated and clarified process 

and the creation of a Federal standard to streamline the 

administration of the borrower defense rule and to increase 

protections for students as well as taxpayers and the 

Federal government; (2) increased financial protections for 

the Federal government and thus for taxpayers; (3) 

additional information to help students, prospective 

students, and their families make educated decisions based 

on information about an institution’s financial soundness 

and its borrowers’ loan repayment outcomes; (4) improved 

conduct of schools by holding individual institutions 

accountable and thereby deterring misconduct by other 

schools; (5) improved awareness and usage, where 

appropriate, of closed school and false certification 

discharges; and (6) technical changes to improve the 

administration of the title IV, HEA programs. Costs 

include paperwork burden associated with the required 

reporting and disclosures to ensure compliance with the 

proposed regulations, the cost to affected institutions of

providing financial protection, and the cost to taxpayers 

of borrower defense claims that are not reimbursed by 

institutions.
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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 identify 

clearly the specific section or sections of the proposed 

regulations that each of your comments addresses, and 

provide relevant information and data whenever possible, 

even when there is no specific solicitation of data and 

other supporting materials in the request for comment. We 

also urge you to arrange your comments in the same order as 

the proposed regulations. Please do not submit comments 

that are outside the scope of the specific proposals in 

this NPRM, as we are not required to respond to such

comments. 

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 the proposed regulations by 
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accessing Regulations.gov. You may also inspect the 

comments in person at 400 Maryland Ave., SW., Washington, 

DC, between 8:30 a.m. and 4:00 p.m., Washington, DC time, 

Monday through Friday of each week except Federal holidays. 

To schedule a time to inspect comments, please contact one 

of the persons listed under FOR FURTHER INFORMATION 

CONTACT. 

Assistance to Individuals with Disabilities in Reviewing 

the Rulemaking Record: On request, we will provide an 

appropriate 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 the proposed regulations. To schedule an appointment

for this type of accommodation or auxiliary aid, please 

contact one of the persons listed under FOR FURTHER

INFORMATION CONTACT. 

Background

The Secretary proposes to amend §§30.70, 668.14, 

668.41, 668.71, 668.90, 668.93, 668.171, 668.175, 674.33, 

674.61, 682.202, 682.211, 682.402, 682.405, 682.410, 

685.200, 685.205, 685.206, 685.209, 685.212, 685.214, 

685.215, 685.200, 685.220, 685.300, 685.308, and 686.42 of 

title 34 of the Code of Federal Regulations (CFR), and also 

to add new §§668.176, 685.222, 685.223, and 685.310 to that 
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title. The regulations in 34 CFR part 30 pertain to Debt 

Collection. The regulations in 34 CFR part 668 pertain to 

Student Assistance General Provisions. The regulations in 

34 CFR part 674 pertain to the Perkins Loan Program. The 

regulations in 34 CFR part 682 pertain to the FFEL Program. 

The regulations in 34 CFR part 685 pertain to the Direct 

Loan Program. The regulations in 34 CFR part 686 pertain 

to the TEACH Grant Program. We are proposing these 

amendments to: (1) specify that the standards used to 

identify an act or omission of a school that provides the 

basis for a borrower defense will depend on when the Direct 

Loan was first disbursed; (2) establish a new Federal 

standard and limitation periods that the Department will 

use to identify an act or omission of an institution that 

constitutes a borrower defense; (3) establish the 

procedures to be used for a borrower to initiate a borrower 

defense; (4) establish the standards and certain procedures 

that the Department would use to determine the liability of 

an institution for the amount of relief arising from a 

borrower defense; (5) prohibit schools’ use of mandatory 

pre-dispute arbitration agreements or class action bans to 

resolve disputes for claims that could also form the basis 

of borrower defense claims or require borrowers to waive 

any rights to initiate or participate in class actions 
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regarding such claims; and impose certain notification and 

disclosure requirements relating to a school’s use of 

arbitration; (6) establish the conditions or events upon 

which an institution is or may be required to provide to 

the Department financial protection, such as a letter of 

credit, to help protect the Federal government, and thus 

taxpayers, against potential institutional liabilities; (7) 

require a proprietary institution with a student loan 

repayment rate that is less than or equal to zero percent 

to place a Department-issued plain language warning on its 

Web site and in advertising and promotional materials, as 

well as to provide the warning to prospective and enrolled 

students; (8) require that a school disclose to prospective 

and enrolled students if it is required to provide 

financial protection to the Department; (9) expand the 

allowable documentation that may be submitted to 

demonstrate eligibility for a death discharge of a title 

IV, HEA loan or a TEACH Grant service obligation; (10) 

revise the closed school discharge regulations to ensure 

borrowers are aware of and able to benefit from their 

ability to receive the discharge; (11) expand the 

eligibility criteria for the false certification loan 

discharge; (12) make technical corrections to the 

regulation that describes the authority of the Department 
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to compromise, or suspend or terminate collection of,

debts; (13) make technical corrections to the regulations 

governing the Pay as You Earn (PAYE) and Revised Pay as You 

Earn (REPAYE) repayment plans; (14) allow for the 

consolidation of Nurse Faculty Loans; (15) allow borrowers 

to obtain a Direct Consolidation Loan if the borrower 

consolidates at least one of the eligible loans listed in 

§685.220(b); (16) clarify the conditions under which the 

capitalization of interest by FFEL Program loan holders is 

permitted; and (17) 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.

Public Participation

On August 20, 2015, we published a notice in the 

Federal Register (80 FR 50588) announcing our intent to 

establish a negotiated rulemaking committee under section 

492 of the HEA to develop proposed regulations for 

determining which acts or omissions of an institution of 

higher education (“institution” or “school”) a borrower may 

assert as a borrower defense under the Direct Loan Program 

and the consequences of such borrower defenses for 

borrowers, institutions, and the Secretary. We also 
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announced two public hearings at which interested parties 

could comment on the topic suggested by the Department and 

suggest additional topics for consideration for action by 

the negotiated rulemaking committee. The hearings were 

held on--

September 10, 2015, in Washington, DC; and

September 16, 2015, in San Francisco, CA. 

Transcripts from the public hearings are available at 

www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.ht

ml. 

We also invited parties unable to attend a public 

hearing to submit written comments on the proposed topics 

and to submit other topics for consideration. Written 

comments submitted in response to the August 20, 2015, 

Federal Register notice may be viewed through the Federal 

eRulemaking Portal at www.regulations.gov, within docket ID 

ED-2015-OPE-0103. Instructions for finding comments are 

also available on the site under “How to Use 

Regulations.gov” in the Help section. 

On October 20, 2015, we published a notice in the 

Federal Register (80 FR 63478) requesting nominations for 

negotiators to serve on the negotiated rulemaking committee 

and setting a schedule for committee meetings. 
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On December 21, 2015, we published a notice in the 

Federal Register (80 FR 79276) requesting additional 

nominations for negotiators to serve on the negotiated 

rulemaking committee. 

Negotiated Rulemaking

Section 492 of the HEA, 20 U.S.C. 1098a, requires the 

Secretary to obtain public involvement in the development 

of proposed regulations affecting programs authorized by 

title IV of the HEA. After obtaining extensive input and 

recommendations from the public, including individuals and 

representatives of groups involved in the title IV, HEA 

programs, the Secretary in most cases must subject the 

proposed regulations to a negotiated rulemaking process. 

If negotiators reach consensus on the proposed regulations, 

the Department agrees to publish without alteration a 

defined group of regulations on which the negotiators 

reached consensus unless the Secretary reopens the process 

or provides a written explanation to the participants 

stating why the Secretary has decided to depart from the 

agreement reached during negotiations. Further information 

on the negotiated rulemaking process can be found at: 

www2.ed.gov/policy/highered/reg/hearulemaking/hea08/negreg-faq.html.
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On October 20, 2015, the Department published a notice 

in the Federal Register (80 FR 63478) announcing its

intention to establish a negotiated rulemaking committee to 

prepare proposed regulations governing the Federal Student 

Aid programs authorized under title IV of the HEA. The 

notice set forth a schedule for the committee meetings and 

requested nominations for individual negotiators to serve 

on the negotiating committee. 

 The Department sought negotiators to represent the 

following groups: students/borrowers; legal assistance 

organizations that represent students/borrowers; consumer 

advocacy organizations; groups representing U.S. military 

servicemembers or veteran Federal loan borrowers; financial 

aid administrators at postsecondary institutions; State 

attorneys general (AGs) and other appropriate State 

officials; State higher education executive officers; 

institutions of higher education eligible to receive 

Federal assistance under title III, parts A, B, and F, and 

title V of the HEA, which include Historically Black 

Colleges and Universities, Hispanic-Serving Institutions, 

American Indian Tribally Controlled Colleges and 

Universities, Alaska Native and Native Hawaiian-Serving 

Institutions, Predominantly Black Institutions, and other 

institutions with a substantial enrollment of needy 
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students as defined in title III of the HEA; two-year 

public institutions of higher education; four-year public 

institutions of higher education; private, nonprofit 

institutions of higher education; private, for-profit 

institutions of higher education; FFEL Program lenders and 

loan servicers; and FFEL Program guaranty agencies and 

guaranty agency servicers (including collection agencies). 

The Department considered the nominations submitted by the 

public and chose negotiators who would represent the 

various constituencies.

On December 21, 2015, the Department published a 

notice in the Federal Register (80 FR 79276) requesting 

additional nominations for negotiators to serve on the 

negotiated rulemaking committee to represent constituencies 

that were not represented following the initial request for 

nominations. The Department sought negotiators to 

represent the following groups: State higher education 

executive officers; institutions of higher education 

eligible to receive Federal assistance under title III, 

parts A, B, and F, and title V of the HEA; two-year public 

institutions of higher education; private, for-profit 

institutions of higher education; and national, regional, 

or specialized accrediting agencies.
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The negotiating committee included the following 

members:

Ann Bowers, for-profit college borrower, and Chris 

Lindstrom (alternate), U.S. Public Interest Research Group, 

representing students/borrowers. 

Noah Zinner, Housing and Economic Rights Advocates, 

and Eileen Connor (alternate), Project on Predatory Student 

Lending at Harvard Law School (at the time of nomination, 

New York Legal Assistance Group) representing legal 

assistance organizations that represent students. 

Maggie Thompson, Higher Ed, Not Debt, and Margaret 

Reiter (alternate), attorney, representing consumer 

advocacy organizations. 

Bernard Eskandari, Office of the Attorney General of 

California, and Mike Firestone (alternate), Commonwealth of 

Massachusetts Office of the Attorney General, representing 

State attorneys general and other appropriate State 

officials. 

Walter Ochinko, Veterans Education Success, Will 

Hubbard (first alternate), Student Veterans of America, and 

Derek Fronabarger (second alternate), Student Veterans of 

America, representing U.S. military servicemembers or 

veterans.
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Karen Solinski, Higher Learning Commission, and Dr. 

Michale McComis (alternate), Accrediting Commission of 

Career Schools and Colleges, representing accreditors. 

Becky Thompson, Washington Student Achievement 

Council, representing State higher education executive 

officers.

Alyssa Dobson, Slippery Rock University, and Mark 

Justice (alternate), The George Washington University, 

representing financial aid administrators. 

Sharon Oliver, North Carolina Central University, and 

Emily London Jones (alternate), Xavier University of 

Louisiana, representing minority-serving institutions. 

Angela Johnson, Cuyahoga Community College, and 

Shannon Sheaff (alternate), Mohave Community College,

representing two-year public institutions. 

Kay Lewis, University of Washington, and Jean McDonald 

Rash (alternate), Rutgers University, representing fouryear public institutions. 

Christine McGuire, Boston University, and David 

Sheridan (alternate), Columbia University, representing 

private, nonprofit institutions. 

Dennis Cariello, Hogan Marren Babbo & Rose, Ltd., and 

Chris DeLuca (alternate), DeLuca Law, representing private, 

for-profit institutions. 
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Wanda Hall, EdFinancial Services, and Darin Katzberg

(alternate), Nelnet, representing FFEL Program lenders and 

loan servicers. 

Betsy Mayotte, American Student Assistance, and Jaye 

O’Connell (alternate), Vermont Student Assistance 

Corporation, representing FFEL Program guaranty agencies 

and guaranty agency servicers.

Gail McLarnon, U.S. Department of Education, 

representing the Department. 

The negotiated rulemaking committee met to develop 

proposed regulations on January 12-14, 2016, February 17-

19, 2016, and March 16-18, 2016. The Department held 

informational sessions by telephone for interested members 

of the committee on March 1 and March 3, 2016, to review 

the Department’s loan repayment rate disclosure proposal, 

and on March 9 and March 10, 2016, at the request of a nonFederal negotiator, to hear from Professor Adam Zimmerman 

of Loyola Law School regarding agency class settlement 

processes. 

At its first meeting, the negotiating committee 

reached agreement on its protocols and proposed agenda. 

The protocols provided, among other things, that the 

committee would operate by consensus. Consensus means that 

there must be no dissent by any member in order for the 
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committee to have reached agreement. Under the protocols, 

if the committee reached a final consensus on all issues,

the Department would use the consensus-based language in 

its proposed regulations. Furthermore, the Department 

would not alter the consensus-based language of its 

proposed regulations unless the Department reopened the 

negotiated rulemaking process or provided a written 

explanation to the committee members regarding why it 

decided to depart from that language.

During the first meeting, the negotiating committee 

agreed to negotiate an agenda of seven issues related to 

student financial aid. These seven issues were: borrower 

defenses, false certification discharges, institutional 

accountability, electronic death certificates,

consolidation of Nurse Faculty Loans, interest 

capitalization, and technical corrections to the PAYE and 

REPAYE plans. During the second meeting, the negotiating 

committee agreed to add two additional issues: closed 

school discharges and a technical correction to the 

regulations that describe the authority of the Department 

to compromise, or suspend, or terminate collection of,

debts. Under the protocols, a final consensus would have 

to include consensus on all nine issues. 
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During committee meetings, the negotiators reviewed 

and discussed the Department’s drafts of regulatory 

language and the committee members’ alternative language

and suggestions. At the final meeting on March 18, 2016,

the committee did not reach consensus on the Department’s 

proposed regulations. For that reason, and according to 

the committee’s protocols, all parties who participated or 

were represented in the negotiated rulemaking, in addition 

to all members of the public, may comment freely on the 

proposed regulations. For more information on the 

negotiated rulemaking sessions, please visit:

http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/i

ndex.html.

Summary of Proposed Changes

 The proposed regulations would--

 • Amend §685.206 to clarify that existing 

regulations with regard to borrower defenses apply to loans 

first disbursed prior to July 1, 2017, and that a borrower 

defense asserted pursuant to this section will be subject 

to the procedures in proposed §685.222(e) to (k);

 • Amend §685.206 to remove the period of limitation 

on the Secretary’s ability to recover from institutions the 

amount of the losses incurred by the Secretary on loans to 

which an approved borrower defense applies;
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 • Amend §685.206 to clarify that a borrower defense 

may be asserted as to an act or omission of the school that 

relates to the making of the loan or the provision of 

educational services that would give rise to a cause of 

action against the school under applicable State law;

• Add a new borrower defense section at §685.222 

that applies to loans first disbursed on or after July 1, 

2017;

• Provide in §685.222(a) that a borrower defense 

may be established if a preponderance of the evidence shows 

that the borrower has a borrower defense claim that relates 

to the making of the borrower’s Direct Loan or the 

provision of educational services and meets the 

requirements in §685.222(b), (c), or (d); 

• Provide in §685.222(a) that a violation by a 

school of an eligibility or compliance requirement in the 

HEA or its implementing regulations is not a basis for a 

borrower defense;

• Define in §685.222(a) the terms “borrower” and 

“borrower defense”;

• Amend the definition of “misrepresentation” in 

§668.71 to define a misleading statement as one that 

“includes any statement that has the likelihood or tendency 

to mislead under the circumstances” and to include “any 
29

statement that omits information in such a way as to make 

the statement false, erroneous, or misleading”;

• Establish in §685.222(b), (c), and (d) a new 

Federal standard upon which a borrower defense may be 

based--a judgment against the school, a breach of contract 

by the school, or a substantial misrepresentation by the 

school;

• Provide in §685.222(d)(2) that in determining 

whether a school made a substantial misrepresentation, the 

Secretary may consider certain factors as to whether the 

reliance of a borrower on the misrepresentation was 

reasonable; ;

• Establish in §685.222(e) a procedure under which 

an individual borrower may assert a borrower defense;

• Provide in §685.222(f) a general description of a 

group borrower defense claim process, including the 

conditions under which the Secretary may allow a claim to 

proceed without receiving an application;

• Establish in §685.222(g) and (h) processes for 

borrower defense claims made by groups of borrowers with 

respect to closed schools and open schools, respectively;

• Specify in §685.222(i) that the relief granted to 

a borrower with an approved borrower defense is based on 

the facts underlying the borrower’s claim;
30

• Require in §685.222(j) and (k) cooperation by the 

borrower in any borrower defense proceeding and, upon the 

granting of relief to a borrower, provide for the transfer 

to the Secretary of the borrower’s right to recovery 

against third parties;

• Add a new paragraph (k) to §685.212 to include an 

approved borrower defense among the reasons for a discharge 

of a loan obligation, and to address borrower defense 

claims on Direct Consolidation Loans;

• Amend §685.205 to expand the circumstances under 

which the Secretary grants forbearance without requiring 

documentation from the borrower to include periods of time 

when a borrower defense has been asserted and is under 

review;

• Amend §685.300 to prevent schools from requiring 

that students first engage in a school’s internal complaint 

process before contacting accrediting and government 

agencies about the complaint; prohibit the use of predispute mandatory arbitration agreements by schools; 

prohibit the use of class action lawsuit waivers; and 

require schools to disclose to and notify the Secretary of 

arbitration filings;
31

• Clarify in §685.308 that the Secretary may 

recover from the school losses from loan discharges,

including losses incurred from approved borrower defenses;

• Amend §668.171 to include conditions and events 

that trigger a requirement that the school provide 

financial protection, such as a letter of credit. Such

conditions and events include incurring significant amounts 

of liability in recent years for borrower defense claim 

losses, a school’s inability to pay claims, and events that 

would compromise a school’s ability to continue its 

participation in the title IV, HEA programs;

• Require in §668.41 a proprietary school with a 

student loan repayment rate that is less than or equal to 

zero percent to place a Department-issued plain language 

warning on its Web site and in advertising and promotional 

materials, as well as to provide the warning to prospective 

and enrolled students;

• Require in §668.41 that a school disclose to

prospective and enrolled students if it is required to 

provide financial protection, such as a letter of credit,

to the Department; 

• Amend §668.175 to state the amounts of financial 

protection, such as letters of credit, required in the 

event of particular occurrences;
32

• Clarify in §668.90 when a hearing official must 

uphold the limitation or termination requested by the 

Secretary for disputes related to the amount of financial 

protection, such as a letter of credit, for a school’s

failure under the financial responsibility standards;

• Clarify in §668.93 that a limitation sought by 

the Secretary on a school’s participation in title IV, HEA 

programs may include a change in participation from fully 

certified to provisionally certified;

• Amend §§674.61, 682.402, 685.212, and 686.42 to 

allow for a death discharge of a loan or TEACH Grant 

service obligation to be granted based on an original or 

certified copy of a death certificate that is submitted 

electronically or sent by facsimile transmission, or 

through verification of death in an electronic Federal or 

State database that is approved for use by the Secretary;

• Amend §§668.14(b), 674.33(g), 682.402(d), and 

685.214(f) to increase outreach by the Secretary and 

schools and make more information available to borrowers 

eligible for a closed school discharge so that they are 

aware of this option;

• Amend §685.215 to update and expand the existing 

categories of false certification discharge to include the 

improper certification of eligibility of a student who is 
33

not a high school graduate and false certification of a 

borrower’s academic progress;

• Amend §682.211 to require lenders to grant a 

mandatory administrative forbearance for borrowers who have 

filed a borrower defense claim with the Secretary with the 

intent of seeking relief under §685.212(k) after 

consolidating into the Direct Loan Program; 

• Update the provisions in §30.70 to reflect the 

increased debt resolution authority provided in Pub. L. 

101-552 that authorizes the Department to resolve debts up 

to $100,000 without approval from the Department of Justice 

(DOJ) as well as other changes to the Department’s claim 

resolution authority;

• Amend §685.209 by making technical corrections 

and clarifying changes to the PAYE and REPAYE repayment 

plan regulations;

• Amend §685.220 to allow a borrower to obtain 

Direct Consolidation Loan, if the borrower consolidates any

of the eligible loans listed in §685.220(b); and

• Clarify in §§682.202, 682.405, and 682.410 that 

guaranty agencies and FFEL Program lenders are not 

permitted to capitalize outstanding interest on FFEL loans 

when the borrower rehabilitates a defaulted FFEL loan; and
34

 Amend §685.200 to codify the Department’s current 

practice regarding the elimination or recalculation of a 

subsidized usage period or the restoration of interest 

subsidy under the 150 Percent Direct Subsidized Loan Limit 

when a Direct Subsidized Loan is discharged.

Significant Proposed Regulations

 We group major issues according to subject, with the 

applicable 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.

Borrower Defenses (§§668.71, 685.205, 685.206, and 685.222)

Background: The proposed regulations address several 

topics related to the administration of title IV, HEA 

student aid programs and benefits and options for 

borrowers. The Department first implemented borrower 

defense regulations for the Direct Loan Program in the 

1995-1996 academic year to protect borrowers. The 

Department’s original intent was for this rule to be in 

place for the 1995-1996 academic year, and then to develop 

a more extensive rule for both the Direct Loan and FFEL 

Loan programs through negotiated rulemaking in the 

following year.
35

However, based on the recommendation of non-Federal 

negotiators in the spring of 1995, the Secretary decided 

not to develop further regulations for the Direct Loan and 

FFEL programs. 60 FR 37768. As a result, the regulations 

have not been updated in two decades to establish 

appropriate processes or other necessary information to 

allow borrowers to effectively utilize their options under 

the borrower defense regulation.

In May 2015, Corinthian, a publicly traded company 

operating numerous postsecondary schools that enrolled over

70,000 students at more than 100 campuses nationwide, filed 

for bankruptcy. Corinthian collapsed under deteriorating 

financial conditions and while subject to multiple State 

and Federal investigations, one of which resulted in a 

finding by the Department that the college had 

misrepresented its job placement rates. Upon the closure

of Corinthian, which included Everest Institute, Wyotech,

and Heald College, the Department received thousands of 

claims for student loan relief from 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 the current closed 

school and borrower defense regulations. The Department 

appointed a Special Master in June 2015 to create and 
36

oversee a process to provide debt relief for these 

Corinthian borrowers who applied for Federal student loan

discharges based on claims against Corinthian. 

The current borrower defense regulation, which has 

existed since 1995 but has rarely been used, requires a 

borrower to demonstrate that a school’s acts or omissions 

would give rise to a cause of action under “applicable 

State law.” The regulation is silent on the process a 

borrower follows to assert a borrower defense claim. 

The landscape of higher education has changed 

significantly over the past 20 years. The role of distance 

education in the higher education sector has grown 

substantially. In the 1999-2000 academic year, about eight 

percent of students were enrolled in at least one distance 

education course; by the 2007-2008 academic year, that 

number had grown to 20 percent.

1 Recent IPEDS data indicate 

that in the fall of 2013, 26.4 percent of students at 

degree-granting, title IV-participating institutions were 

enrolled in at least one distance education class.2 Much of 

this growth occurred within and coincided with the growth 

 

1 Learning at a Distance: Undergraduate Enrollment in Distance Education 

Courses and Degree Programs (http://nces.ed.gov/pubs2012/2012154.pdf). 

2 2014 Digest of Education Statistics: Table 311.15: Number and 

percentage of students enrolled in degree-granting postsecondary 

institutions, by distance education participation, location of student, 

level of enrollment, and control and level of institution: Fall 2012 

and fall 2013.
37

of the proprietary higher education sector. In the fall of 

1995, degree-granting, for-profit institutions enrolled 

approximately 240,000 students. In the fall of 2014, 

degree-granting, for-profit schools enrolled over 1.5

million students.3 These changes to the higher education 

industry have allowed students to enroll in colleges based 

in other States and jurisdictions with relative ease.

These changes have had an impact on the Department’s 

ability to apply its borrower defense regulations. The 

current borrower defense regulations do not identify which 

State’s law is considered “applicable” State law on which 

the borrower’s claim can be based.

4 Generally, the 

regulation was assumed to refer to the laws of the State in 

which the institution was located; we had little occasion 

to address differences in protection for borrowers in 

States that offer little protection from school misconduct 

or borrowers who reside in one State but are enrolled via 

distance education in a program based in another State. 

Some States have extended their rules to protect these 

 

3

2015 Digest of Education Statistics: Table 303.10: Total fall 

enrollment in degree-granting postsecondary institutions, by attendance 

status, sex of student, and control of institution: Selected years, 

1947 through 2025-

http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=y

es.

4 In the few instances in which claims have been recognized under 

current regulations, borrowers and the school were typically located in 

the same State.
38

students, while others have not. As a result of the 

difficulties in application and interpretation of the 

current State law standard, as well as the lack of clarity 

surrounding the procedures that apply for borrower defense,

the Department took additional steps to improve the 

borrower defense claim process. 

In a Federal Register notice published on October 20, 

2015 (80 FR 63478), the Department announced its intent to 

establish a negotiated rulemaking committee to develop 

proposed regulations that establish, among other items, the 

criteria that the Department will use to identify acts or 

omissions of an institution that constitute, for borrowers 

of Federal Direct Loans, a borrower defense, including a 

Federal standard, the procedures to be used for a borrower 

to establish a borrower defense, and the standards and 

procedures that the Department will use to determine the 

liability of the institution for losses arising from 

approved borrower defenses. 

We propose to create a new §685.222, and amend 

§§668.71, 685.205, and 685.206, to establish, effective 

July 1, 2017, a new Federal standard for borrower defenses, 

new limitation periods for asserting borrower defenses, and 

processes for the assertion and resolution of borrower 

defense claims. In the following sections, we describe in 
39

more detail these proposed changes and other clarifying 

changes proposed to improve the borrower defense process.

Borrower Defenses--General (§685.222(a))

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 487 of the HEA provides that the Secretary can 

take enforcement action against an institution 

participating in the title IV, HEA programs that

substantially misrepresents the nature of the institution’s 

education program, its financial charges, or the 

employability of its graduates.

Current Regulations: Section 685.206(c) establishes the 

conditions under which a Direct Loan borrower may assert a 

borrower defense, the relief afforded by the Secretary in 

the event the borrower’s claim is successful, and the 

Secretary’s authority to recover from the school any loss 

that results from a successful borrower defense. 

Specifically, §685.206(c) provides that a borrower defense 

may be asserted based upon any act or omission of the 

school that would give rise to a cause of action against 

the school under applicable State law. The current 

regulations in §685.206(c) are described in more detail 
40

under “Borrower Responsibilities and Defenses (34 CFR 

685.206).” 

Proposed Regulations: Proposed §685.222(a) would provide 

that borrower defense claims asserted by a borrower for 

Direct Loans first disbursed before July 1, 2017, are 

considered by the Secretary in accordance with the 

provisions of §685.206(c), while borrower defense claims 

asserted by a borrower for Direct Loans first disbursed on 

or after July 1, 2017, will be considered by the Secretary 

in accordance with the provisions of §685.222.

For borrower defense claims asserted by a borrower for 

Direct Loans first disbursed on or after July 1, 2017, 

proposed §685.222 would establish a new Federal standard 

and new limitation periods. Proposed §685.222 would also 

establish a process for the assertion and resolution of all 

borrower defense claims--both those made under §685.206(c) 

for Direct Loans first disbursed prior to July 1, 2017, and 

for those made under proposed §685.222. We describe the 

proposed regulations relating to the new Federal standard 

and new limitation periods under “Federal Standard and 

Limitation Periods (34 CFR 685.222(b), (c), and (d) and 34 

CFR 668.71),” and the borrower defense claim process under 

“Process for Individual Borrowers (34 CFR 685.222(e)),”

“Group Process for Borrower Defenses--General (34 CFR 
41

685.222(f)),” “Group Process for Borrower Defenses–-Closed 

School (34 CFR 685.222(g)),” and “Group Process for 

Borrower Defense Claims–-Open School (34 CFR 685.222(h)).”

For borrower defense claims asserted by a borrower for 

Direct Loans first disbursed on or after July 1, 2017, 

proposed §685.222(a)(2) would provide that a preponderance 

of the evidence must show that the borrower has a borrower 

defense that relates to the making of the borrower’s Direct 

Loan or the provision of educational services by the school 

to the student and that meets the requirements under 

§685.222(b), (c), or (d), which are described in detail 

under ”Federal Standard and Limitation Periods (34 CFR 

685.222(b), (c), and (d) and 34 CFR 668.71).”

Section 685.222(a)(3) would clarify that a violation 

by the school of an eligibility or compliance requirement 

in the HEA or its implementing regulations is not a basis 

for a borrower defense unless that conduct would by itself, 

and without regard to the fact that the conduct violated an 

HEA requirement, give rise to a cause of action against the 

school under either applicable State law or under the new 

Federal standard, whichever is applicable depending on the 

first disbursement date of the Direct Loan in question.

Proposed §685.222(a)(4) would define “borrower” and 

“borrower defense.” Under the proposed definitions, 
42

“borrower” would mean the borrower and, in the case of a 

Direct PLUS Loan, the student and any endorsers. Under 

proposed §685.222(a)(5), “borrower defense” would include 

one or both of the following: a defense to repayment of 

amounts owed to the Secretary on a Direct Loan, in whole or 

in part; and a right to recover amounts previously 

collected by the Secretary on the Direct Loan, in whole or 

in part. 

If the borrower asserts both a borrower defense under 

§685.222 and any other objection to an action of the 

Secretary with regard to the Direct Loan at issue (such as 

a claim for a closed school discharge or false 

certification discharge), the Secretary would notify the 

borrower of the order in which the Secretary considers the 

borrower defense and any other objections. The order in 

which the Secretary will consider objections, including 

borrower defense, would be determined by the Secretary as 

appropriate under the circumstances. 

Reasons: We propose to establish in §685.222 a new Federal 

standard and new limitation periods for borrower defense 

claims asserted with respect to loans first disbursed after 

the expected effective date of these proposed regulations--

July 1, 2017--as well as a process for the assertion and 

resolution of all borrower defense claims, both those made 
43

under proposed §685.206(c) and those made under proposed 

§685.222. The Department believes that the proposed 

changes could reduce the number of borrowers who are 

struggling to meet their student loan obligations. During 

the public comment periods of the negotiated rulemaking 

sessions, many public commenters who were borrowers 

mentioned that they believed that they had been defrauded 

by their institutions of higher education and were unable 

to pay their student loans or obtain debt relief under the 

current regulations. For instance, many of these borrowers 

stated that they had relied upon the misrepresentation by 

their school as to employment outcomes, but later found out 

that they were unable to secure employment as had been 

represented to them before their enrollment. 

We discuss more specifically our reasons for adopting 

a new Federal standard and limitation periods under the 

discussion of “Federal Standard and Limitation Periods (34 

CFR 685.222(b), (c), and (d) and 34 CFR 668.71).” We 

discuss our reasons for establishing a borrower defense 

claim process under “Process for Individual Borrowers (34 

CFR 685.222(e),” “Group Process for Borrower Defenses –

General (34 CFR 685.222(f),” “Group Process for Borrower 

Defenses – Closed School (34 CFR 685.222(g),” and “Group 

Process for Borrower Defense Claims – Open School (23 CFR 
44

685.222(h).” We explain why the borrower defense 

regulations apply only to the Direct Loan Program under 

“Discharge of a Loan Obligation (§685.212).”

Proposed §685.222(a) would establish provisions of 

general applicability for borrower defense claims. As 

noted above, we would clarify in paragraphs (a) and (b) of 

that section that borrower defense claims for loans 

disbursed before July 1, 2017, are made under §685.206(c) 

and that borrower defense claims for loans disbursed on or 

after July 1, 2017, are made under proposed §685.222. 

Although proposed §685.206(c) also would specify that it 

applies to borrower defense claims for loans disbursed 

before July 1, 2017, we believe that also stating the 

general framework in §685.222 would help eliminate any 

confusion as to which standard applies. 

In proposed §685.222(a)(2) and (5), we would establish 

the basic elements of borrower defense claims for loans 

disbursed on or after July 1, 2017. Specifically, proposed 

§685.222(a)(2) and (5) would require that a borrower 

defense claim:

• Is supported by a preponderance of the evidence;

• Relates to the making of the borrower’s Direct Loan 

or the provision of educational services; and
45

• Meets the requirements under paragraph (b), (c), or 

(d) of the section.

In addition, proposed §685.222(a)(2) would clarify 

that a claim may be brought by a borrower to discharge

amounts owed to the Secretary on a Direct Loan, in whole or 

in part, or to recover amounts previously collected by the 

Secretary on the Direct Loan, in whole or in part, or both.

A claim is supported by a “preponderance of the 

evidence” if there is sufficient evidence produced to 

persuade the decision maker that it is more likely than not 

that something happened or did not happen as claimed. In 

practice, the decision maker in a borrower defense 

proceeding would measure the value, or weight, of the 

evidence (including attestations, testimony, documents, and 

physical evidence) produced to prove that the borrower 

defense claim as alleged is true. We believe this 

evidentiary standard is appropriate as it is the typical 

standard in most civil proceedings. Additionally, the 

Department uses a preponderance of the evidence standard in 

other processes regarding borrower debt issues. See 34 CFR 

34.14(b), (c) (administrative wage garnishment); 34 CFR 

31.7(e) (Federal salary offset). We believe that this

evidentiary standard strikes a balance between ensuring 

that borrowers who have been harmed are not subject to an 
46

overly burdensome evidentiary standard and protecting the 

Federal government, taxpayers, and institutions from 

unsubstantiated claims. We discuss the types of evidence 

that may be presented in support of a claim under “Process 

for Individual Borrowers (34 CFR 685.222(e)).”

Proposed §685.222 would clarify that, whether a 

borrower defense is brought under the standard described in 

§685.206(c) or the standards in proposed §685.222(b), (c), 

and (d), the Department’s position is that it will 

acknowledge a borrower defense asserted under the 

regulations “only if the cause of action directly relates 

to the loan or to the school’s provision of educational 

services for which the loan was provided.” 60 FR 37768, 

37769. Such claims may include, for example, fraud in the 

making of the Direct Loan in the course of student 

recruitment or a failure to provide educational services. 

In some circumstances, this may include post-enrollment 

services like career advising or placement services. The

Department does not recognize as a defense against 

repayment of the loan a cause of action that is not 

directly related to the loan or to the provision of 

educational services, such as personal injury tort claims 

or actions based on allegations of sexual or racial 

harassment. Id. The proposed language is consistent with 
47

this longstanding position and is also reflected in similar 

proposed language for §685.206(c). Non-Federal negotiators 

also requested clarification on whether borrower defenses 

may be asserted as to tort claims asserting that 

educational institutions and their employees breached their 

duty to educate students adequately (otherwise known as 

“educational malpractice”), or to issues relating to 

academic and disciplinary disputes. Courts that have 

considered claims characterized as educational malpractice 

have generally concluded that State law does not recognize 

such claims.5 The Department does not intend in these 

regulations to create a different legal standard, and for 

existing loans would apply that same principle under 

§685.206(c), and would maintain that same position in 

applying the standards proposed in §685.222. Claims 

relating to the quality of a student’s education or matters 

regarding academic and disciplinary disputes within the 

judgment and discretion of a school are outside the scope 

of the borrower defense regulations. The Department 

recognizes, however, that in certain circumstances, such as 

 

5 See Bell v. Board of Educ. of City of West Haven, 55 Conn. App. 400, 

739 A.2d 321, 139 Ed. Law Rep. 538 (1999), noting that the vast 

majority of courts have refused to recognize a cause of action for 

educational malpractice; Sain v. Cedar Rapids Cmty. Sch. Dist., 626 

N.W.2d 115, 121 (Iowa 2001)(Educational malpractice almost universally 

rejected as a cause of action).
48

where a school may make specific misrepresentations about 

its facilities, financial charges, programs, or 

employability of its graduates, such misrepresentations may 

function as the basis of a borrower defense as opposed to 

being a claim regarding educational quality.6 Additionally, 

a breach of contract borrower defense may be raised where a 

school has failed to deliver specific obligations, such as 

programs and services, it has committed to by contract. 

The Department also notes that the limitations of the scope 

of the borrower defense regulations should not be taken to 

represent any view that other issues are not properly the 

concern of the Department as well as other Federal 

agencies, State authorizers and other State agencies, 

accreditors, and the courts. 

With regard to the other required elements of a 

borrower defense claim, we discuss our reason for requiring 

a borrower defense to meet the requirements under 

paragraphs (b), (c), and (d) of proposed §685.222 under 

“Federal Standard and Limitation Periods (34 CFR 

685.222(b), (c), and (d) and 34 CFR 668.71).” 

Proposed §685.222(a)(3) would set forth the 

Department’s longstanding position that an act or omission

 

6 See, e.g., Sain v. Cedar Rapids Cmty. Sch. Dist., 626 N.W.2d 115, 121 

(Iowa 2001), recognizing that tort of negligent misrepresentation 

applicable in education context. 
49

by the school that violates an eligibility or compliance 

requirement in the HEA or its implementing regulations does 

not necessarily affect the enforceability of a Federal 

student loan obtained to attend the school, and is not, 

therefore, automatically a basis for a borrower defense.7 

The HEA vests the Department with the sole authority to 

determine and apply the appropriate sanction for HEA 

violations. A school’s act or omission that violates the 

HEA may, of course, give rise to a cause of action under 

other law, and that cause of action may also independently 

constitute a borrower defense claim under §685.206(c) or 

proposed §685.222. For example, advertising that makes 

untruthful statements about placement rates violates 

section 487(a)(8) of the HEA, but may also give rise to a 

 

7 As stated by the Department in 1993:

[The Department] considers the loss of institutional 

eligibility to affect directly only the liability of the 

institution for Federal subsidies and reinsurance paid on 

those loans.... [T]he borrower retains all the rights with 

respect to loan repayment that are contained in the terms 

of the loan agreements, and [the Department] does not 

suggest that these loans, whether held by the institution 

or the lender, are legally unenforceable merely because 

they were made after the effective date of the loss of 

institutional eligibility.

58 FR 13337. Armstrong v. Accrediting Council for Continuing Educ. & 

Training, Inc., 168 F.3d 1362, 1369 (D.C. Cir. 1999), opinion amended 

on denial of reh'g, 177 F.3d 1036 (D.C. Cir. 1999) (rejecting claim of 

mistake of fact regarding institutional accreditation as grounds for 

rescinding loan agreements).
50

cause of action under common law based on misrepresentation8

or constitute a substantial misrepresentation under the new 

Federal standard and, therefore, constitute a basis for a

borrower defense claim.

In proposed §685.222(a)(4), we propose to define 

“borrower” to provide clarity and to include all parties 

who may be responsible for repaying the Secretary for a 

Direct Loan to which a borrower defense claim relates or 

who are otherwise harmed. 

In proposed §685.222(a)(5), “borrower defense” is 

defined to include one or both of the following: a defense 

to repayment of amounts owed to the Secretary on a Direct 

Loan, in whole or in part; and a right to recover amounts 

previously collected by the Secretary on the Direct Loan, 

in whole or in part. Currently, the existing regulation 

for borrower defense at §685.206(c) allows for 

reimbursement of amounts paid towards a loan as possible 

further relief, in addition to a discharge of any remaining 

loan obligation, for approved borrower defenses. The 

Department believes that the proposed definition will more 

accurately capture borrowers’ requests for and the 

 

8

See, e.g., Moy v. Adelphi Inst., Inc., 866 F. Supp. 696, 706 

(E.D.N.Y. 1994)(upholding claim of common law misrepresentation based 

on false statements regarding placement rates.)
51

Secretary’s ability to offer relief through the borrower 

defense process--for both a discharge of any remaining loan 

obligation and for reimbursement of amounts paid to the 

Secretary for the loan that is the subject of an approved 

borrower defense. 

Federal Standard and Limitation Periods (§685.222(b), (c), 

and (d) and §668.71)

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 487 of the HEA provides that institutions 

participating in the title IV, HEA programs shall not 

engage in substantial misrepresentation of the nature of 

the institution’s education program, its financial charges, 

or the employability of its graduates.

Current Regulations: Section 685.206(c) provides that a 

borrower defense may be asserted based upon any act or 

omission of the school that would give rise to a cause of 

action against the school under applicable State law. The 

current regulations in §685.206(c) are described in more 

detail under “Borrower Responsibilities and Defenses (34 

CFR 685.206).”
52

Subpart F of the Student Assistance General Provisions 

establishes the types of activities that may constitute 

substantial misrepresentation by an institution and defines 

“misrepresentation” and “substantial misrepresentation.” 

“Misrepresentation” is defined in proposed §668.71(c) as a

false, erroneous, or misleading statement that an eligible 

institution, one of its representatives, or any eligible 

institution, organization, or person with whom the eligible 

institution has an agreement to provide educational 

programs, or to provide marketing, advertising, recruiting, 

or admissions services, makes directly or indirectly to a 

student, prospective student, a member of the public, an 

accrediting agency, a State agency, or the Secretary. 

Under the proposed regulations, we would clarify that a

misleading statement also includes any statement that has 

the likelihood or tendency to deceive. A statement is any 

communication made in writing, visually, orally, or through 

other means. “Misrepresentation” also includes the 

dissemination of a student endorsement or testimonial that 

a student gives either under duress or because the 

institution required the student to make such an 

endorsement or testimonial to participate in a program.

“Substantial misrepresentation,” also defined in 

§668.71(c), means “any misrepresentation on which the 
53

person to whom it was made could reasonably be expected to 

rely, or has reasonably relied, to that person’s 

detriment.”

Proposed Regulations: Proposed §685.222(b), (c), and (d) 

would establish a new Federal standard for a borrower 

defense. 

Proposed §685.222(b) would provide that if a borrower 

has submitted for consideration a nondefault, favorable 

contested judgment against the school based on State or 

Federal law from a court or administrative tribunal of 

competent jurisdiction for relief, the judgment might serve 

as a basis for a borrower defense. This would apply

regardless of whether the judgment was obtained by the 

borrower as an individual or member of a class, or was 

obtained by a State attorney general (State AG) or other 

governmental agency. Judgments that could form the basis 

of a borrower defense under this section would not be 

limited to causes of action based on breach of contract or 

a substantial misrepresentation under §685.222(c) or (d), 

respectively. Rather, they could also be based on other 

causes of action under State or Federal law, provided that

the claim relates to the making of the borrower’s Direct

Loan for enrollment at the school, or the provision of 

educational services for which the loan was provided. 
54

There would be no time limitation on a borrower’s ability 

to assert a borrower defense based on such a judgment. 

Proposed §685.222(c) would define the conditions under 

which a breach of contract might be the basis for a 

borrower defense and specify the limitation period for 

recovering payments previously made on the loan in 

connection with such a claim. Under proposed §685.222(c), 

a borrower would have a borrower defense if the school that 

the borrower received a Direct Loan to attend failed to 

perform its obligations under the terms of a contract with 

the student. A borrower would be permitted to assert, at 

any time, a claim based on breach of contract as a defense 

to repayment of the amount still outstanding on the loan. 

A borrower would be permitted to assert that same claim as 

grounds for recovery of amounts previously collected by the 

Secretary not later than six years after the breach by the 

school of its contract with the student. 

Proposed §685.222(d) would establish the conditions 

under which a substantial misrepresentation might serve as 

the basis for a borrower defense, and the limitation period 

for recovering payments previously made on the loan. Under 

proposed §685.222(d), a borrower would have a borrower 

defense if the school or any of its representatives, or any 

institution, organization, or person with whom the school 
55

has an agreement to provide educational programs, or to 

provide marketing, advertising, recruiting, or admissions 

services, made a substantial misrepresentation that the 

borrower reasonably relied on when the borrower decided to 

attend, or to continue attending, the school. “Substantial 

misrepresentation” would have the definition set forth in

subpart F, as amended by these proposed regulations. The 

proposed regulations would modify the definition of 

misrepresentation in §668.71(c) to replace the word 

“deceive” with “mislead under the circumstances.” The 

definition would also be expanded to specify that a 

misrepresentation includes any statement that omits 

information in such a way as to make the statement false, 

erroneous, or misleading. 

Section 685.222(d) would also establish that a

borrower may assert, at any time, a defense to repayment 

for amounts still owed on the loan to the Secretary, but

may assert a right to recover funds previously collected by 

the Secretary no later than six years after the borrower 

discovers, or reasonably could have discovered, the 

information constituting the substantial misrepresentation. 

The definition of “substantial misrepresentation” 

would require a borrower to have reasonably relied on a 

misrepresentation to his or her detriment. Under proposed 
56

§685.222(d), in determining whether a borrower’s reliance 

on a misrepresentation was reasonable, the decision maker, 

whether a designated Department official or hearing 

official, as described in detail under “Process for 

Individual Borrowers (34 CFR 685.222(e)),” “Group Process 

for Borrower Defenses--General (34 CFR 685.222(f)),” “Group 

Process for Borrower Defenses–-Closed School (34 CFR 

685.222(g)),” and “Group Process for Borrower Defense 

Claims–-Open School (34 CFR 685.222(h)),” could consider, 

among other things, if the school or its representatives or 

other specified parties engaged in conduct such as: 

 Demanding that the borrower make enrollment or loanrelated decisions immediately;

 Placing an unreasonable emphasis on unfavorable 

consequences of delay;

 Discouraging the borrower from consulting an 

adviser, a family member, or other resources;

 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

 Otherwise taking advantage of the borrower’s 

distress or lack of knowledge or sophistication.
57

Reasons: The current borrower defense standard in 

§685.206(c) is wholly dependent upon State law and, as a 

result, may provide uneven relief to students affected by 

the same bad practices but who attended schools in 

different States; a Federal standard would help to ensure 

fair and equitable treatment of all borrowers. Moreover, 

the reliance upon State law presents a significant burden 

for borrowers who are making a threshold determination as 

to whether they may have a claim and for Department 

officials who must determine the applicability and 

interpretation of laws that may vary from one State to 

another.

In crafting the Federal standard, the Department 

sought to incorporate not only the substantial

misrepresentation regulation (34 CFR 668 subpart F), but 

also other causes of action upon which students had based 

complaints against schools in court cases. For example, 

the Federal standard maintains the borrower’s ability to 

bring forward a claim based on a judgment determined by a 

court or administrative tribunal applying either State or 

Federal law. We also noted that a common claim that 

students had raised in lawsuits against postsecondary 
58

schools was breach of contract.9 These bases for a borrower 

defense would ensure that the Federal standard provides

effective relief opportunities for borrowers, and efficient 

administration of the process by which the Department and 

borrowers interpret and apply the standard, resulting in 

more timely resolution for all parties involved. However, 

we do not believe it would be appropriate to adopt a 

standard that would make the fact that the conduct violates 

an HEA requirement an automatic ground for a borrower 

defense, whether that claim is asserted directly or 

indirectly based on State law. Such conduct, to the extent 

it injures borrowers through substantial misrepresentation 

or a breach of contract, would already be covered by the 

proposed Federal standard. Moreover, it is not clear that 

any other such conduct forms an appropriate basis for loan 

discharge. Similarly, non-Federal negotiators suggested 

that the Department provide that all causes of action under

State law constitute a basis for borrower defense. As 

explained previously, we believe that an approach based on 

State law would present a significant burden for borrowers 

and Department officials to determine the applicability and 

 

9 See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 129, 133 (3d 

Cir. 2011); Chenari v. George Washington Univ., No. CV 14-0929 (ABJ), 

2016 WL 1170922 (D.D.C. Mar. 23, 2016).
59

interpretation of States’ laws and would increase the risk 

of uneven relief for similarly situated borrowers; 

therefore, we decline to adopt such a standard.

Non-Federal negotiators also proposed other bases for 

borrower defense, such as deceptive, unfair, or abusive 

conduct. We carefully considered such suggestions and 

decided that they were not appropriate for the borrower 

defense regulations. The Department believes it would face 

significant challenges in determining which cases of such 

conduct warrant relief. A wide variety of conduct can be 

considered deceptive, unfair, or abusive, under both State 

and Federal law, and characterizing particular conduct as 

falling under such standards would require the Department 

to engage in a nuanced application of complex legal 

doctrines that vary across jurisdictions and that often 

have not been subject to a degree of judicial development 

sufficient to make their application to the borrower 

defense context clear. Furthermore, some of the 

significant sources of law regarding such conduct would not 

easily transfer to the borrower defense context. Federal 

and State law empowers government agencies to pursue relief 

for deceptive and unfair conduct.10 In exercising this 

 

10 See, e.g., 12 U.S.C. 5531, 15 U.S.C. 43 (authorities used or 

referenced, respectively, by the Consumer Financial Protection Bureau 
60

authority, Federal and State agencies are charged with 

gathering facts about particular practices, and weighing 

appropriate policy considerations to determine whether the 

practice warrants the exercise of their authority under 

these laws. The borrower defense regulations, on the other 

hand, are directed necessarily toward claims by 

individuals, which should not be subject to public policy 

considerations. Nonetheless, we agree with the negotiators 

that deceptive, unfair, or abusive practices that may not 

otherwise constitute a misrepresentation under the proposed 

definition should be taken into consideration when we are 

evaluating a borrower defense claim. See “Substantial 

misrepresentation: Reasonable reliance” in this section for 

a discussion of how we propose to consider such conduct for 

the purpose of a borrower defense claim based on a 

substantial misrepresentation.

The Department’s substantial misrepresentation 

regulations (34 CFR part 668 subpart F) were informed by 

the FTC’s policy guidelines on deception, and we believe 

they are more tailored to, and suitable for, use in the 

 

(CFPB) and State agencies, and the Federal Trade Commission (FTC)). 

For deceptive and unfair practices, the CFPB has stated that its 

standards are informed by the standards for the same terms as used by 

the FTC. See CFPB Bulletin 2013-7, “Prohibition of Unfair, Deceptive, 

or Abusive Acts or Practices in the Collection of Consumer Debts,” 

(Jul. 10, 2013).
61

borrower defense context. The Department proposes that in 

the borrower defense context, certain factors addressing 

specific problematic conduct may be considered to determine 

whether a misrepresentation has been relied upon to a 

borrower’s detriment, thus making the misrepresentation 

“substantial” under the proposed regulation. With regard 

to unfair and abusive conduct, we considered the available 

precedent and determined that it is unclear how such 

principles would apply in the borrower defense context as 

stand-alone standards. Such practices are often alleged in 

combination with misrepresentations and are not often 

addressed on their own by the courts. With this lack of 

guidance, it is unclear how such principles would apply in 

the borrower defense context. Moreover, many of the 

borrower defenses the Department has addressed or is 

considering have involved misrepresentations by schools, 

such as in the case of Corinthian. The Department believes 

that its proposed standard as described below will address 

much of the behavior arising in the borrower defense 

context. We believe that the standard that we are proposing 

appropriately addresses the Department’s interests in 

accurately identifying and providing relief to borrowers 

for misconduct by schools; providing clear standards for 

borrowers, schools, and the Department to use in resolving 
62

claims; and avoiding for all parties the burden of 

interpreting other Federal agencies’ and States’ 

authorities in the borrower defense context. 

As a result, the Department declines to adopt

standards for relief based on unfair and abusive conduct. 

However, we note that actions against institutions may be 

taken, and borrowers may have avenues of relief outside of 

the Department, under other Federal or State statutes based 

on unfair and abusive conduct, which may result in State or 

Federal court judgments. Because the Department does not 

adopt the unfair and abusive conduct as a Federal borrower 

defense standards unless reduced to a contested judgment 

against the school under proposed §685.222(b), the 

Department does not consider its own findings and 

determinations in the borrower defense context for the 

proposed standards in §685.222 to be dispositive or 

controlling for actions brought by any other Federal or any 

State agency in the exercise of their power under the 

statutes on which they rely. We intend that, to the extent 

that borrowers fail to establish a claim under the 

regulations proposed here, such a determination does not 

affect the ability of another agency to obtain relief under 

a different standard that the agency is authorized to 

apply.
63

We note that the Department commonly uses the term 

“hearing official” in its regulations, such as 34 CFR 

subparts G and H (proceedings for limitation, suspension, 

termination and fines, and appeal procedures for audit 

determinations and program review determinations). The 

hearing officials referred to in the proposed regulations 

would make decisions and determinations independent of the 

Department official described in proposed §685.222(e) to 

(h). Although here we use the term “Department official” 

to describe the individual who reviews and decides an 

individual borrower defense claim pursuant to §685.222(e), 

for the group processes described in proposed §685.222(g) 

and (h), we use the term “Department official” to describe 

the individual who performs a very different role. In the 

group process, the “Department official” is the individual 

who would initiate the group borrower defense process and 

who would present evidence and respond to any argument for 

the group borrower defense claimants. The decision would 

then be made by the hearing official, who is independent of 

the Department official who asserts the claims, and that 

decision would be based on the merits of the borrower 

defense claim as described in the proposed regulations, and 

not upon other considerations.

Judgment against a school
64

As discussed, the Department is declining to adopt a 

standard based on applicable State law for loans first 

disbursed after July 1, 2017, due, in part, to the burden 

to borrowers and Department officials in interpreting and 

applying States’ laws. While we believe that the proposed 

standards will capture much of the behavior that can and 

should be recognized as the basis for borrower defenses, it 

is possible that some State laws may offer borrowers

important protections that do not fall within the scope of 

the Department’s Federal standard. To account for the 

situations in which this is the case, the proposed 

regulations would provide, as a basis for a borrower 

defense, nondefault, contested judgments obtained against a 

school based on any State or Federal law, whether obtained 

in a court or administrative tribunal of competent 

jurisdiction. Under the proposed regulations, a borrower 

may use such a judgment as the basis for a borrower defense 

if the borrower was personally affected by the judgment, 

that is, the borrower was 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. As with all the borrower defense standards, to 

support a borrower defense claim, the judgment would be 

required to pertain to the making of a Direct Loan or the 
65

provision of educational services to the borrower. We

believe that the proposed standard 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.

We also propose that a judgment obtained by a 

governmental agency, such as a State AG or a Federal 

agency, that a borrower can show relates to the making of 

the borrower's Direct Loan or the provision of educational 

services to the borrower, may also serve as a basis for a 

borrower defense under the standard, whether the judgment 

is obtained in court or in an administrative tribunal. 

Governmental agencies may not specifically join individual 

constituents as parties to a lawsuit; however, any 

resulting judgment may result in determinations that an act 

or omission of a school was in violation of State or 

Federal law and thus be the basis of a borrower defense for 

an individual within the group identified as injured by the 

conduct for which the government agency brought suit. 

In considering a borrower defense claim, for either an 

individual borrower under proposed §685.222(e) for 

individually-filed applications or for a group of borrowers 

under proposed §685.222(f),(g), and (h), based upon a
66

favorable judgment obtained in court or an administrative 

tribunal, the Department will consider the relief to which 

that judgment entitles the borrower based upon the 

judgment’s findings regarding the school’s liability under 

the state or Federal law at issue, whether or not the form 

and amount of relief was prescribed as part of the 

favorable judgment. Depending on the facts and 

circumstances of the judgment, the Department may determine 

relief as described in proposed §685.222(i).11 The 

Department will also consider to what degree the claimant 

has already received relief as an outcome of the judgment 

at issue, if any. 

The Department is aware that many court cases may not 

result in contested, nondefault judgments, for reasons such 

as settlement. However, we are proposing to limit the 

basis for a borrower defense under §685.222(b) to 

nondefault, contested judgments in courts or administrative 

tribunals. The Department is seeking to establish a 

process that results in accurate determinations of borrower 

defenses after a careful consideration of evidence. We are

 

11 For example, the judgment may be one obtained by an enforcement 

agency and may not identify or require any individual as a party for 

whom particular relief is required; the judgment may simply provide 

injunctive relief, barring a particular practice as violating 

applicable law, but not addressing or requiring any relief for 

individuals; or the judgment may find liability, but also determine 

that the affirmative claim is time-barred. 
67

proposing to consider decisions made by courts and 

administrative tribunals, as the decision-making process in 

those forums similarly involves a consideration of evidence 

from all parties and the decision is one that has been made 

on the merits of the claim. By limiting this standard to 

nondefault, contested judgments, we would reduce or 

eliminate the need for the Department to evaluate the merit 

of borrower claims based on State law by including only 

those judgments that are in fact the product of litigation 

in which both claimant and school challenged the 

contentions of the opponent and a tribunal decided the case 

on the merits. The standard would echo the principle of 

res judicata, whereby parties are bound by a judgment 

entered by a court of competent jurisdiction and may not 

challenge that judgment either before that tribunal or 

before a different tribunal. Default judgments generally 

do not involve the same level of factual and evidentiary 

evaluation, or provide a decision on the merits resulting 

from a contested hearing where all parties have had an 

opportunity to present evidence and arguments. Similarly, 

settlements do not require a decision maker to reach a 

decision after an evaluation of the evidence. As a result, 

we propose that judgments may form the basis of a borrower 

defense only if they are nondefault, contested judgments 
68

rendered by a court or administrative tribunal of competent 

jurisdiction. 

Although other court orders that do not rise to the 

level of a contested, nondefault judgment (e.g., settlement 

or motion to dismiss orders) may not be used to satisfy the 

proposed judgment standard for borrower defense claims, the 

Department welcomes the submission of and will consider any 

such orders, other court filings, admissions of fact or 

liability, or other evidence used in such a court 

proceeding as evidence in the borrower defense process 

under the other proposed standards. The Department would 

also welcome the submission of and will consider any 

arbitration filings, orders, and decisions for 

consideration in the borrower defense process. Similarly, 

we recognize that a party to a suit or administrative 

proceeding may be barred from disputing a factual finding 

or issue decided in that proceeding if that fact or issue 

were to arise in a different case, even if the ruling on 

the fact or issue was not a final judgment on the merits 

resulting from a contested proceeding that meets the 

standard we propose here. We propose to take such findings 

and rulings on such specific facts and issues into account, 

and give them appropriate weight if principles of 
69

collateral estoppel would bar the school from disputing the 

matter. 

Breach of contract

In developing a new Federal borrower defense standard, 

we recognize that students enter into enrollment agreements 

and other contracts with the school to provide educational 

services and that borrowers have, over the years, asserted 

claims for relief against schools for losses arising from a 

breach of those contracts.

12 We therefore propose to 

include a separate ground for relief, based on a breach by 

the school of the contract with the borrower, because such 

claims may not necessarily fall within the scope of the 

substantial misrepresentation component of the Federal 

standard. 

The terms of a contract between the school and a 

borrower will largely depend on the circumstances of each 

claim. For example, a contract between the school and a 

borrower may include an enrollment agreement and any school 

catalogs, bulletins, circulars, student handbooks, or 

school regulations.

13

 

12 See, e.g., Vurimindi v. Fuqua Sch. of Bus., 435 F. App'x 129 (3d Cir. 

2011).

13 In Ross v. Creighton University, 957 F.2d 410 (7th Cir. 1992), 

in describing the limits of a contract action brought by a student 

against a school, the court stated that there is “‘no dissent’” 

from the proposition that “‘catalogues, bulletins, circulars, and 
70

A non-Federal negotiator requested that we limit the

standard to material breaches of contract.

14 The Department 

anticipates that it may receive borrower defense claims 

regarding breaches of contract that may not be considered 

to be material breaches that would have warranted a 

cancellation of the contract between the borrower and the 

school. For example, a breach of contract may pertain to a 

school’s failure to fulfill a specific contractual promise 

to provide certain training or courses, but the school may 

have otherwise performed its other obligations under its 

contract with the borrower. The Department is comfortable 

with its ability to grant relief commensurate to the injury 

to a borrower alleged under the breach of contract 

standard, which may constitute full relief or partial 

relief with respect to a borrower’s Direct Loan. The 

Department’s proposed methods for determining relief, which 

would require a consideration of available evidence and 

arguments by a Department official or a hearing official, 

as applicable, are discussed in more detail under “Borrower 

Relief (34 CFR 685.222(i) and Appendix A).” 

 

regulations of the institution made available to the matriculant’” 

become part of the contract. See 957 F.2d at 416 (citations 

omitted). See also Vurimindi, 435 F. App’x at 133 (quoting Ross).

14 See Modern Law of Contracts § 11:1 (quoting Andersen, A New Look at 

Material Breach in the Law of Contracts, 21 UC Davis L. Rev. 1073 

(1988)) (“[M]ateriality is best understood in terms of the specific 

purpose of the cancellation remedy that material breach entails.”)
71

The non-Federal negotiator also requested that we

exclude claims for educational malpractice or claims 

regarding schools’ academic standards. As explained 

earlier in this discussion, we decline to impose a

materiality requirement, but would consider the 

circumstances underlying a breach of contract borrower 

defense and award relief that is commensurate with the 

injury to the borrower. We also explain under “Borrower 

Defenses–-General (§685.222(a))”))” that the Department 

does not consider claims relating to educational 

malpractice or academic disputes to be within the scope of 

the proposed borrower defense regulations. 

Substantial misrepresentation

The proposed Federal standard for borrower defense 

based upon a substantial misrepresentation is predicated on 

existing regulations in the Student Assistance General 

Provisions (34 CFR 668 subpart F) that address 

misrepresentation. These existing regulations provide a 

clear framework regarding the acts or omissions that would 

constitute misrepresentations as they relate to the nature 

of educational programs, the nature of financial charges, 

and the employability of graduates. 

Under proposed §685.222(d), to establish a borrower 

defense based on a substantial misrepresentation, a 
72

borrower must demonstrate that (1) there was a 

misrepresentation by the college made to the borrower, (2) 

the borrower reasonably relied on that substantial 

misrepresentation when he or she decided to attend, or to 

continue attending, the school, and (3) that reliance 

resulted in a detriment to the borrower.

Substantial misrepresentation: Misrepresentation

We have proposed to revise the definition of 

“misrepresentation” in §668.71 to provide clarity and 

specificity, as it is important that the definition of 

“misrepresentation,” whether for the Department’s 

enforcement purposes or in the borrower defense context,

capture the full scope of acts and omissions that may 

result in a borrower being misled about the provision of 

educational services or making of a Direct Loan. 

Specifically, we propose to replace the word “deceive” 

with “mislead under the circumstances.” In some contexts 

the word “deceive” implies knowledge or intent on the part 

of the school, which is not a required element in a case of 

misrepresentation. Although we stated that the Department 

“considers a variety of factors, including whether the 

misrepresentation was intentional or inadvertent” in the 

preamble to the final rule for subpart F, 75 FR 66915, we 

believe that this proposed change would more clearly 
73

reflect the Department’s intent that a misrepresentation 

does not require knowledge or intent on the part of the 

school. A non-Federal negotiator at the negotiated 

rulemaking requested that specific intent be considered as 

an element of misrepresentation. As the Department 

explained in the preamble to the final rule for subpart F, 

75 FR 66914, while the Department declines to include a 

specific intent element, the Department has always operated 

within a rule of reasonableness and has not pursued 

sanctions without evaluating the available evidence in 

extenuation and mitigation as well as in aggravation. 

Whether using the definitions in subpart F for the 

Department’s enforcement purposes or for evaluating a 

borrower defense claim, we intend to continue to consider 

the circumstances surrounding any misrepresentation before 

determining an appropriate response. That said, the 

general rule is that an institution is responsible for the 

harm to borrowers caused by its misrepresentations, even if 

such misrepresentations cannot be attributed to 

institutional intent. We believe this is more reasonable 

and fair than having the borrower (or the Department) bear 

the cost of such injuries. It is also reflective of the 

consumer protection laws of many States.
74

We also propose to add to the definition of 

“misrepresentation” a sentence addressing omissions, which 

would read, “Misrepresentation includes any statement that 

omits information in such a way as to make the statement 

false, erroneous, or misleading.” Some non-Federal

negotiators were concerned about the use of the word 

“information” as opposed to “facts.” These non-Federal 

negotiators were concerned that the use of the word “facts” 

might imply a higher standard than would be required for a 

borrower to prove a substantial misrepresentation had 

occurred. Another non-Federal negotiator believed that a 

misrepresentation of “facts” more accurately described what 

should be required. Although we believe that the two words 

are effectively synonymous, we propose to use the word 

“information,” as this change was endorsed by most of the 

non-Federal negotiators.

Non-Federal negotiators requested that the Department 

clarify what is meant by “misleading under the 

circumstances,” as used in the proposed definition of 

“misrepresentation.” One non-Federal negotiator asked 

whether the term “under the circumstances” was a reference 

to the use of the term by the Federal Trade Commission 

(FTC). In the 1983 FTC Policy Statement on Deception, the 

FTC clarified that, for a representation, omission, or 
75

practice to be deceptive, it must be likely to mislead 

reasonable consumers under the circumstances.

15 The FTC 

looks at the totality of the practice when determining how 

a reasonable recipient of the information would respond. 

If a representation is targeted to a specific audience, 

then the FTC determines the effect of the practice on a 

reasonable member of that group. We believe it is 

appropriate that, in reviewing a borrower defense claim 

based on a substantial misrepresentation, we similarly

consider the totality of circumstances in which the 

statement or omission occurs, including the specific group 

at which a statement or omission was targeted, to determine 

whether the statement or omission was misleading under the 

circumstances. A statement made to a certain target group

of students may not lead to reliance and injury; however, 

when the statement is made to a different target group that 

may not be the case. 

Moreover, we propose to include the language “under 

the circumstances” to clarify that, to constitute a 

substantial misrepresentation, the misleading statement or 

omission must have been made in a situation where the 

borrower or student should have been able to rely upon the 

 

15 FTC Policy Statement on Deception, 103 F.T.C. 110, 174 (1984) 

(appended to Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984)), available 

at www.ftc.gov/bcp/policystmt/ad-decept.htm.
76

school to provide accurate information. For example, if a 

student is speaking with a course instructor about her 

difficulties paying tuition and the course instructor 

advises her to meet with the financial aid office because 

“there are scholarships available,” that circumstance would 

most likely not create an expectation that the course 

instructor is assuring the student that she will receive a 

scholarship. However, if a student is speaking with a 

financial aid advisor and asks if she will receive 

scholarships to help cover the cost of her education and 

the financial aid advisor says, “Yes. Most of our students 

receive scholarships,” that statement may be considered 

misleading under the circumstances, given that the speaker 

is someone whose professional role is to provide students 

with guidance pertaining to student aid.

Substantial misrepresentation: Reasonable reliance

Although the definition of “substantial 

misrepresentation” in §668.71 requires that the borrower 

reasonably relied on the misrepresentation, or could 

reasonably be expected to rely, proposed §685.222(d) would 

require there to have been actual reasonable reliance. 

Section 668.71 refers to the Department’s enforcement 

authority to impose fines, or limit, suspend, or terminate 

a school’s participation in title IV, HEA programs. As an 
77

enforcement body acting in the public interest, the 

Department believes that it is appropriate for the

Department to be able to stop misrepresentations even 

before any persons are misled, and thus to act upon 

misrepresentations that “could have been reasonably relied 

upon” by a person. However, borrower defenses relate to 

injuries to individual borrowers. Unlike the Department’s 

interest in public enforcement of its regulations and laws, 

an individual borrower’s interest in bringing a borrower 

defense is predicated upon the harm to the borrower. We

also believe that an actual reliance requirement will 

protect the Federal Government, taxpayers, and institutions 

from unsubstantiated claims. As a result, we believe that 

it is appropriate to require that the evidence show that 

the misrepresentation at issue influenced the borrower, or 

led to the borrower’s reliance on the misrepresentation, to 

the borrower’s detriment. We note, however, that a 

rebuttable presumption of reasonable reliance may arise in 

claims brought for a group of borrowers, as we discuss in 

detail under “Group Process for Borrower Defenses--General 

(34 CFR 685.222(f)).”

Generally, reasonable reliance refers to what a 

prudent person would believe and act upon if told something 

by another person. Moreover, reasonable reliance considers 
78

the representation or statement from the viewpoint of the 

audience the message is intended to reach–-in this case, 

prospective or continuing students. Thus, in assessing 

whether a substantial misrepresentation has occurred, the 

Department would consider the facts of the case in the 

context of the audience.

As discussed, the standard requires not just that a 

borrower has relied upon a misrepresentation to the 

borrower’s detriment, but also requires that the reliance 

be reasonable. As discussed in the introduction to this 

“Reasons” section, non-Federal negotiators representing 

students and borrowers, consumer advocacy organizations, 

and legal assistance organizations that represent students 

and borrowers, advocated that the Federal standard include 

a provision for abusive practices on the part of a school, 

particularly as they relate to high pressure or aggressive 

sales tactics. We agree that there has been evidence of 

such conduct on the part of some schools, but believe it 

would be difficult to develop clear, consistent standards 

as to when such conduct, in the absence of any 

misrepresentation by the school, should give rise to a 

right of relief from the loans taken out to attend the 

school. However, we also believe that such high pressure 

or aggressive sales tactics may make borrowers more likely 
79

to rely upon a misrepresentation. As a result, we have

determined that reliance on a misrepresentation may be 

appropriately viewed as more reasonable when the 

misrepresentation is made in the context of certain 

circumstances, including those that may be considered to be 

high pressure or aggressive sales tactics. 

To address these concerns, in proposed §685.222(d) we 

include a non-exhaustive list of examples of factors that, 

if present in conjunction with a misrepresentation on the 

part of the school, would likely elevate that 

misrepresentation to a substantial misrepresentation. 

However, as proposed by the Department, the factors by 

themselves would not necessarily mandate a finding of 

substantial misrepresentation, nor would the absence of any 

of the factors defeat a borrower defense based on 

substantial misrepresentation. It may be entirely 

reasonable for a borrower to rely on a misrepresentation 

without any of these factors present. Rather, as proposed, 

the factors would be non-exhaustive examples of conduct 

that could be considered in a determination of whether a 

borrower’s reliance on a misrepresentation was reasonable, 

even if such reliance would not have been reasonable in the 

absence of such conduct, thus making the misrepresentation 

substantial.
80

Specifically, we looked at the borrower defenses 

before the Department and comments from non-Federal 

negotiators regarding issues such as schools making 

insistent demands of students to make commitments to enroll 

and the borrowers’ lack of information and resources. As a 

result, we propose that a misrepresentation, when coupled 

with conduct that affects a borrower’s understanding of his 

or her decision-making timeframe, such as demanding that 

the borrower make enrollment or loan-related decisions 

immediately or placing an unreasonable emphasis on 

unfavorable consequences of delay, may lead a borrower to 

reasonably rely upon the misrepresentation and, thus,

elevate the misrepresentation to a substantial 

misrepresentation for the purposes of asserting a borrower 

defense. Similarly, conduct that affects a borrower’s 

information-gathering regarding the risks and potential

benefits of his or her decision, such as discouraging a 

borrower from consulting an advisor, a family member, or 

other resources or failing to respond to a borrower’s 

reasonable requests for information, may lead a borrower to 

reasonably rely upon the misrepresentation for the purposes 

of asserting a substantial misrepresentation as a borrower 

defense. We also recognize that school conduct that takes

advantage of the borrower’s distress or lack of knowledge 
81

or sophistication may also elevate the misrepresentation to 

a substantial misrepresentation, by way of affecting a 

borrower’s reasonable reliance on a misrepresentation, for 

the purposes of borrower defense. For example, a school 

may be found to have made statements that would not have 

been misleading to a borrower of average English ability; 

however, when made to a borrower with limited English 

proficiency in a way that takes advantage of the borrower’s 

lack of knowledge or sophistication, the circumstances may 

warrant a borrower defense under the standard. 

As noted above, a non-Federal negotiator requested 

that the Department use a “justifiable” reliance standard.

While a reasonable reliance standard looks to whether a 

reasonably prudent person would be justified in his or her 

reliance and may be measured against the behavior of other 

persons, the justifiable reliance standard is measured by 

reference to the plaintiff’s capabilities and knowledge.

16 

As discussed, the proposed standard would allow 

consideration of practices that would impact a specific 

 

16 See Restatement (Third) of Torts: Liab. for Econ. Harm § 11 TD No 2 

(2014)(“[R]easonableness is measured against community standards of 

behavior. Justifiable reliance has a personalized character. It is 

measured by reference to the plaintiff's capabilities and knowledge; a 

plaintiff's sophistication may affect a court’s judgments about what 

dangers were fairly considered obvious.”). 
82

borrower’s understanding and reliance upon a 

misrepresentation in a way that would reference the 

borrower’s understanding and knowledge. However, the 

Department believes that it is appropriate for the proposed 

standard to consider the perspective of not only the 

borrower, but of similarly situated borrowers, especially 

to the extent it is composed of other Direct Loan borrowers 

or potential Direct Loan borrowers who may be subject to 

the same misrepresentations by the school. As discussed 

under “Group Process for Borrower Defenses--General (34 CFR 

685.222(f)),” “Group Process for Borrower Defenses–-Closed 

School (34 CFR 685.222(g)),” and “Group Process for 

Borrower Defense Claims–-Open School (34 CFR 685.222(h)),” 

in addition to proposing this regulation to provide relief 

for individual borrowers who have filed applications for 

relief, the borrower defense regulation also proposes that 

the Department may initiate a process for determinations as

to both a school’s liability and as to borrower defenses 

for a group of borrowers, which may include those who have 

not applied for relief. As discussed under “Group Process 

for Borrower Defenses--General (34 CFR 685.222(f)),” the 

Department anticipates that such proceedings, in which 

Secretary may recover from the school the amount of losses 

from granting borrower defense relief, will have a 
83

significant deterrent effect on the school and promote 

compliance among other schools in a way that will benefit 

other borrowers. By considering both the individual 

borrower’s perspective and the perspective of similarly

situated borrowers at the institution, we believe the 

Department official or hearing official, as applicable, 

would be able to determine an amount of relief that is fair 

to the borrower and protect the Department’s general 

interest in other Direct Loan borrowers who have also 

attended the school and who may have been subject to the 

same misrepresentations.

The non-Federal negotiator also requested that we 

limit the standard to material misrepresentations. It is 

the Department’s understanding that under Federal deceptive 

conduct prohibitions, a misrepresentation must be material 

for deception to occur. In this context, material 

misrepresentation involves information important to 

consumers, likely to affect the consumer’s choice or 

conduct regarding a product or service.17 The Department 

 

17 See, e.g., F.T.C. Policy Statement on Deception, 103 F.T.C. at 182; 

see also Restatement (Second) of Torts § 538 (1977) (“The matter is 

material if (a) a reasonable man would attach importance to its 

existence or nonexistence in determining his choice of action in the 

transaction in question; or (b) the maker of the representation knows 

or has reason to know that its recipient regards or is likely to regard 

the matter as important in determining his choice of action, although a 

reasonable man would not so regard it.”).
84

believes that a materiality element is not required in 

either the proposed amendments to the definition for the 

Department’s enforcement authority under §668.71 or as this 

definition is adopted for the purposes of the proposed 

Federal standard under §685.222(d). In the context of the 

Department’s enforcement authority, the Department 

previously declined in 2010 to adopt a materiality 

component, stating that the regulatory definition of

“substantial misrepresentation” is “clear and can be easily 

used to evaluate alleged violations of the regulations.” 

75 FR 66916. 

In adopting the definition of “substantial 

misrepresentation” for the purposes of borrower defense, 

the Department similarly believes that the definition is 

clear and can be easily used to evaluate borrower defenses. 

Moreover, a substantial misrepresentation in the borrower 

defense context incorporates similar concepts to 

materiality. Under proposed §685.222(d), the borrower must 

show that he or she “reasonably relied” upon the 

misrepresentation at issue. As discussed above, generally 

materiality refers to whether the information in question 

was information to which a reasonable person would attach 

importance to, in making the decision at issue. Similarly, 

in determining whether the borrower reasonably relied on 
85

the misrepresentation, the Department would consider 

whether the misrepresentation related to information to 

which the borrower would reasonably attach importance in 

making the decision to enroll or continue enrollment at the 

school. As a result, the Department considers it 

unnecessary to add an explicit materiality element to the 

definition of “substantial misrepresentation,” for the 

purposes of claims under the borrower defense regulations.

Substantial misrepresentation: The borrower’s 

detriment

The definition of “substantial misrepresentation,” for 

the purpose of proposed §685.222(d), would require that the 

borrower reasonably relied on the misrepresentation to the 

borrower’s detriment. As noted previously, the proposed 

borrower defense regulations are intended to provide relief 

for individual borrowers for schools’ wrongful conduct that 

led in a meaningful way to harm or injury to the borrower 

based upon the borrower’s specific circumstances. We

believe that a demonstration of detriment or injury to the 

borrower will protect the Federal government, taxpayers, 

and institutions from unsubstantiated claims. As a result, 

we believe that it is appropriate to require that a 

preponderance of the evidence demonstrate the 

misrepresentation at issue influenced the borrower, or led 
86

to the borrower’s reliance on the misrepresentation, to the 

borrower’s detriment. 

Limitation periods

For each of the bases for a borrower defense under the 

proposed Federal standard, the Department considered 

whether there should be a limitation on the time period 

during which borrower defense claims may be brought and, if 

so, what the limitation period should be. Because the 

availability of evidence for a borrower defense that is 

based on a judgment in a court or administrative tribunal

is not a concern, as the only evidence required is the 

judgment itself, we propose no limitation period under 

proposed §685.222(b) for those claims. However, for the 

bases for a borrower defense in proposed §685.222(c) and 

(d), we believe a limitation period is appropriate. A 

limitation period for borrower defense claims based on a 

breach of contract or substantial misrepresentation, by 

encouraging borrowers to assert borrower defense claims 

while memories and evidence are fresh, would make the claim 

resolution process more reliable. 

When considering a limitation period that would 

provide for a reasonable amount of time during which a 

borrower might submit a claim, we also recognized that 

common law generally allows a debtor to assert claims from 
87

the same transaction as the loan at any time as a defense 

to repayment of the loan, but requires a debtor to assert 

any claim for recovery of payments already made within the 

deadlines that would apply had the debtor brought suit on 

the claim. Consistent with that generally applicable 

principle, we propose here that no limitation period would 

apply to borrower defense claims asserted under proposed 

§685.222(c) or (d) as defenses to repayment of any 

outstanding loan obligation. To select an appropriate 

limit on the period during which a claim for recovery may

be made, we looked to the existing limitation periods under 

State and Federal law for similar claims. With regard to a 

borrower defense claim based on a substantial 

misrepresentation, we considered, among other things, 

limitation periods applicable to consumer protection and 

fraud claims, as those claims often address misleading or 

deceptive conduct and are, thus, analogous to claims based 

on a substantial misrepresentation. 

The Department’s research indicates that six years is 

one of the breach of contract limitation periods most 

commonly used by States, as well as the limitation period 

applicable to non-tort claims against the United States, 28 

U.S.C. 2401(a).
88

Because many non-Federal negotiators’ discussions of 

school misconduct included discussions of fraud, the 

Department also considered existing limitation periods for 

fraud. Although limitation periods under State consumer 

protection laws vary, our research indicates that three 

years is one of the most common limitation periods used by 

the States. 

For claims for recovery of payments already made that 

are based on breach of contract, we propose a six-year 

limitation period that would begin upon the breach of 

contract. For claims for recovery of payments already 

made that are based on a substantial misrepresentation, we 

also propose six years as the limitation period, but the

period would begin when a borrower discovers or should have 

reasonably discovered the facts that constitute the 

misrepresentation. Although six years is longer than the 

period afforded under many State laws for fraud and 

consumer protection, other States do provide a six-year 

limitation period for similar claims, and the Department 

believes a six-year period would provide sufficient time 

for a borrower to gather evidence related to a substantial 

misrepresentation. 

The non-Federal negotiators representing consumer 

advocates, legal assistance organizations, and State AGs 
89

suggested that no limitation period should apply to 

defenses to repayment of remaining amounts owed on a debt, 

under the legal principle of recoupment (asserting a claim 

as a defense to repayment). As noted earlier, we propose 

to adopt this position. Later, some non-Federal 

negotiators suggested that, notwithstanding the distinction 

under State and Federal law between recoupment and 

asserting a claim for an affirmative recovery of amounts 

previously paid, the Department should apply no limitation 

period to affirmative claims for recovery. In support of 

this position, they cited the Department’s ability to 

collect on a Direct Loan until it is paid in full or 

discharged. Other non-Federal negotiators, however, 

expressed concerns about having no limitation period for 

borrower defense claims, stating that such an approach 

would result in significant difficulties for a school in 

responding to allegations due to a lack of documentary 

evidence and witnesses and would subject schools to broader 

liability than under the current borrower defense standard 

based upon State law under §685.206(c). 

After careful consideration of the legal principles 

cited by the negotiators, we do not believe there is 

justification to depart from the requirements that Federal 

and State courts generally apply to affirmative claims to 
90

recover amounts already collected on a debt. We believe 

the proposed limitation periods are appropriate for the 

reasons stated above, regarding existing periods of 

limitation in State and Federal law and the Department’s 

interest in the reliability of the claim resolution 

process. However, we seek comment on whether the 

Department should adopt different limitation periods for 

borrower defense claims under §685.222(c) and (d), and, if 

so, what the limitation periods should be, what the

supporting rationale for those periods would be, and why 

those other limitation periods would meet the objectives

outlined in this section.

Non-Federal negotiators asked the Department to 

clarify, with respect to the substantial misrepresentation 

limitation period, when a borrower would be deemed to have 

discovered, or when a borrower should have reasonably 

discovered, the facts constituting a substantial 

misrepresentation. For example, a borrower may learn of a 

substantial misrepresentation upon discussion with other 

students or borrowers, or it may be deemed that a borrower

should have reasonably known of the facts underlying a 

substantial misrepresentation if facts concerning the 

misrepresentation are published in nationwide news 

articles. However, the borrower must demonstrate when the 
91

borrower discovered the facts underlying the specific 

substantial misrepresentation forming the basis of the 

borrower defense. For example, knowledge of one particular 

problem at a school would not necessarily give notice of 

other, unrelated problems. Thus, student warnings issued 

for gainful employment programs under 34 CFR 668.410 or 

relating to repayment rate under proposed §668.41(h), or 

the disclosure of proposed financial protections, such as a 

letter of credit, under proposed §668.41(i), would warn 

students about whether a program could close soon, the 

repayment outcomes of borrowers at the school, or the 

school’s financial risk, but would not put students on 

notice of misrepresentations by the school of matters other 

than earnings and debt of graduates or financial soundness. 

To demonstrate that the borrower is asserting a 

borrower defense within six years of discovery of the facts 

on which the claim is based, the borrower should explain in 

the borrower defense application how he or she learned of 

the substantial misrepresentation and include any 

applicable documents or other information demonstrating the 

source of the knowledge. Again, we note that, under the 

proposed regulations, the borrower may assert a claim based 

on substantial misrepresentation solely for discharge of 

the remaining amount owed on the Direct Loan at any time.
92

Process for individual borrowers (§685.222(e))

Statute: Section 455 of the HEA sets forth the terms and 

conditions of Direct Loan Program loans.

Current Regulations: Section 685.206(c) states that 

borrowers have the right to assert borrower defenses, but 

does not establish any process for doing so. 

Proposed Regulations: Proposed §685.222(e) would establish

the process for an individual borrower to bring a borrower 

defense. Proposed §685.222(e)(1) would describe the steps 

an individual borrower must take to initiate a borrower 

defense claim. First, an individual borrower would submit 

an application to the Secretary, on a form approved by the 

Secretary. In the application, the borrower would certify 

that he or she received the proceeds of a loan to attend a 

school; would have the opportunity to provide evidence that 

supports the borrower defense; and would indicate whether 

he or she has made a claim with respect to the information 

underlying the borrower defense with any third party, and, 

if so, the amount of any payment received by the borrower 

or credited to the borrower's loan obligation. The 

borrower would also be required to provide any other 

information or supporting documentation reasonably 

requested by the Secretary. The Secretary would provide 
93

notice of the borrower’s application for a borrower defense 

to the school at issue. 

Proposed §685.222(e)(2) would describe the treatment 

of defaulted and nondefaulted borrowers upon the 

Secretary’s receipt of the borrower defense claim. If the 

borrower is not in default on the loan for which a borrower 

defense has been asserted, the Secretary would grant an 

administrative forbearance, notify the borrower of the 

option to decline the forbearance and to continue making 

payments on the loan, and provide the borrower with 

information about the availability of the income-contingent 

repayment plans under §685.209 and the income-based 

repayment plan under §685.221. If the borrower is in 

default on the loan for which a borrower defense has been 

asserted, the Secretary would suspend collection activity 

on the loan until the Secretary issues a decision on the 

borrower’s claim; notify the borrower of the suspension of 

collection activity and explain that collection activity 

will resume if the Secretary determines that the borrower 

does not qualify for a full discharge; and notify the 

borrower of the option to continue making payments under a 

rehabilitation agreement or other repayment agreement on 

the defaulted loan.
94

To process the claim, the Secretary would designate a 

Department official to review the borrower’s application to 

determine whether the application states a basis for a 

borrower defense, and would resolve the claim through a 

fact-finding process conducted by the Department official. 

As part of the fact-finding process, the Department 

official would consider any evidence or argument presented 

by the borrower and would also consider any additional 

information, including Department records, any response or 

submissions from the school, and any additional information 

or argument that may be obtained by the Department 

official. The Department official would identify to the 

borrower, and may identify to the school, the records he or 

she considers relevant to the borrower defense. The 

Secretary provides any of the identified records upon 

reasonable request to either the school or the borrower.

At the conclusion of the proposed fact-finding 

process, the Department official would issue a written 

decision. The decision of the Department official would be 

final as to the merits of the claim and any relief that may 

be warranted on the claim. If the Department official 

approves the borrower defense, the Department official 

would notify the borrower in writing of that determination 

and of the relief provided as determined under §685.222(i) 
95

or, if the Department official denies the borrower defense

in full or in part, the Department official would notify

the borrower of the reasons for the denial, the evidence 

that was relied upon, the portion of the loan that is due 

and payable to the Secretary, whether the Secretary will 

reimburse any amounts previously collected, and would 

inform the borrower that if any balance remains on the 

loan, the loan will return to its status prior to the 

borrower’s application. The Secretary would also inform 

the borrower of the opportunity to request reconsideration 

of the claim based on new evidence not previously provided 

or identified as relied upon in the final decision.

Under proposed §685.222(e)(5)(ii), the Secretary could 

reopen a borrower defense application at any time to 

consider evidence that was not considered in making the 

previous decision. The Secretary could also consolidate 

individual applications that have common facts and claims 

and resolve such borrower defenses as a group through the 

group processes described under “Group Process for Borrower 

Defenses--General (34 CFR 685.222(f)),” “Group Process for 

Borrower Defenses–-Closed School (34 CFR 685.222(g)),” and

“Group Process for Borrower Defense Claims–-Open School (34 

CFR 685.222(h)).”
96

Finally, the Secretary could initiate a separate 

proceeding to collect from the school the amount of relief 

resulting from a borrower defense.

Reasons: The current regulations for borrower defense do 

not provide a process for claims. Since Corinthian’s 2015 

bankruptcy, the Department has received a number of 

borrower defense claims from individuals outside of the 

Federal loan relief process initiated by the Department for 

Corinthian students in response to the bankruptcy. The 

lack of guidance has led to confusion for borrowers and 

inconsistency in the types and format of information 

submitted for such requests. To ease the Department’s 

administrative burden in reviewing such requests and the 

burden of borrowers making borrower defense claims, we

propose §685.222(e) to establish clear guidelines for 

individuals who wish to submit a borrower defense claim. 

Many of the non-Federal negotiators at the negotiated 

rulemaking sessions emphasized the advantages of deciding 

claims on a group basis wherever possible. In response to 

these arguments, the proposed regulations would permit the 

Secretary to consolidate individual claims that present 

common facts and claims pertaining to the same school and 

resolve those claims through the group processes described 

under “Group Process for Borrower Defenses--General (34 CFR 
97

685.222(f)),” “Group Process for Borrower Defenses–-Closed 

School (34 CFR 685.222(g)),” and “Group Process for 

Borrower Defense Claims–-Open School (34 CFR 685.222(h)).”

To standardize the form of the requests and facilitate 

the Department’s efficient review, under the proposed 

process, the Department would create an easy-to-use claim 

form for borrower defense for use by individual borrowers 

to provide information regarding the borrower’s Direct Loan

and evidence the borrower may have in support of his or her 

claim, or such other information that the Department may 

reasonably decide is necessary. In addition, the 

application would require the borrower to indicate if he or 

she has submitted a claim to, and received money from,

entities aside from the Department for the same alleged 

harm underlying the borrower defense claim. We believe 

requesting such information is important to make clear to 

borrowers the information the Department needs from them,

to ensure the fairness of the discharge process, and to

protect Federal taxpayers by prohibiting borrowers from 

collecting relief from multiple parties for the same claim. 

If the borrower should choose to be represented by counsel, 

the Department would work directly with such a 

representative, upon receipt of the borrower’s consent.
98

One non-Federal negotiator requested that the 

Department clarify what evidence might be considered by the 

Department official, or hearing official, in the group 

processes discussed under “Group Process for Borrower 

Defenses--General (34 CFR 685.222(f)),” “Group Process for 

Borrower Defenses–-Closed School (34 CFR 685.222(g)),” and 

“Group Process for Borrower Defense Claims–-Open School (34 

CFR 685.222(h)),” when adjudicating a claim for borrower 

defense. Evidence that a borrower could submit as part of 

the application may include, but would not be limited to: 

the borrower’s own statement or declaration regarding the 

claim, statements of any other persons that the borrower 

believes support the claim, and copies of any documents 

that may be relevant to the borrower’s claim. These 

documents may include, for example, copies of the 

enrollment agreement with the school, school catalogs, 

bulletins, letters or other communications, Web page printouts, circulars, advertisements, or news articles. In 

addition to written materials, documents may also include 

any media by which information can be preserved, such as 

videos or recordings. For applications filed by an 

individual, a Department official may also contact the 

borrower to obtain more information and such oral 

statements may also be evidence that would be considered in 
99

the borrower defense process. The Department official may 

also consider other information that the Department has in 

its possession, such as information obtained from the 

school or otherwise obtained by the Department or third 

parties (e.g., accreditors, government agencies). The kind 

of evidence that will be needed and available to determine 

the validity of the borrower’s claim will vary from case to 

case and will depend on the specific circumstances of each 

borrower’s claim.

The Department also proposes in §685.222(e)(7) that 

the Secretary may initiate a separate proceeding to collect 

from the school the amount of relief resulting from a 

borrower defense determined under §685.222(e). As 

proposed, the Secretary may initiate a proceeding to 

recover against the school, but may also determine that a 

separate proceeding will not be initiated. For example, 

the Secretary may decide not to initiate such a proceeding 

due to evidentiary constraints. The Department intends 

that the proposed fact-finding process used for an 

individual borrower defense claim would be separate and 

distinct from the Department’s efforts to recover from 

schools any losses arising from a borrower defense. The 

final decision would determine the amount of relief to be 

awarded, which in turn would determine the amount of losses 
100

to the Secretary that the Department can then collect from 

the school. However, the Department’s proposed regulation 

would not condition borrower relief awarded in this 

proceeding on whether the Secretary has the actual ability 

to recover those losses from the school. Rather, the 

Department will provide relief to the borrower according to 

the final decision of this process, and the Department’s 

action to recover losses from the school will follow in a 

separate proceeding. 

Group Process for Borrower Defenses--General (§685.222(f))

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 487 of the HEA provides that institutions 

participating in the title IV, HEA programs shall not 

engage in substantial misrepresentation of the nature of 

the institution’s education program, its financial charges, 

or the employability of its graduates.

Current Regulations: Section 685.206(c) states that 

borrowers have the right to assert borrower defenses, but 

does not establish any process for doing so. 

Proposed Regulations: Proposed §685.222(f) would provide a 

framework for the borrower defense group process, including
101

descriptions of the circumstances under which borrower 

defense claims asserted by or with regard to a group could

be considered and the process the Department would follow

for borrower defenses for a group. 

Generally, we propose that the Secretary would 

initiate a review of borrower defense claims asserted by or 

with regard to a group. This would occur when, upon 

consideration of factors including, but not limited to, the 

existence of common facts and claims among borrowers that 

are known to the Secretary, fiscal impact, and the 

promotion of compliance by the school or other title IV,

HEA program participants, the Secretary determines it is 

appropriate to initiate a process to determine whether a 

group of borrowers has a common borrower defense.

The proposed regulations would also provide for 

members of the group to be identified by the Secretary from 

individually filed applications or from any other source of 

information. Moreover, if the Secretary determines that 

common facts and claims exist that apply to borrowers who 

have not filed an application, the Secretary could include 

such borrowers in the group.

Once a group of borrowers with common facts and claims 

has been identified, under §685.222(f)(2)(i), the Secretary 

would designate a Department official to present the 
102

group’s common borrower defense claim in the fact-finding 

process described in §685.222(g) or (h) of this section, as 

applicable, and would provide each identified member of the 

group with notice that allows the borrower to opt out of 

the proceeding. The Secretary would notify the school, as 

practicable, of the basis of the group’s borrower defense,

the initiation of the fact-finding process, any procedure 

by which to request records, and how the school should 

respond.

For a group of borrowers with common facts and claims 

for which the Secretary determines there may be a borrower 

defense on the basis of a substantial misrepresentation 

that was widely disseminated, there would be a rebuttable 

presumption that all of the members of the group reasonably 

relied on the misrepresentation.

Reasons: In response to requests by non-Federal 

negotiators representing students and borrowers, consumer 

advocacy organizations, and legal assistance organizations, 

we propose to establish a group claim process that is 

designed to be simple, accessible, and fair, and to promote

greater efficiency and expediency in the resolution of 

borrower defense claims.

The Secretary would determine whether a group process 

should be initiated after consideration of relevant 
103

factors. We expect that the Secretary would initiate a 

group process only where there are common facts and claims 

among the borrowers. These common facts and claims may 

emerge, for example, from the Department’s analysis of 

individual borrower defense claims; the identification by 

the Secretary of factors that indicate a school has engaged 

in substantial misrepresentation that has potentially 

impacted a group of borrowers; the Department’s receipt of 

a judgment possibly affecting a group of borrowers in the 

same way; the Department’s identification of a breach of 

contract that may affect a group of borrowers; or, for 

loans first disbursed before July 1, 2017, the Department’s 

knowledge of a violation of State law relating to the 

making of Direct Loans or provision of education services 

affecting a group of borrowers. Evidence for any of these 

determinations might come from submissions to the 

Department by claimants, State AGs or other officials, or 

advocates for claimants, as well as from the Department’s 

investigations.

We also propose that if the Secretary determines that 

there are common facts and claims that may affect numerous 

borrowers, the Secretary may include in the group those 

borrowers whom we can identify from Department records who 

are likely to have experienced conduct involving common 
104

facts as those who have filed, and who could be expected to 

have similar claims, even if those we identify have not 

filed a borrower defense application. The Department 

believes that including such borrowers would allow for 

faster relief for a broader group of borrowers than if the 

process is limited to just those who file applications for 

relief.

In proposed §685.222(f), we specify that, in 

determining whether to initiate a group process, the 

Secretary may also consider other factors. These factors 

include items such as the fiscal impact of considering 

claims only in individual instances and the significant 

amount of administrative resources required to consider 

such claims one by one, the promotion of compliance by 

pursuing recovery from the schools in aggregated amounts 

that may affect a school’s interests, and the deterrent 

effect such actions can be expected to have on both the 

individual school and similarly situated schools. Although 

the Department intends to carefully weigh the above factors 

in deciding whether to initiate a group process--which we 

anticipate will have more formal processes and procedures, 

involvement by the school, and commitment of administrative 

resources by the Department--the Department’s consideration 

of such factors for the initiation of a group process would
105

not prevent individual borrowers from obtaining 

determinations. Individual borrowers would be able to 

continue to seek relief and obtain determinations as 

described in proposed §685.222(e), and could also opt out 

of a group process as described in proposed §685.222(f)(2) 

at the outset and utilize the process in §685.222(e). 

We believe the Secretary is best positioned to make a 

determination as to whether a group process is appropriate 

since the Secretary is likely to have the most information 

regarding the circumstances that warrant use of a group 

process. However, non-Federal negotiators requested that 

State AGs and legal assistance organizations be allowed to 

request that the Secretary initiate a group process and to 

make submissions in those processes, and that the Secretary 

be required to issue written responses to such requests and 

submissions. The Department always welcomes cooperation 

and input from other Federal and State enforcement 

entities, as well as legal assistance organizations and 

advocacy groups. In our experience, such cooperation is 

more effective when it is conducted through informal 

communication and contact. Accordingly, we have not 

incorporated a provision regarding written responses from 

the Secretary, but plan to create a point of contact for 

State AGs to allow for active channels of communication on 
106

borrower defense issues, and reiterate that we welcome a 

continuation of cooperation and communication with other 

interested groups and parties. As indicated above, the 

Department is also fully ready to receive and make use of 

evidence and input from other stakeholders, including 

advocates and State and Federal agencies.

In response to negotiator concerns, the proposed group 

process is designed to ensure that the school has an 

opportunity for a full and fair opportunity to be heard 

regarding claims. We propose that, when the Secretary 

determines that the group claim process is appropriate, the 

Department would assume responsibility for presenting the 

group’s claims in the administrative proceeding against the 

school. Because the administrative proceeding will 

determine both the validity of the borrowers’ claims and 

the liability of the school to the Department, the 

Department believes that it is the appropriate party to 

present the claims. Additionally, by undertaking this 

role, the Department intends to reduce the likelihood that

third parties, such as debt “counselors” or collection 

companies, are able to prey upon borrowers unfamiliar with 

the borrower defense process by promoting their services to 

arrange relief, and to lessen the legal costs and 

administrative burden to borrowers in the process.
107

In response to negotiator concerns, we have proposed 

that a borrower could opt out of a group borrower defense

claim action, and instead submit an individual application. 

This would allow the individual to make his or her own case 

(with or without legal representation), giving the 

individual the same right to control the assertion of the 

individual’s claim as would be available in a class action. 

Fed. R. Civ. Proc. 23(c). A determination made in the 

administrative proceeding on the group claim would be given 

substantial weight in any subsequent evaluation of the 

individual claim of a borrower who “opted out” of the group 

process. 

Finally, for a group of borrowers with common facts 

and claims for which the Secretary determines there may be 

a borrower defense on the basis of a substantial 

misrepresentation that was widely disseminated, there would 

be a rebuttable presumption that all of the members of the 

group to which the representation was made reasonably 

relied on the misrepresentation. If a representation that 

is reasonably likely to induce a recipient to act is made 

to a broad audience, we consider it logical to presume that 

those audience members did in fact rely on that

representation. We believe there is a rational nexus 

between the publication of the misrepresentation and the 
108

likelihood of reliance by the audience such that we propose 

to adopt a rebuttable presumption that all members of the 

group did in fact so rely.18 This rebuttable presumption 

would shift the burden to the school, requiring the school

to demonstrate that individuals in the identified group did 

not in fact rely on the misrepresentation at issue. 

Group Process for Borrower Defenses–-Closed School 

(§685.222(g))

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.

Current Regulations: Section 685.206(c) states that 

borrowers may assert borrower defenses, but does not 

establish any process for doing so. 

 

18 Case law requires no more than such a rational nexus:

 . . [A]dministrative agencies may establish presumptions, “as 

long as there is a rational nexus between the proven facts and 

the presumed facts.” Cole v. U.S. Dep't of Agric., 33 F.3d 

1263, 1267 (11th Cir.1994); Sec'y of Labor v. Keystone Coal

Mining Corp., 151 F.3d 1096, 1100-01 (D.C.Cir.1998) (stating 

that presumptions are permissible “if there is ‘a sound and 

rational connection between the proved and inferred facts’”) 

(quoting Chem. Mfrs. Ass'n v. Dep't of Transp., 105 F.3d 702, 

705 (D.C.Cir.1997)). “Appellants bear ‘the heavy burden of 

demonstrating that there is no rational connection between the 

fact proved and the ultimate fact to be presumed.’” USX Corp.,

395 F.3d at 170 (quoting Cole, 33 F.3d at 1267).

U.S. Steel Corp. v. Astrue, 495 F.3d 1272, 1284 (11th Cir. 2007).
109

Proposed Regulations: Section 685.222(g) of the proposed 

regulations would establish a process for review and 

determination of borrower defense claims for groups 

identified by the Secretary for which the claims relate to 

Direct Loans to attend a school that has closed and has 

provided no financial protection currently available to the 

Secretary from which to recover any losses based on 

borrower defense claims, and for which there is no 

appropriate entity from which the Secretary can otherwise 

practicably recover such losses.

Under proposed §685.222(g)(1), a hearing official 

would review the Department official’s basis for 

identifying the group and resolve the claim through a factfinding process. As part of that process, the hearing 

official would consider any evidence and argument presented 

by the Department official on behalf of the group and, as 

necessary to determine any claims at issue, on behalf of 

individual members of the group. The hearing official 

would consider any additional information the Department 

official considers necessary, including any Department 

records or response from the school or a person affiliated 

with the school as described in §668.174(b) as reported to 

the Department or as recorded in the Department’s records,

if practicable. As discussed under “Borrower Relief (34 
110

CFR 685.222(i) and Appendix A),” the hearing official may 

also request information as described in §685.222(i)(1).

The hearing official would issue a written decision

determining the merits of the group borrower defense claim. 

If the hearing official approves the borrower defense, that 

decision would notify the members of the group of that 

determination and of the relief provided on the basis of 

the borrower defense claim. If the hearing official denies 

the borrower defense in full or in part, that decision

would state the reasons for the denial, the evidence that 

was relied upon, the portion of the loans that are due and 

payable to the Secretary, and whether reimbursement of 

amounts previously collected is granted, and would inform 

the borrowers that if any balance remains on their 

respective loans, the loans will return to their statuses

prior to the group process. The Secretary would provide 

copies of the written decision to the members of the group, 

and, as practicable, to the school.

Similar to the individual claim process, the hearing 

official’s decision would be final as to the merits of the 

group borrower defense and any relief that may be granted 

on the group borrower defense. However, if relief for the 

group was denied in full or in part, an individual borrower 

would be able to request that the Secretary reconsider the 
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borrower defense upon the identification of new evidence in 

support of the borrower’s individual borrower defense claim 

as described in proposed §685.222(e)(5)(i). Additionally,

the proposed regulation provides that the Secretary may

also reopen a borrower defense application at any time to 

consider evidence that was not considered in making the 

previous decision.

Reasons: When a group borrower defense is asserted with 

respect to Direct Loans to attend a school that has closed 

and has provided no financial protection currently 

available to the Secretary from which to recover any losses 

based on borrower defense claims, and for which there is no 

appropriate entity such as a corporate owner of a school 

from which the Secretary can otherwise practicably recover 

such losses,19 the proposed regulations on the process for 

resolving the claim would focus on the arguments and 

evidence that may be brought by the Department official 

before a hearing official. 

 

19 In some instances, the Department may consider a school owned by a 

corporate parent to be financially responsible based on an evaluation 

of the consolidated balance sheets of the school, the parent

corporation, and affiliated subsidiaries. 34 CFR 668.23(d)(2). If the 

school is considered to be financially responsible only based on the 

assets of the consolidated entities, the Department requires the parent 

corporation to execute the Program Participation Agreement by which the 

school participates. 
112

We expect that the fact-finding process in this case 

would occur after a school has liquidated its assets and,

thus, would not typically involve the school. The evidence 

and records used to make a determination would be largely 

composed of the common facts and claims that served as the 

basis for forming the group.

While this group borrower defense process would not

typically involve the school, a hearing official would 

still preside over the fact-finding process to ensure that 

the decision is based on a sound and thorough evaluation of 

the merits of the claim. The hearing official would 

consider the arguments and evidence presented by the 

designated Department official and, as discussed under 

“Borrower Relief (34 CFR 685.222(i) and Appendix A),” may 

also request information under proposed §685.222(i)(1). 

Group Process for Borrower Defense Claims–-Open School 

(§685.222(h))

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.

Current Regulations: Section 685.206(c) states that 

borrowers may assert borrower defenses, but does not 

establish any process for doing so. 
113

Proposed Regulations: Proposed §685.222(h) would establish 

the following process for groups identified by the 

Secretary for which the borrower defense is asserted with 

respect to Direct Loans to attend an open school.

A hearing official would resolve the borrower defense 

and determine any liability of the school through a factfinding process. As part of the process, the hearing 

official would consider any evidence and argument presented 

by the school and the Department official on behalf of the 

group and, as necessary, evidence presented on behalf of 

individual group members. As discussed under “Borrower 

Relief (34 CFR 685.222(i) and Appendix A),” the hearing 

official may also request information as described in

§685.222(i)(1). 

The hearing official would issue a written decision, 

regardless of the outcome of the group borrower defense. 

If the hearing official approved the borrower defense, that 

decision would describe the basis for the determination,

notify the members of the group of the relief provided on 

the basis of the borrower defense, and notify the school of 

any liability to the Secretary for the amounts discharged 

and reimbursed.

If the hearing official denied the borrower defense in 

full or in part, the written decision would state the 
114

reasons for the denial, the evidence that was relied upon,

the portion of the loans that are due and payable to the 

Secretary, whether reimbursement of amounts previously 

collected is granted, and would inform the borrowers that 

their loans–-in the amounts determined to be enforceable 

obligations--will return to their statuses prior to the 

group borrower defense process. It also would notify the 

school of any liability to the Secretary for any amounts 

discharged. The Secretary would provide copies of the 

written decision to the members of the group, the 

Department official, and the school. 

The hearing official’s decision would become final as 

to the merits of the group borrower defense claim and any 

relief that may be granted within 30 days after the 

decision is issued and received by the Department official 

and the school unless, within that 30-day period, the 

school or the Department official appeals the decision to 

the Secretary. A decision of the hearing official would

not take effect pending the appeal. The Secretary would 

render a final decision following consideration of any 

appeal. 

After a final decision has been issued, if relief for 

the group has been denied in full or in part, a borrower 

may file an individual claim for relief for amounts not 
115

discharged in the group process. In addition, the 

Secretary may reopen a borrower defense application at any 

time to consider evidence that was not considered in making 

the previous decision, as discussed above.

The Secretary would collect from the school any amount 

of relief granted by the Secretary for the borrowers’ 

approved borrower defense. Relief may include discharge of 

some or all accrued interest, and the loss to the 

government in those instances will include that discharged 

interest. 

Reasons: The group borrower defense process involving an 

open school would be structured to provide substantive and 

procedural due process protections to both the borrowers 

and the school. By having a Department official present 

the group’s borrower defense claims, the Department seeks 

to lessen, if not eliminate, the need for borrowers to 

retain counsel in order to pursue relief and remove 

potential difficulties that navigating the borrower defense 

process could present for borrowers. As proposed, schools 

would have the opportunity to raise arguments and evidence, 

including any defenses, in the proceeding. Additionally, 

as discussed under “Borrower Relief (34 CFR 685.222(i) and 

Appendix A),” the hearing official may also independently 

request information as described in §685.222(i)(1). 
116

The open school process would also provide for an 

appeal to the Secretary of the hearing official’s decision, 

by either the school or the Department official. The 

proposed regulations would allow individual members of the 

group to request reconsideration of their individual claims

upon the presentation of new evidence in the event the 

group claim is not successful.

Non-Federal negotiators requested clarification as to 

whether a hearing official’s determination of borrower 

relief in the open school process would be contingent upon 

the Department’s ability to recover its losses from 

granting such relief from the school. The final decision 

of the hearing official, or of the Secretary upon appeal, 

would determine the amount of relief to be awarded, which 

in turn would determine the amount of losses to the 

Secretary that the Department can then collect from the 

school under proposed §685.222(h)(5). However, while the 

final decision will include a determination as to a 

school’s liability for the conduct in question, the 

Department intends that determinations of borrower relief 

will be independent of, and not contingent upon, 

determinations of school liability that will lead to the 

Department’s ability to recover the losses it incurs from 

granting such relief. 
117

Borrower Relief (§685.222(i) and Appendix A)

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.

Current Regulations: Section 685.206(c) states that, in 

the event of a successful borrower defense claim against 

repayment, the Secretary would notify the borrower that he 

or she is relieved of the obligation to repay all or part 

of the loan and associated costs and fees, and also affords 

the borrower further appropriate relief. This further 

relief may include, but is not limited to, reimbursement 

for amounts paid toward the loan voluntarily or through 

enforced collection, a determination that the borrower is 

not in default and is eligible to receive title IV, HEA 

program aid, and updating reports to consumer reporting 

agencies.

Proposed Regulations: Proposed §685.222(i)(1) describes 

the proposed process by which a borrower’s relief would be 

determined when a borrower defense claim is approved under 

the procedures in §685.222(e), (g), or (h). The Department 

official or–-for group claims, the hearing official--

charged with adjudicating the claim would determine the 

appropriate method for calculating, and amount of, relief 
118

arising out of the facts underlying the borrower’s claim, 

based upon the information gathered by, or presented to and 

considered by, the official. The amount of relief may 

include a discharge of all amounts owed to the Secretary on 

the loan at issue and may include the recovery of amounts 

previously collected by the Secretary on the loan, or some 

lesser amount. The official would consider the 

availability of information required for a method of 

calculation and could use one or more of the methods 

described in Appendix A to the proposed regulations, or 

some other method determined by the official. For group 

claims, the official could consider information from a 

sample of borrowers in the group. 

The designated Department official would notify the 

borrower of the relief determination and the potential for 

tax implications and would provide the borrower an 

opportunity to opt out of group relief, if applicable.

Consistent with the determination of relief, the 

Secretary would discharge the borrower’s obligation to 

repay all or part of the loan and associated costs and fees 

that the borrower would otherwise be obligated to pay and, 

if applicable, would reimburse the borrower for amounts 
119

paid to the Secretary toward the loan voluntarily or 

through enforced collection.20 

The Secretary or the hearing official, as applicable, 

would afford the borrower such further relief as the 

Secretary or the hearing official determines is appropriate 

under the circumstances. That relief would include, but 

not be limited to, determining that the borrower is not in 

default on the loan and is eligible to receive assistance 

under title IV of the HEA, and updating reports to consumer 

reporting agencies to which the Secretary previously made 

adverse credit reports with regard to the borrower's Direct 

Loan. 

The total amount of the relief granted with respect to 

a borrower defense cannot exceed the amount of the loan and 

any associated costs and fees, and would be reduced by the 

amount of any refund, reimbursement, indemnification, 

restitution, compensatory damages, settlement, debt 

 

20 Reimbursement includes only the actual gross amount paid, including 

any amount used to defray collection costs, but does not include 

interest on the amount paid. 

“Under the long-standing ‘no-interest rule,’ sovereign 

immunity shields the U.S. government from interest charges for 

which it would otherwise be liable, unless it explicitly 

waives that immunity[.]” Sandstrom v. Principi, 358 F.3d 1376, 

1379 (Fed.Cir.2004).

DMS Imaging, Inc. v. United States, 123 Fed. Cl. 645, 660 (2015). 

There is no waiver of that immunity in the HEA. 
120

forgiveness, discharge, cancellation, compromise, or any 

other benefit received by, or on behalf of, the borrower 

that was related to the borrower defense. The relief to 

the borrower may not include non-pecuniary damages such as 

inconvenience, aggravation, emotional distress, or punitive 

damages.

Appendix A describes some of the methods the Secretary 

could employ to calculate relief if the requested relief 

for a borrower defense is approved in full or in part. The 

amount of relief may include a cancellation of the 

outstanding balance on the loan at issue, or some lesser 

amount, and may include the recovery of amounts previously 

collected by the Secretary on the portion of the loan 

determined to be not enforceable against the borrower as a 

result of the borrower’s claim, taking into account any 

limiting factors such as applicable limitation periods or 

statutes of limitation. The methods described include the 

following:

 The difference between what the borrower paid and 

what a reasonable borrower would have paid had the school 

made an accurate representation as to the issue that was 

the subject of the substantial misrepresentation underlying 

the borrower defense claim;
121

 The difference between the amount of financial 

charges the borrower could have reasonably believed the 

school was charging, and the actual amount of financial 

charges made by the school, for claims regarding the cost 

of a borrower’s program of study; and

 The total amount of the borrower’s economic loss, 

less the value of the benefit, if any, of the education 

obtained by the borrower. Economic loss, for the purposes 

of this section, may be no greater than the amount of the 

cost of attendance. The value of the benefit of the 

education may include transferable credits obtained by the 

borrower,, and, for gainful employment programs, qualifying 

placement in an occupation within the Standard Occupational 

Classification (SOC) code for which the training was 

provided, provided that the borrower’s earnings meet the 

expected salary for the program’s designated occupation(s) 

or field, as determined using an earnings benchmark for 

that occupation. The Department official or hearing 

official will consider any evidence indicating that no 

identifiable benefit of the education was received by the

student. 

The Secretary may also calculate the borrower’s relief on 

the basis of such other measures as the Secretary may 

determine.
122

Reasons: The proposed regulations provide for the 

determination of relief commensurate with the borrower’s 

injury stemming from the act or omission of the school 

asserted in the borrower defense claim. While some 

borrower defenses may merit a discharge of the full amount 

of the Direct Loan, other claimants may prove an injury in 

an amount less than that full amount. After considering

relevant facts and data, the Department official or the 

hearing official, as applicable, would determine an amount 

of relief that is fair to the borrower. This approach 

would compensate borrowers fairly for the harm they 

suffered while protecting the fiscal interests of the 

Federal government.

Proposed §685.222(i)(5) would provide that the relief 

provided to a borrower under §685.206(c) or §685.222 may 

not exceed the amount of the Direct Loan and associated 

costs and fees. The Department’s ability to provide relief 

for borrowers is predicated upon the existence of the 

borrower’s Direct Loan, and the Department’s ability to 

provide relief for a borrower on a Direct Loan is limited 

to the extent of the Department’s authority to take action 

on such a loan. Section 455(h) of the HEA, 20 U.S.C.

1087e(h), gives the Department the authority to allow 

borrowers to assert “a defense to repayment of a [Direct 
123

Loan],” and discharge outstanding amounts to be repaid on 

the loan. However, section 455(h) also provides that “in 

no event may a borrower recover from the Secretary . . . an 

amount in excess of the amount the borrower has repaid on 

such loan.” As a result, the Department may not reimburse 

a borrower for amounts in excess of the payments that the 

borrower has made on the loan to the Secretary as the 

holder of the Direct Loan. Additionally, proposed 

§685.222(i)(5) would reduce a borrower’s amount of relief 

from the borrower defense process by any amounts that the 

borrower obtained pursuant to such other sources for 

reasons discussed under “Process for Individual Borrowers 

(34 CFR 685.222(e)).” The rule is intended to prevent a 

double recovery for the same injury at the expense of the 

taxpayer. Because the borrower defense process relates to 

the borrower’s receipt of a Federal loan, we would reduce

the amount of a borrower’s relief from the borrower defense 

process by the amount received from such other sources only 

if the relief from the other sources also relates to the 

Federal loan that is the subject of the borrower defense.

Additionally, proposed §685.222(i)(5) would also 

clarify that a borrower may not receive non-pecuniary 

damages such as damages for inconvenience, aggravation, 

emotional distress, or punitive damages. We recognize 
124

that, in certain civil lawsuits, plaintiffs may be awarded 

such damages by a court. However, such damages are not 

easily calculable and may be highly subjective. The 

Department believes that excluding non-pecuniary damages 

from relief under this rule would help produce more

consistent and fair results for borrowers. 

Subject to these limitations, the Department’s 

proposal would require that the designated Department 

official, or hearing official, as applicable, determine the 

appropriate method for calculating the relief to the 

borrower and the amount of such relief, whether relief to 

the borrower was approved in full or in part. 

Determinations on borrower defenses may vary widely, 

depending on the underlying basis of the claim and 

circumstances alleged, as well as the level of injury 

suffered by or detriment to the borrower. For example, for

a borrower defense claim brought for a breach of a discrete 

contractual term such as a school’s failure to provide some 

specific service, the borrower’s injury may be more 

appropriately calculated in consideration of the value of 

that service and may not warrant a full discharge of the 

borrower’s loan and full reimbursement of payments on the 

loan made to the Secretary. For example, if the school 

contractually promised to provide tutoring services, but 
125

failed to provide such services, then the borrower would

receive the cost of such tutoring services as relief under 

the proposed method.

We also recognize that the feasibility of any 

particular method of calculation may be limited due to a 

lack of available information required for such a method. 

Information regarding tuition prices among comparable 

programs in a specific geographic region may not be 

available or suitable for use in the calculation of relief 

for an individual borrower’s claim, but may in certain 

circumstances be available and relevant for the calculation 

of relief for a group of borrowers. To permit the 

Department official or the hearing official, as applicable, 

to determine the appropriate method of calculation and to 

determine relief, the proposed regulations would provide 

that the official may request information for such 

purposes. Additionally, the proposed regulations would 

require the official to consider what information may be 

feasibly obtained in selecting a method of calculation and 

in making requests for information. 

For determinations of relief for a group of borrowers

pursuant to §685.222(g) and (h), the Department also 

believes it is appropriate to allow the hearing official to 

consider evidence from a sample of borrowers from the 
126

group. The proposed group claim processes are designed to 

facilitate the efficient adjudication of borrower defenses 

with common facts and claims. We believe that allowing a 

calculation of relief based upon information from a sample 

of borrowers would facilitate this goal. However, the

hearing official would consider in each case the 

feasibility of using a sample, and the method of 

determining the sample, in determining the appropriate 

method for calculating relief.

In proposed §685.222(i)(1), the Department also crossreferences proposed Appendix A to subpart B of part 685, 

which lists specific methods by which a borrower’s relief 

may be calculated. Appendix A notes that the amount of the 

borrower’s relief may include a discharge of all amounts 

owed to the Secretary on the loan at issue, or a lesser 

amount, and may include the recovery of amounts previously 

collected by the Secretary on the loan. The Department 

recognizes that the choice and use of any method listed in 

Appendix A may vary depending on the availability of 

information and underlying facts and claims for the 

borrower defense, as noted in paragraph (i)(1), and also 

notes that the designated Department official or hearing 

official, as applicable, may use another method that is not 

listed to calculate relief. However, the Department 
127

proposes the methods in Appendix A as possible 

methodologies for a designated Department official or 

hearing official, as applicable, to consider in determining 

calculations for relief.

The first proposed method in Appendix A applies in the 

case of a substantial misrepresentation and looks to the 

difference between what was actually paid by a borrower in 

reliance on a misrepresentation, and what the borrower 

would have paid if the borrower had been given an accurate 

understanding of the subject of the substantial 

misrepresentation. The item at issue in the substantial 

misrepresentation could include the total cost of 

attendance at a school, or could pertain to a specific 

service related to the making of the borrower’s Direct Loan 

or the provision of educational services for which the loan 

was provided. In some situations, as when the borrower 

receives education that proves to be worthless, a

substantial misrepresentation may warrant full relief, 

without further analysis. However, in other situations,

the Department believes it may be appropriate to determine 

a borrower’s relief by restoring to the borrower the value 

of what he or she paid for, but did not receive. We 

believe that such an approach is consistent with the 

Department’s interest in providing relief to borrowers for 
128

the harm they suffered while protecting the Federal 

taxpayer and the interests of the Direct Loan Program.

The second proposed method in Appendix A looks to the 

difference between the amount of financial charges a 

borrower reasonably believed that a school was charging, 

and the actual amount of charges made by the school 

regarding the cost of a borrower’s program of study. For 

example, if a school misrepresented the amount of a 

participation fee or the costs of books for a specific 

class, under this method, the borrower would be entitled to 

the difference between what the borrower reasonably thought 

the charges were as represented by the school, and the 

actual costs of such items. To the extent that a borrower 

did, for example, participate in such an experience or did 

receive the books, we believe that such an approach 

balances the borrower’s interest in paying actual costs 

with the Department’s interest in protecting the Federal 

taxpayer.

The third proposed method in Appendix A is based on 

the concept that, if circumstances warrant, a borrower may 

be entitled to receive the total amount of his or her 

economic loss. Economic loss may not be greater than the 

borrower’s cost of attendance, which is a term defined in 

section 472 of the HEA, 20 U.S.C. 1087ll. Pursuant to 
129

section 472, a borrower may obtain Federal financial aid up 

to the cost of attendance at a school and may use that aid 

only for expenses related to attendance, which include

costs such as tuition and fees; allowances for books, 

supplies, transportation, and miscellaneous personal 

expenses; allowances for room and board; and allowances for 

dependent care for students with dependents, among others. 

The Department has stated that it will recognize borrower 

defenses only if they are directly related to the making of 

a Direct Loan or to the school’s provision of educational 

services for which the loan was provided. 60 FR 37768, 

37769. Section 484(a)(4)(A) of the HEA requires the 

borrower to commit to use title IV, HEA funds received 

only to pay expenses incurred to attend the school. By

clarifying that a borrower’s relief under the proposed 

method may be no greater than the borrower’s cost of 

attendance at the school, the proposed approach would avoid

the difficulty of attempting to track which particular 

expense the borrower paid with the loan proceeds, as 

opposed to those paid with grant funds or personal funds. 

It would do so by including only those costs that Congress 

considered to be costs that all title IV, HEA applicants 

would incur and warrant Federal consideration and support. 

The third proposed method would also note that the relief 
130

measured will be reduced by the value of the benefit, if 

any, of the education. We recognize that under some 

circumstances, a borrower’s education will be deemed to 

have no value, and thus the borrower’s relief would be 

measured by the borrower’s total economic loss, subject to 

the limit that the borrower’s relief can only be approved 

up to the amount of the borrower’s Direct Loan. The 

proposed method explicitly states that the Department 

official, or hearing official, will consider any evidence 

that no benefit was received by the student. However, in 

other circumstances, we believe it will be appropriate for 

a designated Department official or hearing official, as 

applicable, to consider the value provided by the 

education, as determined by the official. For example, if 

a borrower obtained transferrable credits, then the 

borrower can use those credits towards the completion of 

his or her education at another school, thus reducing his 

or her cost of attendance at that other institution. 

However, if transferability of those credits is limited due 

to the school’s accreditation or for other reasons, then 

the hearing official or designated Department official may 

consider such factors and assign due value to the credits. 

Similarly, for gainful employment programs, where the 

explicit purpose of such programs is to train students for 
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specific vocations, the Department believes it could be 

appropriate to consider whether the borrower obtained 

qualifying placement with earnings commensurate with the 

expected earnings for the occupation or field for which the 

borrower obtained his or her training. The expected salary 

would be determined using an earnings benchmark for that 

occupation. Although the proposed method would note 

transferable credits and qualifying placement and earnings 

for gainful employment program borrowers as possible 

indicators of value, this list is not exhaustive and the 

hearing official or designated Department official would be 

permitted to also consider other factors. As with the 

other proposed methods, we believes this approach balances 

the interest of the Federal taxpayer with a borrower’s 

interest in paying for only the true cost of his or her 

education, in light of the act or omission of the school 

giving rise to the borrower defense. 

Non-Federal negotiators requested that the Department 

create a presumption of full discharge and reimbursement of 

amounts paid on the loan whenever a borrower defense is 

approved by the Department. In cases where a Department 

official is making determinations, under proposed 

§685.222(e), such a presumption would shift the burden of 

disproving loss to the Department. In cases where a group 
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process has been initiated under proposed §685.222(f)–(h), 

this burden would be shifted to the school. However, as 

noted, the Department has a responsibility to protect the 

interests of Federal taxpayers and such burden shifting is 

not justified when losses from borrower defenses may be 

borne by the taxpayer. The Department believes that to 

balance its interest in protecting the taxpayer with its 

interest in providing fair outcomes to borrowers, the 

Department must consider the extent to which claimants 

actually suffered financial loss when determining relief. 

In proposing that designated Department officials and 

hearing officials consider such calculations, however, the 

Department does not preclude full relief for borrowers; 

rather, such officials would carefully consider available 

evidence and make reasoned determinations as to when and 

whether full relief is justified. 

Proposed §685.222(i)(2) lists certain items the 

designated Department official or hearing official would 

include in the notification to the borrower of the relief 

determination. Given that the Department does not have the 

authority to determine the tax implications for relief in 

borrower defenses, which is within the jurisdiction of the 

Internal Revenue Service, the notice would simply advise 

the borrower that accepting the relief could affect the 
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borrower’s tax obligations. The Department would encourage 

any borrower who receives relief to seek advice from tax 

professionals on the tax implications of his or her 

acceptance of that relief.

Relief granted through the group processes described 

in proposed §685.222(f) to (h) may raise specific concerns 

for members who did not file an application for borrower 

defense or members who may not have been engaged in the 

process to their satisfaction. As a result, for 

determinations of relief for a group of borrowers, the 

notice would also provide members of the group with an 

opportunity to opt out of the relief determination. This 

would provide borrowers in a group process with a second 

opportunity to opt out of the proceeding, in addition to 

the opt-out provided by the notice given at the initiation 

of the group process described in proposed paragraph 

(f)(2). If a borrower declines to accept the relief 

determination from the group process, the borrower may 

choose to have his or her borrower defense considered on an 

individual basis through the process described in proposed 

paragraph (e) of this section. As noted earlier, the 

decision of the hearing official in a group proceeding 

would likely bear strongly on the resolution of the 

borrower’s claim, if pursued on an individual basis. 
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Borrower cooperation and transfer of rights (§685.222(j) 

and (k))

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.

Current Regulations: Current borrower defense regulations 

(§685.206(c)) do not address borrower cooperation or the 

transfer of rights.

Proposed Regulations: Section 685.222(j) of the proposed 

regulations would require that a borrower seeking relief

through the borrower defense process reasonably cooperate 

with the Secretary, whether relief is sought through an 

individual application filed under proposed §685.222(e) or 

through the group processes described in proposed 

§685.222(f) to (h). The Secretary would be permitted to

revoke relief granted to a borrower who does not fulfill 

this obligation. 

In addition, proposed §685.222(k) would provide that, 

when the Secretary grants relief in response to a borrower 

defense claim, the borrower is deemed to have assigned to, 

and relinquished in favor of, the Secretary any right to a 

loan refund (up to the amount discharged) that the borrower 

may have by contract or applicable law with respect to the 
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loan or the contract for educational services for which the 

loan was received, against the school, its principals, its 

affiliates, and their successors, its sureties, and any 

private fund. If the borrower asserts and recovers on a 

claim with a public fund, and if the Secretary determines

that the borrower’s recovery from that public fund was 

based on the same claim raised as a borrower defense and 

for the same loan for which the discharge was granted, the 

Secretary may reinstate the borrower’s obligation to repay 

the amount discharged on the loan based on the amount 

recovered from the public fund.

Proposed §685.222(k) would apply notwithstanding any 

provision of State law that would otherwise restrict 

transfer of those rights by the borrower, limit or prevent 

a transferee from exercising those rights, or establish 

procedures or a scheme of distribution that would prejudice 

the Secretary's ability to recover on those rights. 

However, §685.222(k) would not prevent a borrower from 

pursuing relief against any party named in §685.222(k) for 

claims in excess of what has been assigned to the 

Secretary, or for claims unrelated to the basis of the 

borrower defense on which the borrower received relief.

Reasons: When a borrower seeks a discharge of a Direct 

Loan, the Department would require the borrower’s 
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cooperation to determine the facts of the claim and provide 

the school with due process, as appropriate. Absent this 

cooperation, the Department could be unable to successfully 

resolve the borrower’s request for relief. Similarly, for 

the reasons discussed for requesting such information on 

claims to third parties under “Process for Individual 

Borrowers (34 CFR 685.222(e)),” it is important that the 

Department prevent double recovery for the same claim, when 

the borrower has already recovered from another source.

Borrower Responsibilities and Defenses (§685.206)

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.

Current Regulations: Section 685.206(c) establishes the 

conditions under which a Direct Loan borrower may assert a 

borrower defense, the relief afforded by the Secretary in 

the event the borrower’s claim is successful, and the 

Secretary’s authority to recover from the school any loss 

that results from a successful borrower defense. 

Specifically, §685.206(c) provides that a borrower defense 

may be asserted based upon any act or omission of the 

school that would give rise to a cause of action against 

the school under applicable State law. Under §685.206(c), 
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a borrower defense is presumed to be raised only in 

response to a proceeding by the Department to collect on a 

Direct Loan, including, but not limited to, tax refund 

offset proceedings under 34 CFR 30.33, wage garnishment 

proceedings under 31 U.S.C. 3720D, salary offset 

proceedings for Federal employees under 34 CFR part 31, and 

consumer reporting proceedings under 31 U.S.C. 3711(f). 

Under §685.206(c), if a borrower defense is successful, the 

borrower is relieved of the obligation to pay all or part 

of the loan and associated costs and fees, and the borrower 

may be afforded such further relief as the Secretary 

determines is appropriate, including, among other things,

reimbursement of amounts previously paid toward the loan. 

Although §685.206(c) permits the Secretary to seek recovery 

from the school of the amount of the loan to which the 

borrower defense applies, it also provides that the 

Secretary may not initiate such a proceeding after the 

three-year record retention period referenced in 

§685.309(c). 

Proposed Regulations: Proposed §685.206(c) would specify 

that it applies only to borrower defenses asserted with 

respect to Direct Loans disbursed prior to July 1, 2017. 

It would clarify that a borrower defense must relate to the 

making of the Direct Loan or the provision of educational 
138

services and define “borrower defense” to include one or 

both of the following: a defense to repayment of amounts 

owed to the Secretary on a Direct Loan, in whole or in 

part; and a right to recover amounts previously collected 

by the Secretary on the Direct Loan, in whole or in part. 

Proposed §685.206(c) would also exclude the language that 

specifically refers to the Department’s defaulted loan 

collection proceedings.

Rather than specifying the available relief in 

proposed §685.206(c) for an approved borrower defense, 

proposed §685.206(c)(2) would refer to proposed 

§685.222(e)-(k), which would provide procedures for both 

the assertion and the resolution of a borrower defense 

claim, including available relief for an approved borrower 

defense. 

Proposed §685.206(c)(2) also would refer to proposed 

§685.222(a) for applicable definitions and to specify the 

order in which the Department would process multiple loan 

discharge claims submitted by the same borrower for the 

same loan or loans. Under proposed §685.222(a)(6), the 

Secretary would determine the order in which multiple loan 

discharge claims submitted by the same borrower for the 

same loan or loans are processed, and notify the borrower 

of that order. 
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Proposed §685.206(c) would continue to permit the 

Secretary to initiate a proceeding to recover from the 

school the amount of relief arising from an approved 

borrower defense, but it would remove the three-year 

limitation on the Secretary’s ability to initiate such a 

proceeding. 

Reasons: The introduction of a definition of “borrower 

defense” streamlines the regulations. The proposed updates 

to §685.206 provide clarity to borrowers who have loans 

first disbursed prior to July 1, 2017, and who are seeking 

relief based on a borrower defense claim. The Department 

considered whether to change the standard by which a 

borrower may assert a borrower defense for loans disbursed 

prior to the anticipated effective date of these 

regulations, or July 1, 2017. However, the existing Direct 

Loan promissory notes incorporate the current borrower 

defense to repayment process for loans first disbursed 

before July 1, 2017, which is based on an act or omission 

of the school attended by the student that would give rise 

to a cause of action against the school under applicable 

State law. As a result, the Department has decided to keep 

the current standard for loans first disbursed prior to 

July 1, 2017. Acts or omissions that may give rise to a 

cause of action under applicable State law may include any 
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cause of action pertaining to the making of the Direct Loan 

or the provision of educational services for which the loan 

was provided. Similarly, other applicable State law 

principles governing the State law cause of action would 

apply, such as any applicable State law statutes of 

limitation. 

We discuss under “Borrower Defenses--General 

(§685.222(a))” the Department’s reasons for clarifying that 

the Department will acknowledge a borrower defense asserted 

under the regulations “only if the cause of action directly 

relates to the loan or to the school’s provision of 

educational services for which the loan was provided.” 60

FR 37768, 37769. We also discuss the reasons for the 

proposed definition of “borrower defense” in that part of 

this NPRM. 

Proposed §685.206(c) would exclude the language that 

specifically refers to the Department’s defaulted loan 

collection proceedings. While many loans that are the 

subject of a borrower defense may be in default, the 

Department has committed in this proposed rulemaking to 

establish a process outside of the defaulted loan 

collection proceedings to evaluate borrower defenses for 

loans regardless of whether the loans are in default or 

not. We believe that establishing such a dedicated process 
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will enhance the Department’s efforts to review and process 

borrower defenses and offer borrowers more consistent and 

focused relief. 

We also propose to amend §685.206 to refer to a new 

section of the regulations, §685.222, for the process to be 

followed when pursuing a borrower defense claim. Proposed 

§685.222 would provide an expanded description of the 

regulatory framework for the range of borrower defense 

claims, including the process by which claims and relief 

are determined.

Proposed §685.206(c)(2) would refer to proposed 

§685.222(a)(6), which addresses the order in which multiple 

claims for loan discharge from the same borrower for the 

same loan or loans will be processed by the Secretary. The 

proposed language indicates that, if the borrower asserts 

both a borrower defense and any other objection to an 

action of the Secretary with regard to that Direct Loan, 

the Secretary notifies the borrower of the order in which 

the borrower defense and any other objections will be 

considered. During the negotiated rulemaking process, a 

non-Federal negotiator requested that further clarification 

be provided regarding the order in which claims will be 

determined. The Department did not agree that it was 

appropriate to do so within the proposed regulations, since 
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the particular circumstances may vary and establishing one 

order for all cases could result in a progression that 

could be unfair to individual borrowers. In general, we 

will evaluate claims in the order that is likely to result 

in a decision for the borrower sooner, while also 

effectively and efficiently using the Department’s 

resources.

While a borrower may still assert a borrower defense 

in connection with the Department’s defaulted loan 

collection proceedings, the Department’s current experience 

with borrower defense claims from Corinthian students 

suggests that such claims are more likely to arise outside 

of such proceedings. However, it is not clear whether this 

will be true in the future.

The existing Direct Loan promissory notes incorporate 

the current borrower defense to repayment process for loans 

first disbursed before July 1, 2017, which is based on an 

act or omission of the school attended by the student that 

would give rise to a cause of action against the school 

under applicable State law. Because current regulations in 

§685.206(c) do not include a process for submission and 

consideration of claims, the Department intends to extend 

to borrowers with loans first disbursed before July 1, 

2017, the processes developed to submit, review, and 
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resolve borrower defense claims for borrowers with loans 

first disbursed on or after July 1, 2017.

The Department is also proposing to remove the 

limitation period on the Department’s ability to initiate a 

proceeding to recover losses from approved borrower 

defenses. We explain the reasons for this proposed change 

under the discussion for §685.206 and §685.308, “Remedial 

Action and Recovery from the Institution.” 

150 Percent Direct Subsidized Loan Limit (§685.200)

Statute: Section 455(q) of the HEA provides that a firsttime borrower on or after July 1, 2013, is not eligible for 

additional Direct Subsidized Loans if the borrower has 

received Direct Subsidized Loans for a period that is equal 

to or greater than 150 percent of the length of the 

borrower’s current program of study (thereinafter referred 

to as the “150 percent limit”). In addition, some 

borrowers who are not eligible for Direct Subsidized Loans 

because of the 150 percent limit become responsible for the 

interest that accrues on their loans when it would 

otherwise be paid by the government. The statute does not 

address what effect a discharge of a Direct Subsidized Loan 

has on the 150 percent limit. The statute also does not 

address whose responsibility it is to pay the outstanding 

interest on any remaining loans that have not been 
144

discharged, but have previously lost eligibility for 

interest subsidy.

Current Regulations: Section 685.200(f)(4) provides two 

exceptions to the calculation of the period of time that 

counts against a borrower’s 150 percent limit--the 

subsidized usage period--that can apply based on the 

borrower’s enrollment status or loan amount. The 

regulations do not have an exception to the calculation of 

a subsidized usage period if the borrower receives a 

discharge of his or her Direct Subsidized Loan. They also 

do not address whose responsibility it is to pay the 

outstanding interest on any remaining loans that have not 

been discharged, but have previously lost eligibility for 

the interest subsidy based on the borrower’s remaining 

eligibility period and enrollment.

Proposed Regulations: Proposed §685.200(f)(4)(iii) would 

specify that a discharge based on school closure, false 

certification, unpaid refund, or defense to repayment will 

lead to the elimination of or recalculation of the 

subsidized usage period that is associated with the loan or 

loans discharged.

The proposed regulations would also specify that, when 

the complete amount of a Direct Subsidized Loan or a 

portion of a Direct Subsidized Loan is discharged, the 
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entire subsidized usage period associated with that loan is 

eliminated. In the event that a borrower receives a closed 

school, false certification, or, depending on the 

circumstances, defense to repayment or unpaid refund 

discharge, the Department would completely discharge a 

Direct Subsidized Loan or a portion of a Direct Subsidized 

Consolidation Loan that is a attributable to a Direct 

Subsidized Loan.

The proposed regulations would also specify that, when 

only a portion of a Direct Subsidized Loan or a portion of 

a Direct Consolidation Loan that is attributable to a 

Direct Subsidized Loan is discharged, the subsidized usage 

period is recalculated instead of eliminated. Depending on 

the circumstances, discharges due to defense to repayment 

and unpaid refund could result in only part of a Direct 

Subsidized Loan or a portion of a Direct Consolidation Loan 

that is attributable to a Direct Subsidized Loan being 

discharged.

The proposed regulations would specify that when a 

subsidized usage period is recalculated instead of 

eliminated, the period is only recalculated when the 

borrower’s subsidized usage period was calculated as one

year as a result of receiving the Direct Subsidized Loan in 

the amount of the annual loan limit for a period of less 
146

than an academic year. For example, if a borrower received 

a Direct Subsidized Loan in the amount of $3,500 as a 

first-year student and on a full-time basis for a single 

semester of a two-semester academic year, the subsidized 

usage period would be one year. If the borrower later 

receives an unpaid refund discharge in the amount of 

$1,000, the subsidized usage period would be recalculated, 

and the subsidized usage period would become 0.5 years 

because the subsidized usage period was previously based on 

the amount of the loan and, after the discharge, is based 

on the relationship between the period for which the 

borrower received the loan (the loan period) and the 

academic year for which the borrower received the loan.

In contrast, if the borrower received a Direct 

Subsidized Loan in the amount of $3,500 as a first-year 

student and on a full-time basis for a full two-semester 

academic year, the subsidized usage period would be one

year. If the borrower later receives an unpaid refund 

discharge in the amount of $1,000, the subsidized usage 

period would still be one year because the subsidized usage 

period would still be calculated based on the relationship 

between the loan period and the academic year for which the 

borrower received the loan.
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Proposed §685.200(f)(3) would provide that, if a 

borrower receives a discharge based on school closure, 

false certification, unpaid refund, or defense to repayment 

that results in a remaining eligibility period greater than 

zero, the borrower is no longer responsible for the 

interest that accrues on a Direct Subsidized Loan or on the 

portion of a Direct Consolidation Loan that repaid a Direct 

Subsidized Loan, unless the borrower once again becomes 

responsible for the interest that accrues on a previously 

received Direct Subsidized Loan or on the portion of a 

Direct Consolidation Loan that repaid a Direct Subsidized 

Loan, for the life of the loan.

For example, suppose a borrower receives three years’ 

worth of Direct Subsidized Loans at school A and then 

transfers to school B and receives three additional years’ 

worth of Direct Subsidized Loans. Further suppose that at 

this point, the borrower has no remaining eligibility 

period and enrolls in an additional year of academic study 

at school B, which triggers the loss of interest subsidy on 

all Direct Subsidized Loans received at schools A and B. 

If the borrower later receives a false certification 

discharge with respect to school B, the borrower’s 

remaining eligibility period is now greater than zero. The 

borrower is no longer responsible for paying the interest 
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subsidy lost on the three loans from school A. If the 

borrower then enrolled in school C and received three 

additional years of Direct Subsidized Loans, resulting in a 

remaining eligibility period of zero, and then enrolled in

an additional year of academic study, the borrower would 

lose the interest subsidy on the Direct Subsidized Loans 

received at schools A and C.

Reasons: The proposed regulations would codify the 

Department’s current practice in this area and would 

provide clarity in the Department’s policies and practices. 

Under the circumstances in which a borrower receives a 

closed school, false certification, defense to repayment, 

or unpaid refund discharge, a borrower has not received all 

or part of the benefit of the loan due to an act or 

omission of the school. In such event, we believe that a 

student’s eligibility for future loans and the interest 

subsidy on existing loans should not be negatively affected 

by having received all or a portion of such loan. 

Accordingly, under the proposed regulations, we would

increase the borrower’s eligibility for Direct Subsidized 

Loans or reinstate interest subsidy on other Direct 

Subsidized Loans under the 150 percent limit where the 

borrower receives a discharge of a Direct Subsidized Loan 

and the discharge was based on an act or an omission of the 
149

school that caused the borrower to not receive all or part 

of the benefit of the loan.

Administrative Forbearance (§685.205(b)(6))

Statute: Section 428(c)(3) of the HEA provides for the 

Secretary to permit FFEL Program lenders to exercise 

administrative forbearances that do not require the 

agreement of the borrower, under conditions authorized by 

the Secretary. Section 455(a) provides that Direct Loans 

have the same terms, conditions, and benefits as FFEL 

Loans.

Current Regulations: Section 685.205(b) of the current 

regulations describes the circumstances under which the 

Secretary may grant forbearance on a Direct Loan without 

requiring documentation from the borrower. Section 

685.205(b)(6) specifies that these circumstances include 

periods necessary for the Secretary to determine the 

borrower's eligibility for a closed school discharge, a 

false certification of student eligibility discharge, an 

unauthorized payment discharge, an unpaid refund discharge, 

a bankruptcy discharge, and teacher loan forgiveness. 

Proposed Regulations: We propose to add to §685.205(b)(6) 

a mandatory administrative forbearance when the Secretary 

is in receipt of, and is making a determination on, a 

discharge request based on a claimed borrower defense. The 
150

proposed changes would add cross-references to the 

regulations on borrower defense claims (§§685.206(c) and 

685.222). By these references, we would expand the 

circumstances under which the Secretary may grant 

forbearance on a Direct Loan without requiring 

documentation from the borrower. 

Reasons: During the Department’s review of a borrower

defense, we believe borrowers seeking relief should have 

the option to continue to make payments on their loans, as 

well as the option to have their loans placed in 

forbearance. Providing an automatic forbearance with an 

option for the borrower to decline the temporary 

forbearance and continue making payments would reduce the 

potential burden on borrowers pursuing borrower defenses. 

Mandatory Administrative Forbearance for FFEL Program 

Borrowers (§682.211)

Statute: Section 428(c)(3)(D) of the HEA provides for the 

Secretary to permit lenders to provide borrowers with 

certain administrative forbearances that do not require the 

agreement of the borrower, under conditions authorized by 

the Secretary.

Current Regulations: Section 682.211(i) specifies the 

circumstances under which a FFEL lender must grant a 

mandatory administrative forbearance to a borrower. The 
151

current regulations do not address circumstances in which a 

borrower has asserted a borrower defense with respect to a 

loan.

Proposed Regulations: Proposed §682.211(i)(7) would 

require a lender to grant a mandatory administrative 

forbearance to a borrower upon being notified by the 

Secretary that the borrower has submitted an application 

for a borrower defense discharge related to a FFEL Loan 

that the borrower intends to pay off through a Direct Loan 

Program Consolidation Loan for the purpose of obtaining 

relief, as reflected in proposed §685.212(k). The 

administrative forbearance would remain in effect until the 

Secretary notifies the lender that a determination has been 

made as to the borrower’s eligibility for a borrower 

defense discharge. If the Secretary notifies the borrower 

that he or she would qualify for a borrower defense 

discharge if he or she were to consolidate, the borrower 

would then be able to consolidate the loan(s) to which the 

defense applies. If the borrower then obtains the Direct 

Consolidation Loan, the Secretary would recognize the 

defense and discharge that portion of the Consolidation 

Loan that paid off the FFEL Loan in question. 

Reasons: We are proposing to change the Direct Loan 

forbearance regulations in §685.205(b)(6) to provide for 
152

the Secretary to grant an administrative forbearance to a 

Direct Loan borrower during the period when the Secretary 

is determining the borrower’s eligibility for a borrower 

defense discharge. Some non-Federal negotiators believed 

that a comparable forbearance benefit should be provided to 

FFEL Program borrowers who believe that they have a defense 

to repayment on a FFEL Loan and intend to seek relief under 

the Direct Loan borrower defense provisions by 

consolidating the FFEL Loan into a Direct Consolidation 

Loan, as addressed in proposed §685.212(k). As described 

more fully below regarding proposed §685.212, that section 

will be amended to address how a Direct Consolidation Loan 

borrower may assert a defense to repayment of that 

Consolidation Loan based on an act or omission of a school 

the borrower attended using the Direct Loan, FFEL Stafford 

or PLUS Loan, or a Perkins Loan paid off by that 

Consolidation Loan. If the borrower defense claim is 

approved in full, for example, the Secretary would 

discharge the portion of the Direct Consolidation Loan that 

paid off the Direct Loan, FFEL Loan, or Perkins Loan. NonFederal negotiators requested that the mandatory 

administrative forbearance provisions for FFEL Program 

borrowers who are seeking relief based on a borrower 

defense claim be amended to mirror the mandatory 
153

administrative forbearance provisions for Direct Loan 

borrowers who are seeking relief under borrower defense. 

The Department agreed that this was appropriate and 

proposes to revise §682.211 to provide this benefit.

Discharge of a Loan Obligation (§685.212) 

Statute: Section 455(h) of the HEA provides that the 

Secretary may specify in regulations which acts or 

omissions of a school a borrower may assert as a defense to 

repayment of a Direct Loan. This provision allows for the 

discharge of the borrower’s Direct Loan pursuant to the 

regulations regarding borrowers’ defenses to repayment. 

Current Regulations: Current §685.212 states those grounds 

specified or explicitly referenced in sections 437 and

455(m) of the HEA, and section 6 of Pub. L. 109-382

(authorizing September 11 survivors discharge), on which 

the Secretary discharges some or all of a borrower’s 

obligation to repay a Direct Loan. These grounds include 

death, disability, closed school, false certification, 

bankruptcy, teacher loan forgiveness, public service loan 

forgiveness, and September 11 survivors discharge. 

Proposed Regulations: We propose to amend §685.212 to 

include discharge of all or part of a borrower’s Direct 

Loan obligation by reason of a borrower defense that has 

been approved under §685.206(c) or proposed §685.222. The 
154

proposed addition would also specify that, with respect to 

a Direct Consolidation Loan for which a borrower defense 

was approved, the Secretary would provide relief as to the 

portion of the Consolidation Loan obligation that repaid

the original Direct Loan, FFEL Loan, Perkins Loan or other 

federally financed student loan used to attend the school 

to which the borrower defense claim relates. The proposed 

addition would further describe the standard we would apply 

to consideration of borrower defense claims raised by 

borrowers to Direct Consolidation Loans and to claims for 

return of payments and recoveries on the Consolidation Loan 

itself, and to payments and recoveries on the Federallyfinanced loans that were paid off by the Direct

Consolidation Loan. 

Reasons: The proposed changes to §685.206(c) and proposed 

new §685.222 include new language establishing the grounds 

on which a borrower’s obligation to repay a Direct Loan may 

be discharged. This proposed change to §685.212 would 

clarify current policy and provide for a more complete set 

of cross-references to the loan discharge types covered in 

§685.212. 

The proposed changes would also clarify that an 

appropriate portion of a borrower’s obligation to repay a 

Direct Consolidation Loan may be discharged, if a borrower 
155

defense has been approved pursuant to §685.206(c) or 

proposed §685.222. Section 455(h) of the HEA provides that 

the Secretary may allow for the discharge of a loan 

pursuant to a borrower defense for a loan made “under this 

part”-–the Direct Loan Program. This includes Direct 

Consolidation Loans made under section 455(g) of the HEA. 

This proposed change to §685.212 is also meant to clarify 

current policy regarding the types of loans for which a 

borrower defense may be asserted, and how a borrower’s 

obligation to repay a Direct Consolidation Loan is affected

if a borrower defense claim has been approved under 

§685.206(c) and proposed §685.222. Because the act or 

omission of the school that would constitute a borrower 

defense under §685.206(c) or proposed §685.222 would 

pertain to the making of the Federal loans that were 

consolidated into his or her Direct Consolidation Loan or 

the provision of educational services for such Federal 

loans, the proposed language would clarify that relief for 

a borrower defense approved as to a Direct Consolidation 

Loan will be provided for that portion of the Consolidation 

Loan that corresponds to the original loan obtained to 

attend the school whose act or omission gave rise to a

borrower defense. Thus, §685.212 would be amended in new 

paragraph (k) to list the Federal education loans that may 
156

be paid off by a Direct Consolidation Loan and with regard 

to which the borrower may assert a borrower defense claim. 

Those original loans include the loans listed in §685.220. 

For some of the discharges already listed in this section, 

the relief available is explained here; for others, the 

relief is described only in the specific regulations that 

describe the grounds and procedure for obtaining relief. 

Some of the discharges already listed provide only relief 

from the obligation to repay the remaining outstanding 

balance on the loan, while others, such as closed school 

discharges, may provide for both debt relief and refund of 

payments already recovered. The relief available for each 

of the listed discharges is controlled by the law on which 

the discharge is based; the basis and relief available for 

borrower defense discharges are stated fully in §685.206(c) 

and proposed §685.222 and will be reflected in the new 

§685.212(k).

Thus, §685.212 would be amended to clarify that the 

Secretary would evaluate a borrower defense claim on a 

Direct Loan using the standards stated in §685.206(c) or, 

for loans first disbursed, or made, on or after July 1, 

2017, in §685.222. The standard that would be applied 

would depend upon factors such as the date that the Direct 

Consolidation Loan was first made; whether the underlying 
157

loan to which a borrower defense is asserted is a Direct 

Loan or some other eligible loan for consolidation; and 

whether the issue at hand refers either to a borrower’s 

defense to repayment to the applicable portion of a Direct 

Consolidation Loan that may be attributable to the 

underlying loan to which a borrower defense is being 

asserted, or refers to the borrower’s request for a return 

of payments collected by the Secretary on the underlying 

loan. 

Direct Loans Paid Off by Direct Consolidation Loans

Applicable standard

For Direct Loans for which borrowers may be 

considering consolidation, the standards would differ 

depending on the date on which the first Direct Loan to 

which a claim is asserted was made. If the Direct Loan 

Consolidation borrower asserts a claim regarding an 

underlying Direct Subsidized, Unsubsidized, or PLUS Loan 

made before July 1, 2017, we would apply the standard in 

§685.206(c). For underlying Direct Loans made after July 

1, 2017, we would apply the standard stated in §685.222(b), 

(c), or (d) to the borrower’s defenses to repayment, as we 

would if the borrower had challenged those loans directly

through the borrower defense process. 

Return of payments
158

For underlying Direct Loans made before July 1, 2017, 

we would apply applicable state law as to the limitations 

period pursuant to §685.206(c), to any claim for return of 

payments made or recovered on the underlying loans or on 

that portion of the Direct Consolidation Loan attributable 

to the paying off of the underlying Direct Loan. 

For underlying Direct Loans made on or after July 1, 

2017, we would apply the limitations period in §685.222(b), 

(c), or (d), as applicable, to any claim for return of 

payments made or recovered on the underlying loans or on 

that portion of the Direct Consolidation Loan attributable 

to the paying off of the underlying Direct Loan. 

Other Eligible Loans Paid Off by Direct Consolidation 

Loans

Applicable standard

For other education loans paid off by the Direct 

Consolidation Loan, such as FFEL, Perkins, or other 

eligible loans for consolidation that are not Direct Loans, 

the standard that will apply to a defense to repayment of 

an applicable portion of the outstanding balance of 

borrowers’ Direct Consolidation Loans would depend upon the 

date that the Direct Consolidation Loan was made. For such 

defense to repayment claims raised by Direct Consolidation 

Loan borrowers with regard to other education loans paid 
159

off by a Direct Consolidation Loan that was made before 

July 1, 2017, we would evaluate the defense to repayment

with respect to the underlying loan under the Direct Loan 

defense standard in §685.206(c), as if the challenged loan 

were a Direct Loan. For such a Direct Consolidation Loan 

made on or after July 1, 2017, we would evaluate the 

borrower’s defense to repayment with respect to the 

underlying loan under the Direct Loan borrower defense 

standard in proposed §685.222.

Return of payments 

However, for claims for return of payments made or 

recovered on the underlying loan, we would return only 

payments made or recovered by the Department directly, and 

only if the borrower proved that the loan or portion of the 

loan to which the payment was credited was not legally 

enforceable under the law governing the claims on the 

underlying, paid off loans. If the borrower seeks recovery 

of a payment made on the Direct Consolidation Loan itself, 

as distinct from payments made on the underlying paid-off 

loan, the applicable standard governing claims for return 

of payments would be that provided in §685.206(c) (for 

Direct Consolidation Loans made before July 1, 2017) or 

§685.222(b), (c), or (d) (for Direct Consolidation Loans 
160

made on or after July 1, 2017). Similarly, depending on 

the date that the Direct Consolidation Loan was made, the 

limitation periods applicable to claims for return of 

payments made on the Direct Consolidation Loan would be

those stated in either §685.206(c) or §685.222(b), (c), or 

(d), accordingly.

In addition, the proposed amendment to §685.212 would 

not allow a borrower to assert a borrower defense more than 

once for a claim that is based on the same underlying 

circumstances and same evidence, unless allowed under the 

procedures in proposed §685.222. For instance, if a 

borrower asserted a borrower defense with respect to a loan 

under either §685.206(c) or proposed §685.222 that was 

denied in full or in part, the borrower may not then assert

a borrower defense with respect to that original loan after 

consolidation, absent new evidence as described in proposed 

§685.222(e)(5) or a reopening of an application for 

borrower defense by the Secretary under that section.

Remedial Action and Recovery from the Institution

General (§§685.206, 685.308)

Statute: Section 454(a) of the HEA provides that the 

Secretary may include in Direct Loan participation 

agreements with institutions provisions that are necessary 

to protect the interests of the United States and to 
161

promote the purposes of the Direct Loan Program, and that 

the institution accepts responsibility and financial 

liability stemming from its failure to perform its 

functions pursuant to the agreement. 

Current Regulations: The current regulations provide, in 

§685.206(c), that the Secretary may initiate an action to 

recover from a school whose act or omission resulted in an 

approved borrower defense the amount of loss incurred by 

the Department for that claim, but may not do so after the 

end of the record retention period provided under 

§685.309(c), which is three years after the end of the 

award year in which the student last attended the 

institution. See §685.309, which references §668.24. 

In addition, current §685.308 provides that the 

Secretary may take various actions to recover for losses 

caused by institutions, and describes the procedures that 

would be used for some claims.

Proposed Regulations: We propose to remove from §685.206 

the provision stating that the Secretary would not initiate 

action to recover after the end of the three-year record 

retention period. We further propose to revise §685.308 to 

more accurately describe the instances in which the 

Secretary incurs a loss for which the institution is 

accountable.
162

Reasons: We propose to remove the limitation on bringing 

actions against an institution to recover for losses 

incurred from borrower defenses for two reasons. First, 

the current three-year limitation in §685.206(c)(3) cites

§685.309(c), which refers to §668.24, the general record 

retention requirements for the title IV, HEA student 

financial assistance programs. Section 668.24(e)(2) 

provides that the institution is to keep records of 

borrower eligibility and other records of its 

“participation” in the Direct Loan Program for three years 

after the last award year in which the student attended the 

institution. The requirement pertains to the retention of 

“program records”-–records of the determination of 

eligibility for Federal student financial assistance and 

management of Federal funds provided to the institution for 

those awards. §§668.24(a), 685.309.

21 The Department 

believes that these records will rarely, if ever, be needed 

to address borrower defense claims. Borrower defense 

claims will turn on other evidence–-advertising, catalogs, 

enrollment contracts, recruiting scripts–-that have not 

 

21 The record retention regulation was adopted pursuant to 20 U.S.C. 

1232f, which requires each recipient of Federal funds under a 

Department program 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.” 
163

been and cannot be categorized as “program records.” 

Moreover, institutions have always faced potential 

litigation on claims that would also constitute borrower 

defense claims, and have already made business judgments as 

to the need and period for which to retain business records 

that may be relevant in such litigation. The proposed 

change would do no more than hold the school to the same 

risk it has already assessed and for which it has exercised 

its business judgment to protect itself. As noted under 

“Federal Standard and Limitation Periods (34 CFR 

685.222(b), (c), and (d) and 34 CFR 668.71),” State laws 

and the new proposed Federal standard generally provide 

that the limitation period for affirmative claims for 

recovery based on misrepresentation begins only upon the 

claimant’s discovery of the facts that give notice that the 

representation was false, and thus an institution would 

already be expected to have accounted for that potential in 

adopting its own record retention policies. We are not, 

however, proposing to impose any new requirements relating 

to record retention. Moreover, borrowers--whether a 

designated Department official assists in developing the 

evidence for the borrower under proposed §685.222 or not--
164

always bear the burden of proof, either initially or 

ultimately.22 The institution thus faces potential risk 

where a borrower belatedly asserts a borrower defense only 

if the borrower-–or the Department, for claims considered 

as a group, asserts a claim pertaining to the borrower--

meets that burden by producing credible evidence of the 

facts on which the claim is based. 

Second, the most readily available tool for recovery 

of Federal claims has always been administrative offset, 

which Federal law encourages and even requires agencies to 

use. 31 U.S.C. 3716. That authority was amended in 2008 

to remove its previous 10-year limitation period.

23 Case 

law makes clear that limitations periods adopted by a 

legislative authority can be changed or abrogated, and the 

new limitation period applied even to claims that may have 

been barred under the prior rule.24 Because the limitation 

period in current §685.206(c)(3) is solely a regulatory 

 

22 The rebuttable presumption applicable to group claims shifts the 

burden of rebuttal to the school; if the school submits evidence to 

rebut that presumption, the burden of proof then, and only then, shifts 

back to the borrower. 

23 “Notwithstanding any other provision of law, regulation, or 

administrative limitation, no limitation on the period within which an 

offset may be initiated or taken pursuant to this section [§3716] shall 

be effective.” 31 U.S.C. 3716(e)(1). 

24 In re Lewis, 506 F.3d 927, 932 (9th Cir. 2007); U.S. v. Distefano, 

279 F.3d 1241, 1244 (10th Cir. 2002) (noting that “the Supreme Court 

has upheld, against due process challenges, statutes reviving such 

barred claims. See Chase Sec. Corp. v. Donaldson, 325 U.S. 304, 311–

14, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945); Campbell v. Holt, 115 U.S. 

620, 628, 6 S.Ct. 209, 29 L.Ed. 483 (1885). As have we. See Bernstein 

v. Sullivan, 914 F.2d 1395, 1400–03 (10th Cir.1990).”).
165

limitation adopted by the Department pursuant to its 

regulatory authority and was in no way compelled by 

statute, the Department can change or remove that 

limitation and can apply the revised rule to any claim, 

without regard to when that claim arose. This would not

produce an unfair result. As noted in the background 

discussion under “Borrower Defenses (34 CFR 668.71, 

685.205, 685.206, and 685.222),” the borrower defense 

provision in §685.206(c) has been infrequently utilized 

from 1995 until the recent Corinthian experience, and there 

is no reason to believe that any institution would have 

relied on the three-year limitation period in current 

§685.206(c)(3) to discard business records that it would 

otherwise have retained. 

We propose to revise §685.308 to more accurately 

describe the grounds on which an institution can cause loss 

for which the Secretary holds the school accountable, and 

the procedures used to establish and enforce that liability 

in some particular circumstances. An institution 

participates in the title IV, HEA programs only by entering 

into a program participation agreement. Under that 

agreement, the institution accepts responsibility to act as 

a fiduciary in handling, awarding, and accounting for title 

IV, HEA funds that it awards, and is liable for the costs 
166

of funds it fails to account for, or funds it awards or 

causes to be awarded improperly.

25 An institution 

participates in the Direct Loan Program only by entering 

into a Direct Loan program participation agreement.26 Under 

that agreement, the institution agrees to “originate” 

Direct Loans that are made by the Department, and to accept 

financial liability for losses “stemming from” its failure 

to perform its functions under that agreement. The 

institution breaches its fiduciary duty as originator of 

Direct Loans when it causes a loan to be made to an 

individual who was ineligible to receive that loan, or 

causes an eligible individual to receive a loan in an 

 

25 See, e.g., Nat'l Career Coll., Inc. v. Spellings, 371 F. App'x 794, 

796 (9th Cir. 2010) (college has fiduciary duties in handling the 

public's money. 34 CFR 668.15, 668.16, 668.82); Sistema Universitario 

Ana G. Mendez v. Riley, 234 F.3d 772, 775 (1st Cir. 2000)(As a result 

of fiduciary status, institutions bear burden of proving that their 

expenditures of title IV funds were warranted and that they complied 

with program requirements); St. Louis Univ. v. Duncan, 97 F. Supp. 3d 

1106, 1109 (E.D. Mo. 2015) (institution acts as fiduciary and is 

liable for improperly awarded funds); Maxwell v. New York Univ., No. 08 

CV 3583 (HB), 2009 WL 1576295, at *7 (S.D.N.Y. June 1, 2009), aff'd,

407 F. App'x 524 (2d Cir. 2010) (school acts as a fiduciary for the 

Department); Instituto De Educ. Universal, Inc. v. U.S. Dep't of Educ., 

341 F. Supp. 2d 74, 82 (D.P.R. 2004), aff'd sub nom. Ruiz-Rivera v. 

U.S. Dep't of Educ., No. 05-1775, 2006 WL 1343431 (1st Cir. May 10, 

2006), and subsequently aff'd sub nom. Instituto de Educacion Universal 

v. U.S. Dep't of Educ., No. 06-1562, 2007 WL 1519059 (1st Cir. May 11, 

2007) (Under HEA, an educational institution operates as a fiduciary to 

the Department, and is subject to the highest standard of care and 

diligence in administering these programs and accounting to the 

Department for the funds it receives. 34 CFR 668.82(a), (b) (1991–

94)); see also Chauffeur's Training Sch., Inc. v. Riley, 967 F. Supp. 

719, 727 (N.D.N.Y. 1997) (institution liable under breach of contract 

for costs of payments the Department made to third parties on account 

of loans the institution improperly caused to be made). 

26 This Direct Loan Program Participation Agreement is now included in, 

and a separate part of, the general program participation agreement 

required by section 487(a) of the HEA. 
167

ineligible amount, or by its act or omission causes the 

Secretary to incur an obligation to discharge a loan or to 

be unable to enforce the loan. 

We propose to revise §685.308 to more accurately 

describe the range of these circumstances. In some 

instances, the Secretary identifies possible claims for 

Department losses for which the Secretary holds the school 

accountable in audits and program reviews, and if such 

claims are asserted in the final determinations that ensue 

from these audits or program reviews, the institution may 

contest the claims under the procedures in subpart H of 

part 668. In other instances, the Secretary asserts these 

claims in other contexts, and may follow other procedures 

to claim recovery. In any such other procedure, Federal 

law and Department regulations require the Secretary to 

provide the institution notice and an opportunity to 

dispute the claim and obtain a hearing on its objections. 

See 34 CFR 34.20 et seq. For borrower defense claims, we 

describe briefly in proposed §685.222 the procedures we 

propose to use for these claims and intend to prescribe 

them in more detail in the future.

We also propose to remove the reference to a remedial 

action (requiring schools to purchase loans) that was 

sanctioned under FFEL regulations in effect when this 
168

section was adopted in 1995, but which has not and will not 

be used for Direct Loans. 

Severability (§685.223)

Statute: Section 454(a) of the HEA provides that the 

Secretary may include in Direct Loan participation 

agreements with institutions provisions that are necessary 

to protect the interests of the United States and to 

promote the purposes of the Direct Loan Program; 20 U.S.C. 

3474 authorizes the Secretary to adopt such regulations as 

needed for the proper administration of programs. 

Current Regulations: None.

Proposed Regulations: Proposed §685.223 would make clear 

that, if any part of the proposed regulations for part 685, 

subpart B, whether an individual section or language within 

a section, is held invalid by a court, the remainder would 

still be in effect.

Reasons: We believe that each of the proposed provisions 

discussed in this preamble would serve one or more 

important, related, but distinct, purposes. Each provision

would provide a distinct value to students, prospective 

students, and their families, the public, taxpayers, the 

Federal government, and institutions separate from, and in 

addition to, the value provided by the other provisions. 

To best serve these purposes, we propose to include this 
169

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.

Institutional Accountability

Financial responsibility 

General (§668.171) 

Statute: Section 487(c)(1) authorizes the Secretary to 

establish reasonable standards of financial responsibility.

Section 498(a) of the HEA provides that, for purposes of 

qualifying an institution to participate in the title IV, 

HEA programs, the Secretary must determine the legal 

authority of the institution to operate within a State, its 

accreditation status, and its administrative capability and 

financial responsibility. 

Section 498(c)(1) of the HEA authorizes the Secretary 

to establish ratios and other criteria for determining 

whether an institution has the financial responsibility 

required to (1) provide the services described in its 

official publications, (2) provide the administrative 

resources necessary to comply with title IV, HEA 

requirements, and (3) meet all of its financial 

obligations, including but not limited to refunds of 
170

institutional charges and repayments to the Secretary for 

liabilities and debts incurred for programs administered by 

the Secretary. 

Current Regulations: The current regulations in 

§668.171(a) mirror the statutory requirements that to begin 

and continue to participate in the title IV, HEA programs, 

an institution must demonstrate that it is financially 

responsible. The Secretary determines whether an 

institution is financially responsible based on its ability 

to provide the services described in its official 

publications, properly administer the title IV, HEA 

programs, and meet all of its financial obligations.

The Secretary determines that a private non-profit or 

for-profit institution is financially responsible if it 

satisfies the ratio requirements and other criteria 

specified in the general standards under §668.171(b). 

Under those standards, an institution:

• Must have a composite score (combining the named 

measures of financial health elements to yield a single 

measure of a school’s overall financial health) of at least 

1.5, based on its Equity, Primary Reserve, and Net Income 

ratios;

• Must have sufficient cash reserves to make required 

refunds;
171

• Must be current in its debt payments. An 

institution is not current in its debt payment if it is in 

violation of any loan agreement or fails to make a payment 

for 120 days on a debt obligation and a creditor has filed 

suit to recover funds under that obligation; and

• Must be meeting all of its financial obligations, 

including but not limited to refunds it is required to make 

under its refund policy or under §668.22, and repayments to 

the Secretary for debts and liabilities arising from the 

institution’s participation in the title IV, HEA programs. 

Proposed Regulations: We are not proposing any changes 

to the composite score requirements under §668.172 or in 

appendices A and B of subpart L, the refund reserve 

standards under §668.73, or the past performance 

requirements under §668.174.

We propose to restructure §668.171, in part, by 

adding a new paragraph (c) that provides that an 

institution is not able to meet its financial or 

administrative obligations if it is subject to one or more

of the following actions or triggering events:

• Any of the following lawsuits and other actions. 

Claims and actions related to a Federal loan or 

educational services. Currently or at any time during 

the three most recently completed award years, the 
172

institution is or was required to pay a material amount,

or incurs a material liability, arising from an

investigation or similar action initiated by a State, 

Federal, or other oversight entity, or settles or 

resolves for a material amount a suit by that entity 

based on claims related to the making of a Federal loan

or the provision of educational services. An amount paid 

or settled is material if it exceeds the lesser of the 

threshold amount for which an audit is required under 2 

CFR part 200, currently $750,000, or 10 percent of the 

institution’s current assets. Or, the institution is 

being sued by one or more State, Federal, or other 

oversight entities based on claims related to the making 

of a Federal loan or provision of educational services

for an amount that exceeds the lesser of the threshold 

amount for which an audit is required under 2 CFR part 

200, currently $750,000, or 10 percent of the 

institution’s current assets.

Claims of any kind. The institution is currently 

being sued by one or more State, Federal, or other 

oversight entities based on claims of any kind that are 

not related to a Federal loan or educational services, 

and the potential monetary sanctions or damages from that 
173

suit or suits are in an amount that exceeds 10 percent of 

its current assets.

False claims and suits by private parties. The 

institution is currently being sued in a lawsuit filed 

under the False Claims Act or by one or more private 

parties for claims that relate to the making of loans to 

students for enrollment at the institution or the 

provision of educational services if that suit (1) has 

survived a motion for summary judgment by the institution 

and has not been dismissed, and (2) seeks relief in an 

amount that exceeds 10 percent of the institution’s 

current assets.

For suits relating to claims of any kind, suits 

filed under the False Claims Act, 31 U.S.C. 3729 et seq., 

or suits by private parties, during the fiscal year for 

which the institution has not yet submitted its financial 

statements, the institution settled or resolved the suit,

had a judgment entered against it, or incurred a 

liability for an amount that exceeds 10 percent of its 

current assets.

An institution would determine whether any of these 

suits or actions exceeded a materiality threshold by 

using the current assets reported in its most recent 
174

audited financial statements submitted to the Department. 

Except for a suit by private parties, if a suit or action 

does not demand a specific amount of relief, the 

institution would calculate the potential amount of the 

relief by totaling the tuition and fees it received from 

every student who attended the institution during the 

period for which the relief is sought. In cases where no 

period is stated in the suit or action, the institution 

would total the tuition and fees it received from 

students who attended the institution during the three 

award years preceding the date that suit or action was 

filed or initiated.

• Repayments to the Secretary. Currently or at any 

time during the three most recently completed award 

years, the institution is or was required to repay the 

Secretary for losses from borrower defense claims in an

amount that, for one or more of those years, exceeds the

lesser of the threshold amount for which an audit is 

required under 2 CFR 200, currently $750,000, or 10 

percent of the institution’s current assets, as reported 

in the most recent audited financial statements. 

• Accrediting agency actions. Currently or at any 

time during the three most recently completed award 

years, the institution’s primary accrediting agency (1) 
175

required the institution to submit a teach-out plan, for 

a reason described in 34 CFR 602.24(c)(1), that covers

the institution or any of its branches or additional

locations, or (2) placed the institution on probation, 

show-cause, or similar status for failing to meet one or

more of the agency’s standards, and the accrediting 

agency does not notify the Secretary within six months of 

taking that action that the action is withdrawn because 

the institution has come into compliance with the 

agency’s standards.

• Loan agreements and obligations. With regard 

to the creditor with the largest secured extension of 

credit , (1) the institution violated a provision or

requirement in a loan agreement with that creditor, 

(2) the institution failed to make a payment in 

accordance with its debt obligations with that 

creditor for more than 120 days, or (3) as provided 

under the terms of the security or loan agreement, a 

default or delinquency event occurs or other events 

occur that trigger, or enable the creditor to 

require or impose, an increase in collateral, a 

change in contractual obligations, an increase in 

interest rates or payments, or other sanction 

penalty or fee. These actions would be disclosed in 
176

a note to the institution’s audited financial 

statements or audit opinion, or reported to the 

Department by the institution.

• Non-title IV revenue. For its most recently 

completed fiscal year, a proprietary institution did not 

derive at least 10 percent of its revenue from sources

other than title IV, HEA program funds, as provided under 

§668.28(c) (90/10 revenue test).

• Publicly traded institutions. As reported by 

the institution, or identified by the Secretary, (1) the 

Securities and Exchange Commission (SEC) warns the 

institution or its corporate parent that it may suspend 

trading on the institution’s stock, or the institution’s 

stock is delisted involuntarily from the exchange on 

which the stock was traded, (2) the institution 

disclosed or was required to disclose in a report filed 

with the SEC a judicial or administrative proceeding 

stemming from a complaint filed by a person or entity 

that is not part of a State or Federal action, (3) the 

institution failed to file timely a required annual or 

quarterly report with the SEC, or (4) the exchange on 

which the institution’s stock is traded notifies the 

institution that it is not in compliance with exchange 

requirements.
177

• Gainful employment (GE). As determined by the 

Secretary each year, the number of students enrolled in GE

programs that are failing or in the zone under the D/E 

rates measure in §668.403(c) is more than 50 percent of the 

total number of title IV recipients enrolled in all the GE

programs at the institution. However, an institution is

exempt from this provision if fewer than 50 percent of 

students enrolled at the institution who receive title IV, 

HEA program funds are enrolled in GE programs.

• Withdrawal of owner’s equity. For an 

institution whose composite score is less than 1.5, any 

withdrawal of owner’s equity from the institution by

any means, including by declaring a dividend.

• Cohort default rates. The institution’s two most 

recent official cohort default rates are 30 percent or 

greater, as determined under subpart N of 34 CFR part 668. 

However, this provision does not apply if the institution 

files a challenge, request for adjustment, or appeal under

that subpart with regard to its cohort default rate, and

that action results in (1) reducing its default rate below 

30 percent, or (2) the institution not losing its

eligibility or being placed on provisional certification.

• Other events or conditions. The Secretary

determines that an event or condition is reasonably 
178

likely to have an adverse impact on the financial 

condition, business, or results of operations of the 

institution. These events or conditions would include 

but are not limited to whether:

• There is a significant fluctuation between 

consecutive award years , or over a period of award years,

in the amount of Direct Loan or Pell Grant funds, or a

combination of those funds, received by the institution

that cannot be accounted for by changes in those programs, 

such as changes in award amounts or eligibility 

requirements;

• The institution is cited by a State 

licensing or authorizing agency for failing State or 

agency requirements;

• The institution fails a financial stress test 

developed or adopted by the Secretary to evaluate whether 

the institution has sufficient resources to absorb losses 

that may be incurred as a result of adverse conditions and 

continue to meet its financial obligations to the 

Secretary and students;

• The institution or corporate parent has a noninvestment grade bond or credit rating;

• As calculated by the Secretary, the 

institution has high annual dropout rates; or
179

• Any event reported on a Form 8-K to the

SEC. 

In addition, we propose to add a new paragraph 

(d) under which an institution would notify the 

Secretary of any action or triggering event described 

above no later than 10 days after that action or event 

occurs. In that notice, the institution could show 

that certain actions or events are not material, or 

that those actions are resolved. Specifically, the 

institution would be permitted to demonstrate that: 

• For a judicial or administrative proceeding 

the institution disclosed to the SEC, the proceeding 

does not constitute a material event;

• For a withdrawal of owner’s equity, the 

withdrawal was used solely to meet tax liabilities of 

the institution or its owners for income derived from 

the institution; or, in the case where the composite 

score is calculated based on the consolidated 

financial statements of a group of institutions, the 

amount withdrawn from one institution in the group was 

transferred to another entity within that group;

• For a violation of a loan agreement, the 

creditor waived that violation. However, if the 

creditor imposes additional constraints or 
180

requirements as a condition of waiving the violation 

and continuing with the loan, the institution must 

identify and describe those constraints or 

requirements. In addition, if a default or 

delinquency event occurs or other events occur that 

trigger, or enable the creditor to require or impose, 

additional constraints or penalties on the 

institution, the institution would be permitted to 

show why these actions would not have an adverse 

financial impact on the institution. 

Reasons: As discussed under “Alternative standards and 

requirements,” the Department seeks to identify, and take 

action regarding, material actions and events that are 

likely to have an adverse impact on the financial condition 

or operations of an institution. In addition to the 

current process where, for the most part, the Department 

determines annually whether an institution is financially 

responsible based on its audited financial statements, 

under these proposed regulations the Department may 

determine at the time a material action or event occurs 

that the institution is not financially responsible. The 

consequences of these actions and events threaten an 

institution’s ability to (1) meet its current and future 

financial obligations, (2) continue as a going concern or 
181

continue to participate in the title IV, HEA programs, and 

(3) continue to deliver educational services. In addition, 

these actions and events call into question the 

institution’s ability or commitment to provide the 

necessary resources to comply with title IV, HEA 

requirements.

Furthermore, we note that recent experiences with 

Corinthian, in which the Department ended up with no 

financial protection for either closed school or borrower 

defense claims, highlight the need to develop more 

effective ways to identify events or conditions that signal 

impending financial problems and secure financial 

protection while the institution has resources sufficient 

to provide that protection either by a letter of credit, 

or, by arranging a set-aside from current payables of 

Federal funds that could defray losses that may arise. 

Applying the routine tests under current regulations did 

not result in financial protection, because Corinthian 

appeared at the time it provided the Department with its 

audited financial statements to pass those tests. Only 

later--too late to secure financial protection--did further 

investigation reveal that Corinthian in fact had failed the 
182

financial tests in current regulations.

27 Based on that 

experience, we conclude that regulations must be revised to 

better identify signs, and to augment the Department’s

tools for detection, of impending financial difficulties 

that could be taken into account and that would have 

required Corinthian to provide financial protection. 

Most visible among these actions or triggering events 

are investigations of, and suits against, institutions by

State, Federal, and other oversight agencies. For example, 

the FTC has investigated or filed suit against institutions 

for deceptive and unfair marketing practices.28 The SEC has 

investigated institutions for inflating job placement 

rates.29 The DOJ, CFPB, and various State AGs have 

investigated or filed suit against institutions for making 

false claims to the Federal and State governments as well 

as violations of consumer protection laws, false 

advertising and deceptive practices, and falsifying job 

placement rates.30 Putting aside, but in no way 

 

27 At that very time, in 2013, the State of California had already sued 

Corinthian for widespread fraud. California v. Heald Coll., No. CGC-13-

534793 (Sup. Ct. S.F. County, filed Oct. 10, 2013).

28 See, e.g., Fed. Trade Comm’n v. DeVry Educ. Group, Inc., C.A. No. 15-

CF-00758 (S.D. Ind. Filed Jan. 17, 2016). 

29 See, e.g., Sec. and Exch. Comm’n v. ITT Educ. Servs. Inc., C. A. No. 

1:15-cv-00758-JMS-MJD (S.D. Ind. filed May 12, 2015). 

30 See, e.g., U.S. et al. ex rel. Washington v. Educ. Mgmt. Corp., C.A. 

No. 2:07-cv-00461-TFM (W.D. Pa. filed Aug. 8, 2011); Consumer Fin.

Prot. Bureau v. Corinthian Colls., Inc., C.A. No. 1:14-cv-07194 (N.D. 
183

diminishing, the harm inflicted on students by troubling 

practices that precipitated these agency actions, the debts 

or liabilities resulting from those actions may be 

substantial. 

For suits that are settled or investigations that are 

otherwise resolved, we initially proposed during negotiated 

rulemaking to adopt as materiality thresholds those amounts 

included in the SEC disclosure rules for legal proceedings 

under 17 CFR 229.103, otherwise referred to as Item 103 of 

Regulation S-K. Under those regulations, an entity filing 

an annual or quarterly report on Form 10-K or 10-Q with the 

SEC must disclose information about (1) any administrative 

or judicial proceeding that involves a claim for damages 

that exceeds 10 percent of the entity’s current assets, or 

(2) any environmental claim where a governmental authority 

is a party to the proceeding and the monetary sanctions are 

more than $100,000. 

Some of the non-Federal negotiators argued that the 

$100,000 threshold could easily be exceeded by claims 

resolved in favor of a small number of students, and that 

outcome would have no bearing on the financial operations 

of most institutions. Those negotiators suggested that a 

 

Ill., filed Oct. 27, 2015); California v. Heald Coll., No. CGC-13-

534793 (Sup. Ct. S.F. County, filed Oct. 10, 2013). 
184

more reasonable threshold would be the amount applicable to 

audits required of non-profit and public entities that 

expend Federal funds. Under 2 CFR 200.501 of the Uniform 

Administrative Requirements, Cost Principles, and Audit 

Requirements for Federal Awards (Uniform Administrative 

Requirements), a non-Federal entity that expends more than 

$750,000 in Federal funds during its fiscal year must 

conduct an audit. We agreed, and propose in this NPRM to 

set the dollar threshold at the amount specified in the 

Uniform Administrative Requirements.

The non-Federal negotiators also argued that because 

the dollar threshold and the percentage threshold based on 

SEC disclosure requirements would apply to a suit based on 

claims that were not related to a Federal student aid 

activity or requirement (for example, a violation of 

copyright laws), the Federal protection that would 

otherwise be required under this circumstance is not 

warranted. We agreed, and propose in this NPRM to apply 

the dollar and percentage thresholds to those suits or 

actions that are based on claims related to the making of a

Federal loan or the provision of educational services. 

The publicity and information stemming from these suits 

and actions will make members of the public, and in particular 

currently enrolled and former students of the institution, 
185

aware or more aware of the alleged practices that gave rise to 

these suits and actions. As a result, we expect current and 

former students to be better informed and thus more likely to 

file borrower defense claims. Some students may file claims 

immediately after a suit or action is resolved, while others 

may take longer. In any case, because the institution is 

required to repay the Secretary for losses from borrower

defense claims, the institution’s liability does not end 

when it pays to resolve the suit or action; it continues as 

long as students file borrower defense claims based on the 

misconduct alleged and publicized in the suit. 

Consequently, if the amount paid by an institution to 

resolve the suit is material, it jeopardizes the 

institution’s ability to meet not only its current financial 

obligations, but also future financial obligations stemming 

from borrower defense claims. For this reason, we propose 

that an institution is not financially responsible during 

the three-year period following the resolution if the amount 

the institution is required to pay is material--that is, it 

exceeds the lesser of the dollar or percentage thresholds. 

If the amount is not material, we believe it is unlikely 

that any resulting borrower defense claims will have an 

adverse impact on the institution.
186

For a suit or action initiated by a State, Federal, or 

other oversight agency, or by an individual or relator,31

where the potential monetary sanctions or damages sought 

exceed 10 percent of an institution’s current assets, we 

propose that the institution is not considered to be 

financially responsible for any year in which that suit or 

action is pending or unresolved.32 

Like a contingent liability, a pending material 

government or individual action (one seeking an amount greater 

than 10 percent of current assets) would pose a threat to an 

institution’s ability to meet its current financial 

obligations, because when a suit or action is settled or 

resolved, the institution must satisfy the resulting liability 

using current assets. In other words, a significant amount of 

current assets (cash and liquid assets, such as securities and 

accounts receivable, that can readily be converted to cash) 

that an institution would otherwise need to use to pay for 

typical current liabilities (for instance, wages payable and 

accounts payable) would be used instead to pay for damages 

stemming from the suit. However, for several reasons, we 

 

31 A person may bring a suit under the False Claims Act, 31 U.S.C. 3729 

et seq., on behalf of the United States against a party whom the 

relator claims submitted false claims to the government. The suit is 

referred to as a “qui tam” suit, and the person is referred to as a 

“relator.”

32 A party who submits false claims may be liable under the False Claims 

Act for treble the actual amount of the claim plus a penalty of at 

least $5000 per violation. 31 U.S.C. 3729(a)(1) 
187

propose to treat a pending material State, Federal, or 

individual action as a liability for filed against the 

institution. First, as previously noted in this discussion, 

State and Federal suits and actions aim to address serious 

violations and harmful practices and may lead to settlements 

or compensation for victimized students, with an attendant 

financial burden on the institution. Moreover, it is not 

uncommon for several State AGs to file suits or take actions

against an institution for the same or similar reasons or for 

State AGs to join a Federal action. These combined efforts 

underscore the severity and magnitude of the misconduct the 

suits or actions seek to address. Second, the impact of a 

suit or action may hinder or prevent investors or creditors 

from providing needed funds to an institution and make it more 

expensive for the institution to raise or obtain additional 

funds. Also, to protect their investment or stake in the 

institution, creditors may condition or alter the terms of 

existing loan agreements or otherwise make it more difficult 

for the institution to obtain additional loans. Third, the 

institution will have to use or divert resources that would 

otherwise be used to carry out normal operations to defray the 

costs of defending the litigation or the costs of achieving 

compliance with the State or Federal requirements on which the 

actions were based. In addition, it is not uncommon for the 
188

Department to impose additional administrative requirements on 

an institution subject to a suit or action, which may further 

stress the institution’s financial resources. So, due to the 

severity and likely success of suits by State and Federal 

agencies or other oversight entities, and to account for the 

costs and risks stemming from a pending suit, we believe that 

a potential liability in the amount considered material under 

this proposed regulation would threaten an institution’s 

ability to meet its current and future financial obligations. 

With regard to the threshold relating to current assets, 

we note that on May 9, 1973, the SEC published final 

regulations reducing its threshold for disclosures relating to 

legal proceedings from 15 percent to 10 percent of current 

assets, stating that the reduced percentage is a “more 

realistic test of materiality.” 38 FR 12100, 12101 

We are not proposing any changes to the composite 

score requirements under §668.172 or in appendices A and B 

of subpart L, the refund reserve standards under §668.73, 

or the past performance requirements under §668.174. We 

believe that the current financial ratio regulations in 

subpart L of part 668 reflect the kind of consideration of 

the effect of the financial risks that judgments and other 

actions pose on the ability of an institution to continue 

operating if faced with the need to satisfy such claims. 
189

We therefore include a brief explanation of the way this 

has been taken into account to some extent in the current 

regulations. For title IV purposes, KPMG Peat Marwick

developed the composite score methodology that is the key 

element for establishing the financial responsibility 

requirements under 34 CFR part 668, subpart L. That 

methodology uses three ratios, Primary Reserve, Equity, and 

Net Income, to evaluate the overall financial health of an 

institution. Under this methodology, strength factors based 

on a common scale are assigned to each ratio result, making it 

arithmetically possible to weight and add the results of each 

ratio together to arrive at a composite score. The strength 

factors and weights were designed to reflect the different 

governing, mission, and operating characteristics of forprofit and non-profit institutions, and to allow institutions 

to offset a poor performance under one ratio with a good 

performance under another ratio. 

The first of these ratios, the Primary Reserve ratio is 

a measure of an institution’s expendable or liquid resource 

base in relation to its operating size, so it is in effect a 

measure of the institution’s margin against adversity. A forprofit institution with a Primary Reserve ratio of 0.05 earns 

a strength factor of 1.0 which means that the value of the 

institution’s assets that can be converted to cash exceeds its 
190

liabilities by an amount equal to five percent of its total 

expenses. Expressed in days, the institution could continue 

operations at its current level for about 18 days (5 percent 

of 365 days) without additional revenue or support. 62 FR 

62854 (November 25, 1997). A non-profit institution with the 

same strength factor score could continue operations at its 

current level for about 37 days without additional revenue or 

support. Id. At this strength factor level, institutions 

have a small amount of expendable capital and would have 

difficulty finding resources internally to handle large 

negative economic events. Table 1 below shows, for a range of 

Primary Reserve ratio results, the margin against adversity 

expressed both as percentage of expendable assets that exceed 

liabilities and the number of days an institution can continue 

operations.

Table 1

For-profit Institutions

Primary 

Reserve 

ratio 

result

Liquid 

assets 

exceed 

liabilitie

s, as % of 

total 

expenses

Strength 

factor

Survive 

without 

additional 

support, # 

of days

0.00 0% 0 0

0.25 3% 0.5 9

0.50 5% 1 18

0.75 8% 1.5 27
191

0.100 10% 2 37

0.125 13% 2.5 46

0.150 15% 3 55

Non-profit Institutions

0.00 0% 0 0

0.05 5% 0.5 18

0.10 10% 1 37

0.15 15% 1.5 55

0.20 20% 2 73

0.25 25% 2.5 91

0.30 30% 3 110

As illustrated in Table 1, a for-profit institution with 

a Primary Reserve strength factor of less than 2.0, or a nonprofit institution with a strength factor of less than 1.0, 

would generally not have resources that it could liquidate in 

the short term to cover current operations if it also had to 

pay damages or settle a suit for an amount that exceeds 10 

percent of its expendable assets. However, the institution 

may have the ability to borrow the funds needed to cover 

operations and pay damages stemming from a suit. For that, we 

look to another component of the composite score, the Equity 

ratio. 

The Equity ratio measures the amount of total resources 

that is financed by owners or the institution’s investments, 

contributions, or accumulated earnings and how much of that 

amount is subject to claims of third parties. So, the Equity 

ratio captures an institution’s overall capitalization 
192

structure and ability to borrow. The strength factors for the 

Equity ratio are the same for non-profit and for-profit 

institutions. A strength factor of zero means that that value 

of an institution’s assets is equal to the value of its 

liabilities. For a for-profit institution, the absence of 

equity provides no evidence of owner commitment to the 

business because there are no accumulated earnings or invested 

amounts beyond the liabilities that are at risk. For a nonprofit institution, the absence indicates there is little or 

no permanent endowment from which the institution could draw 

in extreme circumstances. At a strength factor of 1.0, an 

institution has about $8.33 of liabilities for every $10.00 of 

assets. However, this small amount of equity still makes it 

difficult for the institution to borrow significant amounts of 

money at market rates. For a strength factor of 2.0, the 

institution has about $6.67 of liabilities for every $10.00 of 

assets. At this strength factor and higher levels where an 

increasing proportion of the institution’s resources are not 

subject to claims of third parties, it is more likely that the 

institution will be able to borrow significant amounts of 

money at market rates. 

The remaining ratio, Net Income, is a primary indicator 

of the underlying causes of a change in an institution’s 

financial condition because it directly affects the resources 
193

reflected on the institution’s balance sheet (continued gains 

and losses measured by the ratio will impact all other 

fundamental elements of financial health over time). This 

ratio helps to answer the question of whether an institution 

“operated within its means” during its most recent fiscal 

year. A strength factor of 1.0 for the Net Income ratio means 

that an institution broke even for the year--it did not incur 

operating losses or add to its wealth with operating gains or 

surpluses. In other words, the institution was able to cover 

its cash and non-cash expenses for the year, but no more. As 

the strength factor increases, the wealth and surpluses added 

by operating gains help to increase an institution’s margin 

against adversity.

An institution is financially responsible under the 

composite score methodology if, after weighting, the strength 

factors for all of the ratios sum to a score that is at least 

1.5. For a for-profit institution, the weighting for each 

ratio is fairly equal--30 percent of the score is based on the 

Primary Reserve ratio, 40 percent on the Equity ratio, and 30

percent on the Net Income ratio. For a non-profit institution 

the weighting places less emphasis on the Net Income ratio at 

20 percent, with the Primary Reserve and Equity ratios at 40

percent each. As noted previously, the weighting reflects the 
194

importance or significance of the operating characteristics in

the two sectors. 

In summary, a low strength factor for any of the three 

ratios indicates that an institution has little or no margin 

against adversity, and may not have the resources necessary to 

meet its operating needs. As one or more of the strength 

factors increase to 2.0 and above, the institution’s margin 

against adversity improves through a combination of increases 

in expendable assets, equity, or operating gains. After 

accounting for the importance of each of the ratios, the 

composite score provides an overall measure of the financial 

health of an institution. 

However, as shown in Table 1, the methodology 

contemplates that an institution should have expendable assets 

that exceed liabilities by at least 10 percent to earn a 

strength factor (1.0 for an non-profit, and 2.0 for a forprofit) for the Primary Reserve ratio that provides for a 

margin against adversity in keeping with the minimum passing 

composite score of 1.5. While a good performance under the 

Equity ratio may help an institution obtain resources to meet 

its operating and contingency needs, or a good performance 

under the Net Income ratio may increase its wealth over time, 

the expendable assets reflected in the Primary Reserve ratio, 

which represents 30 percent to 40 percent of the composite 
195

score, are the first line of defense in dealing with an 

adverse situation, such as a lawsuit. That is, an institution 

would first seek to pay damages resulting from the suit out of 

expendable assets or current assets as they are referred to

under the comparable SEC materiality threshold. Either way, 

paying damages out of liquid assets for an amount above 10

percent of expendable or current assets is likely to have an 

adverse impact on an institution’s ability to meet its current 

and future financial obligations, particularly if the 

institution has little or no liquid assets.

With regard to a suit that is based on claims other than 

the making of a Federal loan or the provision of educational 

services, while that suit is pending an institution would not 

be financially responsible. If the institution settles or 

otherwise resolves that suit for an amount that exceeds 10 

percent of its current assets, the institution would still not 

be considered financially responsible until it submits audited 

financial statements that cover the fiscal year in which the 

suit was settled or resolved. At that point, the Department 

would be able to evaluate the impact of the suit through the 

calculation of the institution’s composite score. So, until 

the Department calculates the institution’s composite score, 

the institution would be treated as if the suit was still 

pending.
196

In cases where a suit or action does not demand a 

specific amount as relief, we could allow an institution to 

estimate and use that amount in determining whether the suit 

or action would exceed the materiality thresholds. However, 

doing so would lead to inconsistent and widely differing 

estimates among institutions, or more concerning, estimates 

significantly lower than the potential damages. Consequently, 

we propose a uniform approach under which the estimates are 

based on the total amount of tuition and fees received by the 

institution for students enrolled at the institution during 

the period for which the relief is sought. If no period is 

stated, an institution would estimate the amount based on the 

total amount of tuition and fees received by the institution 

for the three award years preceding the date the suit or 

action was filed or initiated. However, we do not believe 

this approach is appropriate for private party actions that do 

not demand a specific amount of relief because the reasons for 

those actions may impact a more limited group of students. We 

seek comment on this approach and on other approaches that 

provide a reasonable way to estimate the potential damages 

from suits and other actions.

With regard to repayments to the Secretary for losses 

to the Secretary from resolved borrower defense claims, an 

institution’s ability to meet its current and future 
197

financial obligations is threatened whenever repayments for 

those losses rise to levels above the materiality 

thresholds, regardless of whether those repayments are 

related to or otherwise stem from the factual findings and 

theories resulting from an investigation or lawsuit

initiated by the Department, a State or Federal agency, 

oversight entity, or some other party. Therefore, we 

propose to apply the dollar and percentage materiality 

thresholds to this triggering event.

To provide background on the proposed trigger relating 

to a teach-out plan, under 34 CFR 602.24(c)(1), an 

accrediting agency requires an institution to submit a 

teach-out plan whenever (1) the Secretary takes an 

emergency action or initiates a proceeding to limit, 

suspend, or terminate the institution’s participation in 

the title IV, HEA programs, (2) the agency acts to 

withdraw, terminate, or suspend the accreditation or preaccreditation of the institution, (3) the institution 

notifies the agency that it intends to cease operations 

entirely or close a location that provides 100 percent of 

at least one program, or (4) a State licensing or 

authorizing agency notifies the accrediting agency that it 

has or will revoke the institution’s license or legal 

authorization to provide an educational program. Except 
198

for the closure of small locations, these actions 

jeopardize the institution’s participation in the title IV, 

HEA programs. During the negotiated rulemaking sessions, 

some of the non-Federal negotiators noted that an 

institution may close a location that only a few students 

attended. In that case, the negotiators argued that some 

materiality threshold should apply because that closure 

would probably not have an adverse impact on the 

institution. Although those negotiators did not propose 

any specific thresholds, they suggested that thresholds 

based on the number of students enrolled or affected by the 

closure, or a dollar amount associated with those students, 

would be appropriate. We seek comment on whether the 

Department should adopt a threshold for this circumstance, 

and specifically seek comment on what that threshold should 

be. 

With regard to a situation where an accrediting agency 

places an institution on probation, issues a show-cause 

order, or places an institution in a similar status, we 

view that action as calling into question the institution’s 

ability to continue to provide educational services, and it 

may be a precursor to losing accreditation. Some of the 

non-Federal negotiators argued that because an institution 

may be placed on probation for a minor infraction or for a 
199

reason that could be readily resolved, the Department 

should not determine, or at least not determine 

immediately, that the institution is not financially 

responsible. In response, we suggested, and are proposing 

in this NPRM, that the Department would wait six months 

before making a determination to provide adequate time for 

an institution with a minor infraction to come into 

compliance with its accrediting agency standards. We also 

suggested during the negotiating sessions that we could 

accept an accrediting agency determination that an 

institution’s failure to comply with agency standards 

within a six-month timeframe has not had and is not 

expected to have a material adverse financial impact on the 

institution, and that the agency anticipates the 

institution will come into compliance within a longer time 

frame set by the agency under 34 CFR 602.20. However, some 

of the non-Federal negotiators believed that an accrediting 

agency could not make this determination or make 

predictions about future compliance by an institution. We 

seek comment about whether or how we should provide a way 

for an accrediting agency to inform the Department why its 

action of placing an institution on probation will not have 

an adverse impact on the institution’s financial or 

operating condition.
200

With regard to the triggers on loan agreements and 

obligations, some of the non-Federal negotiators believed 

that it was inappropriate to conclude that an institution 

is not financially responsible if it violates any loan 

agreement or fails to make a payment on a loan, regardless 

of the amount of or purpose for the loan or whether the 

loan was collateralized. In response we suggested, and are 

proposing in this NPRM, to apply this trigger when an 

institution violates a loan agreement with, or as currently 

provided under §668.171(b)(3)(ii), fails to make a payment 

for more than 120 days to, the creditor with the largest 

secured extension of credit to the institution. We 

believe this proposal addresses the materiality concerns 

raised by the negotiators and speaks directly to an 

institution’s ability to meet its current financial 

obligations. However, the creditor may impose penalties or 

more restrictive requirements on the institution under the 

terms of its security or loan agreements that call into 

question the institution’s ability to meet its current and 

future financial obligations. The Department is 

particularly concerned about identifying events in which 

the institution displays early indications of financial 

difficulty, and taking appropriate precautions as early as 

possible to protect the taxpayer. Lenders and creditors
201

that provide financing to an institution under security and 

loan agreements typically monitor the institution’s 

financial performance to ensure that it satisfies the loan 

requirements and are thus in the best position to identify 

contemporaneously any risks or problems that may hinder or 

prevent the institution from doing so. If these risks or 

problems arise, the creditor may impose penalties and 

additional restrictions on the institution, including 

increasing collateral or compensating balance requirements. 

For this reason, we propose to treat the imposition of 

penalties and additional requirements in loan agreements as 

a triggering event but, under the reporting requirements in 

proposed paragraph (d), we will allow the institution to 

demonstrate that these actions by the creditor will not 

have adverse impact on the institution.

With regard to the 90/10 revenue test, a for-profit 

institution that fails the test for a fiscal year is in 

danger of losing its eligibility to participate in the 

title IV, HEA programs if it fails again in the subsequent 

fiscal year. Therefore, we believe this is an appropriate 

trigger to include.

For a publicly traded institution, we are proposing 

as triggers four SEC-related actions that jeopardize the 

institution’s ability to meet its financial obligations 
202

or continue as a going concern. First, we propose as a 

trigger an SEC warning to the institution that it may 

suspend trading on the institution’s stock and take 

other action regarding the registration status of the 

company, pursuant to section 12(k) of the Securities 

Exchange Act, 15 U.S.C. 78l(k). The SEC does not make 

this warning public or announce that it is considering a 

suspension until it determines that the suspension is 

required to protect investors and the public interest.

33 

In that event, the SEC posts the suspension and the 

grounds for the suspension on its Web site. However, 

under the reporting requirements in proposed 

§668.171(d), the institution would be required to notify 

the Department within 10 days of receiving such a 

warning from the SEC. The SEC may decide to suspend 

trading on the institution’s stock based on (1) a lack 

of current, accurate, or adequate information about the 

institution, for example when the institution is not 

current in filing its periodic reports, (2) questions 

about the accuracy of publicly available information, 

including information in institutional press releases 

and reports and information about the institution’s 

 

33 See SEC Investor Bulletin: Trading Suspensions, available at 

www.sec.gov/answers/tradingsuspension.htm.
203

current operational status, financial condition, or 

business transactions, or (3) questions about trading in 

the stock, including trading by insiders, potential 

market manipulation, and the ability to clear and settle 

transactions in the stock.34

Second we propose that whenever the exchange on which 

the institution’s stock is traded notifies the institution 

that it is not in compliance with exchange requirements, 

that notice is a triggering event. The major exchanges 

typically require institutions whose stock is listed to 

satisfy certain minimum requirements such as stock price, 

number of shareholders, and the level of shareholder’s 

equity.35 If a stock falls below the minimum price, other 

requirements are not met, or the institution fails to 

provide timely reports of its performance and operations in 

its Form 10-Q or 10-K filings with the SEC, the exchange 

may delist the institution’s stock. Delisting is generally 

regarded as the first step toward Chapter 11 bankruptcy.

 

34 Id.

35 See, e.g., New York Stock Exchange Rule 801.00: 

Suspension and Delisting: Securities admitted to the list may 

be suspended from dealings or removed from the list at any 

time that a company falls below certain quantitative and 

qualitative continued listing criteria. When a company falls 

below any criterion, the Exchange will review the 

appropriateness of continued listing.

Available at http://nysemanual.nyse.com/lcm/sections/lcmsections/chp_1_9/default.asp.
204

However, before the exchange initiates a process to delist 

the stock, it notifies the institution and gives it several

days to respond with a plan of the actions it intends to 

take to come into compliance with exchange requirements. 

Third, as proposed, if an institution discloses or is 

required to disclose in a report filed with the SEC a 

judicial or administrative proceeding stemming from a 

complaint filed by a person or entity that is not part of a 

State or Federal action, that would be a triggering event. 

SEC rules require the institution to disclose litigation 

that is material within the context of its disclosure 

obligations to investors. 17 CFR 229.103. We recognize 

that publicly traded institutions may, to comply 

unequivocally with this obligation, report litigation that 

they would not otherwise consider to be a material adverse 

event. As noted in the description of these proposed 

regulations above, an institution that makes such a 

disclosure of litigation in an SEC filing may explain in 

reporting that disclosure to the Department why that 

litigation or suit does not constitute a material adverse 

event that would pose an actual risk to its financial 

health.

Fourth, we propose to add as a trigger the 

institution’s failure to file timely a required annual or 
205

quarterly report with the SEC. As noted previously in this 

discussion, the late filing of, or failure to file, a

required SEC report may precipitate an adverse action by 

the SEC or a stock exchange. We seek comment on how we 

could more narrowly tailor these proposed triggers for 

publicly traded institutions to capture only those 

circumstances that could pose a risk to the institution’s 

financial health.

The proposed GE trigger would apply to an institution 

at which the majority of its students who receive title IV,

HEA assistance are enrolled in GE programs, and the 

majority of those GE students enroll in failing and zone 

programs. Since failing and zone programs are in danger of 

losing the title IV, HEA eligibility, the corresponding 

loss of revenue from those programs may jeopardize the 

institution’s ability to continue as a going concern. In 

addition, because most of the GE students are enrolled in 

programs that have not enabled former graduates to earn 

enough to afford to pay their student loans, we question 

the institution’s ability to provide adequate educational 

services. We seek comment on whether the majority of 

students that enroll in zone or failing GE programs is an 

appropriate threshold or whether and why we should adopt a 

different threshold.
206

The withdrawal of owner’s equity is currently an 

event that an institution reports to the Department 

under the provisions of the zone alternative in 

§668.175(d). An institution participates under the 

zone alternative if its composite score is between 1.0 

and 1.5. We proposed at negotiated rulemaking and 

propose in this NPRM to relocate this provision to the 

general standards of financial responsibility under 

§668.171. Under the general standards, this provision 

would become a trigger in cases where an institution’s 

financial condition is already precarious and any 

withdrawal of funds from the institution would further 

jeopardize its ability to continue as a going concern 

or its continued participation in the title IV, HEA 

programs. However, as noted in the discussion of these 

proposed regulations above, an institution may show 

that the withdrawal of funds was for a legitimate 

purpose or that it has no impact on the institution’s 

composite score.

With regard to the trigger for an institution 

whose cohort default rate is 30 percent or more for two 

consecutive years, the institution is in danger of 

losing its program eligibility in the subsequent year 

if its cohort default rate is again 30 percent or more. 
207

However, if the institution files a challenge, request 

for adjustment, or appeal under subpart N, we propose 

to wait until that challenge, request, or appeal is 

resolved before determining whether the institution 

violated the trigger. However, we seek comment on 

whether this trigger should apply to an institution 

whose cohort default rate is 30 percent or more for any 

one year because, under that circumstance, the 

institution is required by statute to develop a default 

prevention plan and submit it to the Secretary, 

indicating that Congress recognized the risk that such 

an institution could pose to borrowers and taxpayers 

and therefore warranted a plan for remediation after a 

single year of low performance. 

As discussed during the negotiated rulemaking 

sessions, all of these actions and events would serve 

as “automatic triggers,” meaning that an institution 

would not be financially responsible for at least one 

year based solely on the occurrence of that action or 

event, or for the triggers relating to an action by a

State, Federal, or other oversight entity, including an 

accrediting agency, would not be financially 

responsible for a period of three years after an action 

by that agency. During negotiated rulemaking we also 
208

discussed, and we have proposed in this NPRM, other 

factors or conditions that the Secretary could consider 

in determining whether an institution is financially 

responsible. These factors and conditions, which we 

refer to as “discretionary triggers,” are factors or 

conditions that could be reasonably likely to have an 

adverse impact on the financial condition, business, or 

results of operations of a particular institution. If 

the Secretary determines that any of these factors 

alone or in combination calls into question the 

financial capability of an institution, the Secretary 

notifies the institution of the reasons for that 

determination. 

Two of the discretionary triggers, fluctuations in 

Direct Loan and Pell Grant funds and high dropout 

rates, stem from the statutory provisions for selecting 

institutions for program reviews in section 498a(a) of 

the HEA. 20 U.S.C. 1099c-1(a). Significant increases 

or decreases in the volume of Federal funds may signal 

rapid expansion or contraction of an institution’s 

operations that may either cause or be driven by

negative turns in the institution’s financial condition 

or its ability to provide educational services. 

Similarly, high dropout rates may signal that an 
209

institution is employing high-pressure sales tactics or 

is not providing adequate educational services, either 

of which may indicate financial difficulties and result 

in enrolling students who will not benefit from the 

training offered and will drop out, leading to 

financial hardship and borrower defense claims.

Another discretionary trigger deals with the 

oversight activities of a State authorizing or 

licensing agency, where a failure by an institution to 

comply with agency requirements could jeopardize its 

ability to operate, or provide educational programs, in 

that State. 

Some non-Federal negotiators expressed support for 

the proposed use of a financial stress test that would 

be developed or adopted by the Department. Under the 

test, we would be able to assess or model an 

institution’s ability to deal with an economic crisis 

or other adverse conditions. Like the composite score, 

the stress test could be used to assess whether, or to 

augment an analysis of whether, an institution is able 

to meet its financial obligations to students and the 

Secretary. An institution’s bond or credit rating 

could be used in a similar way. During negotiated 

rulemaking we proposed, and propose in this NPRM, that 
210

an institution with a non-investment grade bond or 

credit rating36 could be subject to additional scrutiny 

because any rating below investment grade indicates 

that the institution is likely to default on the debt 

for which that rating is issued.

The last discretionary trigger, any event reported 

by an institution to the SEC on a Form 8-K, is intended 

to capture events that are not included in the 

automatic triggers but may nevertheless have a 

significant adverse impact on business operations. For 

example, an institution must report to the SEC that a 

material definitive agreement (a contract on which 

business operations are substantially dependent) was 

terminated. 

Under the reporting requirements in proposed 

§668.171(d), an institution would notify the 

Department of any action or event that constitutes an 

automatic or discretionary trigger no later than 10 

days after that action or event occurs. Some of the 

non-Federal negotiators identified a few events that 

may not be material or would be resolved during the 

reporting period and argued that these events should 

 

36 Generally, a bond rating lower than Baa3 (Moody’s) or BBB-

(Standard and Poor’s, Fitch). www.investopedia.com/exam-guide/series7/debt-securities/bond-ratings.asp.
211

not prompt any action by the Department. We agreed, 

and propose in this NPRM that, to keep the Department 

apprised, an institution would still be required to 

report those events but the institution may tell us in 

its notice why the action or event is not material or 

that it has been resolved. If we do not agree with 

the institution’s assessment, the Department will 

notify the institution of the reasons for that 

determination.

Alternative standards and requirements (§668.175)

Statute: Under sections 437(c) and 464(g) of the HEA, if 

the Secretary discharges a borrower’s liability on a loan 

due to the closure of an institution, false certification, 

or unpaid refund, the Secretary pursues a claim against the 

institution or settles the loan obligation pursuant to the 

financial responsibility standards described in section 

498(c).

Section 498(c)(3) of the HEA provides that if an 

institution fails the composite score or other criteria 

established by the Secretary to determine whether the 

institution is financially responsible, the Secretary must 

determine that the institution is financially responsible 

if it provides third-party financial guarantees, such as 

performance bonds or letters of credit payable to the 
212

Secretary, for an amount that is not less than one-half of 

the annual potential liabilities of the institution to the 

Secretary for title IV, HEA funds, including liabilities 

for loan obligations discharged pursuant to section 437, 

and to students for refunds of institutional charges, 

including required refunds of title IV, HEA funds.

Under section 498(h) of the HEA, the Secretary may 

provisionally certify an institution’s eligibility to 

participate in the title IV, HEA programs for not more than 

one year in the case of an institution seeking an initial 

certification, or for no more than three years for an 

institution that seeks to renew its certification, if, in 

the judgment of the Secretary, the institution is in an 

administrative or financial condition that may jeopardize 

its ability to perform its financial responsibilities under 

a program participation agreement. If, prior to the end of 

a period of provisional certification, the Secretary 

determines that the institution is unable to meet its 

responsibilities under its program participation agreement, 

the Secretary may revoke the institution’s provisional 

certification to participate in the title IV, HEA programs.

Current Regulations: Section 668.13(c) of the current 

regulations identifies the reasons and conditions for which 

the Secretary may provisionally certify an institution to 
213

participate in the title IV, HEA programs, including an 

institution’s failure to meet the standards of financial 

responsibility under §668.15 or subpart L of the general 

provisions regulations. Under §668.13(c)(4), an 

institution may participate in the title IV, HEA programs 

under a provisional certification if the institution 

demonstrates to the Secretary’s satisfaction that it (1) is 

capable of meeting the standards of participation in 

subpart B of the general provisions regulations within a 

specified period, and (2) is able to meet its 

responsibilities under its program participation agreement, 

including compliance with any additional conditions that 

the Secretary requires the institution to meet for the 

institution to participate under a provisional 

certification. If the Secretary determines that the 

institution is unable to meet its responsibilities under 

its provisional program participation agreement, the 

Secretary may revoke the institution’s provisional 

certification as provided under §668.13(d).

As provided under §668.175, an institution that is not 

financially responsible under the general standards in 

§668.171 may begin or continue to participate in the title 

IV, HEA programs only by qualifying under an alternative 

standard. 
214

Under the zone alternative in §668.175(d), a 

participating institution that is not financially 

responsible solely because its composite score is less than 

1.5 may participate as a financially responsible 

institution for no more than three consecutive years, but 

the Secretary requires the institution to (1) make 

disbursements to students under the heightened cash 

monitoring or reimbursement payment methods described in 

§668.162, and (2) provide timely information regarding any 

adverse oversight or financial event, including any 

withdrawal of owner’s equity from the institution. In 

addition, the Secretary may require the institution to (1) 

submit its financial statement and compliance audits 

earlier than the date specified in §668.23(a)(4), or (2) 

provide information about its current operations and future 

plans.

Under the provisional certification alternative in 

§668.175(f), an institution that is not financially 

responsible because it does not meet the general standards 

in §668.171(b), or because of an audit opinion in 

§668.171(d) or a condition of past performance in 

§668.174(a), may participate under a provisional 

certification for no more than three consecutive years, if 

the institution (1) provides an irrevocable letter of 
215

credit, for an amount determined by the Secretary that is 

not less than 10 percent of the title IV, HEA program funds 

the institution received during its most recently completed 

fiscal year, (2) demonstrates that it was current in its 

debt payments and has met all of its financial obligations 

for its two most recent fiscal years, and (3) complies with 

the provisions under the zone alternative.

Proposed Regulations: We propose to relocate to proposed 

new §668.171(c) two of the oversight and financial events

that an institution currently reports to the Department 

under the zone alternative in §668.175(d)(2)(ii)--actions 

by an accrediting agency and any withdrawal of owner’s 

equity from the institution. In addition we propose to 

remove from §668.175(d)(2) the two reporting events related 

to loan agreements and debt obligations.

Under the provisional certification alternative in 

§668.175(f), we propose to add a new paragraph (4) that 

ties the amount of the financial protection that an 

institution must provide to the Secretary to an action or 

triggering event described in §668.171(c). Specifically, 

under this alternative, an institution would be required to

provide to the Secretary financial protection, such as an 

irrevocable letter of credit, for an amount that is:
216

• For a State or Federal action under 

§668.171(c)(1)(i) or (ii), 10 percent or more, as 

determined by the Secretary, of the amount of Direct Loan 

Program funds received by the institution during its most 

recently completed fiscal year;

• For repayments to the Secretary for losses from 

borrower defense claims under §668.171(c)(2), the greatest 

annual loss incurred by the Secretary during the three most 

recently completed award years to resolve those claims or 

the amount of losses incurred by the Secretary during the 

current award year, whichever is greater, plus a portion of

the amount of any outstanding or pending claims based on 

the ratio of the total value of claims resolved in favor of 

borrowers during the three most recently completed award 

years to the total value of claims resolved during the 

three most completed award years; and

• For any other action or triggering event described 

in §668.171(c), or if the institution’s composite score 

is less than 1.0, or the institution no longer qualifies 

under the zone alternative, 10 percent or more, as 

determined by the Secretary, of the total amount of title 

IV, HEA program funds received by the institution during 

its most recently completed fiscal year.
217

We propose to remove §668.175(e) because the 

transition year alternative, which pertains to fiscal years

beginning after July 1, 1997 and before June 30, 1998, is 

no longer applicable.

In addition, we propose to add a new paragraph (h) 

that provides for providing financial protection using a 

set-aside in lieu of cash or a letter of credit. If an 

institution does not provide cash or the letter of credit 

for the amount required to participate under the zone or 

provisional certification alternatives within 30 days of 

the Secretary’s request, the Secretary would provide funds 

to the institution only under the reimbursement or 

heightened cash monitoring payment methods, and would 

withhold temporarily a portion of any reimbursement claim 

payable to the institution in an amount that ensures that 

by the end of a nine-month period, the total amount 

withheld equals the amount of cash or the letter of credit

the institution would otherwise provide. The Secretary

would maintain the amount of funds withheld under this 

offset arrangement in a temporary escrow account, would 

use the funds to satisfy the debt and liabilities owed to 

the Secretary that are not otherwise paid directly by the 

institution, and would return to the institution any funds 
218

not used for this purpose during the period for which the 

cash or letter of credit was required.

Reasons: The reportable items under the zone alternative 

were intended to alert the Department to adverse actions or 

events that could occur at any time, or fall outside the 

scope of activities that are typically included or 

disclosed in financial statements, and that could further 

degrade the financial health of an institution with little 

or no margin against adversity. As noted previously, the 

Department is taking a more contemporaneous and broader 

view of the actions or events that are likely to have an 

adverse impact on an institution, regardless of whether the 

institution is participating under the zone or another 

alternative. As such, the reportable events under the zone 

alternative relating to adverse actions by an accrediting 

agency or withdrawals of owner’s equity fall naturally 

under the scope of triggering events for the general 

standards of financial responsibility. With regard to 

removing the reporting requirements for loan agreements and 

debt obligations from the zone alternative, we note that 

while the provisions relating to loan agreements and debt 

obligations are currently part of the general standards, 

the Department typically relies on footnote disclosures in 

the financial statements to determine whether an 
219

institution violated those agreements or obligations. 

Because we would require under proposed §668.171(d) that 

institutions report these violations no later than 10 days 

after they occur, there would be no need to maintain the 

same reporting under the zone alternative. 

With regard to the proposed changes under the 

provisional certification alternative that tie the amount 

of the financial protection, such as a letter of credit, to 

an action or triggering event, as explained more fully 

under the discussion of the general standards in §668.171, 

every cited action or event is material and, on its own, 

likely to have an adverse impact on the institution. So, 

while the Secretary retains the discretion to determine the 

amount of the financial protection for any action or event, 

we propose for most of the triggering events to set as a 

floor the longstanding minimum-–10 percent of the amount of 

title IV, HEA program funds received by the institution 

during its most recently completed fiscal year. To be 

clear, each of these triggering events would require a form 

of financial protection, such as a letter of credit, of at 

least 10 percent, so an institution with three triggering 

events would have to submit financial protection for at 

least 30 percent of its prior year title IV, HEA program 

funds. 
220

For borrower defense claims, the amount of the 

financial protection is tied to the prior experience or 

history of an institution in having to reimburse the 

Secretary for losses stemming from those claims and the 

potential for future losses. As proposed, the Department 

would calculate the amount of the financial protection by 

looking at the three most recently completed award years 

and the current award year to determine the year in which 

the greatest Federal losses occurred, and adding to that 

amount an estimate for the amount of losses from any 

outstanding or pending claims. For example, the estimated 

loss for pending claims would be calculated by multiplying 

the percentage of prior claims resolved in the students’ 

favor (say 75 percent) by the total amount of the pending 

claims (say $500,000), or $375,000. In the normal course, 

the Department would first seek reimbursement from the 

institution before using the financial protection to 

recover losses from borrower defense claims.

For a State or Federal action under §668.171(c)(1)(i) 

or (ii), the amount of the financial protection is based 

only on Direct Loan funds, instead of all title IV, HEA 

funds as for all of the other triggers, because the 

Federal protection sought is related directly to loan 
221

liabilities that could arise in the wake of a State or 

Federal agency suit against the institution. 

With regard to the set-aside, the Department wishes 

to provide an alternative to an institution that, for 

costs or other reasons, is unable to provide a letter of 

credit, or cash equivalent to the amount of the letter of 

credit, within 30 days. However, while we acknowledge 

that obtaining a letter of credit could be costly and time 

consuming for some institutions, or obtaining a letter of 

credit collateralized by physical assets requiring 

valuation by a bank or creditor could take an extended 

time, we believe that the severity or potential 

consequences of the triggering events warrant the 

Department taking immediate steps to protect the Federal 

interest. Therefore, if an institution does not provide 

the letter of credit or cash within 30 days of the 

Secretary’s request, the Department would initiate 

administrative offsets to implement the set-aside. 

Severability 

Current Regulations: None. 

Proposed Regulations: Proposed §668.176 would make clear 

that, if any part of the proposed regulations for part 

668, subpart L, whether an individual section or language 
222

within a section, is held invalid by a court, the 

remainder would still be in effect.

Reasons: We believe that each of the proposed provisions 

proposed in this NPRM 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.

Debt Collection

How does the Secretary exercise discretion to compromise a 

debt or to suspend or terminate collection of a debt?

(§30.70)

Statute: Section 432(a) of the HEA authorizes the 

Secretary to enforce or compromise a claim under the FFEL 

Program; section 451(b) provides that Direct Loans are made 

under the same terms and conditions as FFEL Loans; and 

section 468(2) authorizes the Secretary to enforce or 
223

compromise a claim on a Perkins Loan. Section 452(j) of 

the General Education Provisions Act (GEPA) authorizes 

certain compromises under Department programs, and 31 

U.S.C. 3711 authorizes a Federal agency to compromise or 

terminate collection of a debt, subject to certain 

conditions.

Current Regulations: The current regulation in §30.70 was 

adopted in 1988 to describe the procedures and standards 

the Secretary follows to compromise, or suspend or 

terminate collection of, debts arising under programs 

administered by the Department. The HEA has, since 1965, 

authorized the Secretary to compromise--without dollar 

limitation--debts arising from title IV, HEA student loans. 

The Federal Claims Collection Act of 1966 (FCCA), now at 31 

U.S.C. 3711, authorized Federal agencies to compromise, or

suspend or terminate collection of, debts, subject to 

dollar limitations and compliance with the Federal Claims 

Collection Standards (FCCS), now at 31 CFR 900–904. As in 

effect in 1988 when the current regulation was adopted, the 

FCCA required agencies generally to obtain approval from 

the DOJ in order to resolve debts exceeding $20,000, unless 

DOJ were to prescribe a higher amount. No higher amount 

was prescribed, and the Department included that $20,000 

dollar limit in §30.70. 
224

In 1988, section 452(j) of GEPA (20 U.S.C. 1234a(j)) 

was enacted to provide standards and procedures for certain 

compromises of debts arising under any program administered 

by the Department other than the Impact Aid Program or HEA 

programs. These provisions were also included in 

§30.70(c), (d), and (e). However, in 1989, the Department 

adopted 34 CFR 81.36 to implement these same GEPA 

standards; that regulation supersedes current §30.70(c), 

(d), and (e) to govern compromises of debts under certain 

Department programs. Compromises of debts under Department 

programs that do not fall under standards in §81.36 would 

continue to be subject to the standards and dollar limits 

generally applicable to Department debts. In 1990, in Pub. 

L. 101-552, Congress increased the size of debts that 

agencies may resolve without DOJ approval to $100,000; that 

change is not reflected in §30.70. Finally, in 2008, Pub. 

L. 110-315 amended section 432 of the HEA to require the 

Department to provide DOJ an opportunity to review and 

comment on any proposed resolution of a claim arising under 

any of the title IV, HEA loan programs that exceed

$1,000,000. That, too, is not reflected in current §30.70.

Proposed Regulations: The proposed changes would revise 

§30.70 to--
225

• Reflect the increased debt resolution authority 

($100,000); 

• Refer to §81.36 to describe the authority and 

procedures for those compromises of claims that are subject 

to section 452(j) of GEPA; 

• Clarify that the generally applicable $100,000 

limit does not apply to resolution of claims arising under 

the FFEL Program, or under the Direct Loan Program or 

Perkins Loan Program; and include the requirement that the 

Department seek DOJ review of any proposed resolution of a 

claim exceeding $1,000,000 under any of those loan 

programs.

Reasons: The current regulations do not reflect a series 

of statutory changes that have expanded the Secretary’s 

authority to compromise, or suspend or terminate the 

collection of, debts.

Closed School Discharges (§§668.14, 673.33, 682.402, and 

685.214)

Statute: Sections 437(c) and 464(g)(1) of the HEA provide 

for the discharge of a borrower’s liability to repay a FFEL 

Loan or a Perkins Loan if the student is unable to complete 

the program in which the student was enrolled due to the 

closure of the school. The same benefit applies to Direct 
226

Loan borrowers under the parallel terms, conditions, and 

benefits provisions in section 455(a) of the HEA. 

Current Regulations: Section 668.14(b)(31) provides that, 

as part of an institution’s program participation 

agreement, the institution must submit a teach-out plan, 

if, among other conditions, the institution intends to 

close a location that provides 100 percent of at least one 

program offered by the institution or if the institution 

otherwise intends to cease operations. Sections 674.33(g), 

682.402(d), and 685.214 describe the qualifications and 

procedures in the Perkins, FFEL, and Direct Loan Programs 

for a borrower to receive a closed school discharge.

Proposed Regulations: Proposed §668.14(b)(32) would 

require, as part of its program participation agreement

with the Department, a school to provide all enrolled 

students with a closed school discharge application and a 

written disclosure, describing the benefits and the 

consequences of a closed school discharge as an alternative 

to completing their educational program through a teach-out 

plan after the Department initiates any action to terminate 

the participation of the school in any title IV, HEA 

program or after the occurrence of any of the events 

specified in §668.14(b)(31) that would require the 

institution to submit a teach-out plan.
227

Proposed revisions to §682.402(d)(6)(ii)(F) would 

require a guaranty agency that denies a closed school 

discharge request to inform the borrower of the opportunity 

for a review of the guaranty agency’s decision by the 

Secretary, and explain how the borrower may request such a 

review. Proposed §682.402(d)(6)(ii)(K) would describe the 

responsibilities of the guaranty agency and the Secretary 

if the borrower requests such a review. 

Under current and proposed 682.402(d)(6)(ii)(H) and 

685.214(f)(4), as well as under current §§674.33(g)(8)(v), 

if a FFEL or Direct Loan borrower fails to submit a 

completed closed school discharge application within 60 

days of the notice of availability of relief, the guaranty 

agency or the Department resumes collection on the loan. 

However, proposed §§674.33(g)(8)(vi), 682.402(d)(6)(ii)(I),

and 685.214(f)(5) would require the guaranty agency or the 

Department, upon resuming collection, to provide a Perkins, 

FFEL, or Direct Loan borrower with another closed school 

discharge application, and an explanation of the 

requirements and procedures for obtaining the discharge.

Proposed §§674.33(g)(3)(iii), 682.402(d)(8)(iii), and 

685.214(c)(2) would authorize the Department, or a guaranty 

agency with the Department’s permission, to grant a closed 

school discharge to a Perkins, FFEL, or Direct Loan 
228

borrower without a borrower application based on 

information in the Department’s or guaranty agency’s 

possession that the borrower did not subsequently re-enroll 

in any title IV-eligible institution within a period of 

three years after the school closed. 

Reasons: Many borrowers eligible for a closed school 

discharge do not apply. The Department is concerned that 

borrowers are unaware of their possible eligibility for a 

closed school discharge because of insufficient outreach 

and information about available 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 identified eligible 

borrowers an application and an explanation of the 

qualifications and procedures to obtain a closed school 

discharge. Schools that close, or close a location, may 

also conduct teach-outs in accordance with their 

accreditor’s standards. The proposed amendments to the 

program participation agreement 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 
229

for a closed school discharge, as well as the consequences 

of receiving such a discharge.

Non-Federal negotiators cited cases in which schools 

that were closing or had closed failed to provide complete 

or accurate information to their students about their 

options. They described instances in which schools told 

students that, if the student received a closed school 

discharge, the credits that the student earned at the 

school would not be transferable to another school. While 

borrowers who receive a closed school discharge may be able 

to transfer the credits that they have earned, others may 

struggle to find another institution willing to accept 

those credits. Yet relying on the information provided to 

them, these borrowers often choose teach-outs rather than 

closed school discharges. Though teach-outs can be 

beneficial to borrowers in a closed school situation, a 

closed school discharge may be a better option for some 

students. 

In the Perkins and Direct Loan Programs, closed school 

discharge determinations are generally made by the 

Department. The Department is the loan holder for all 

Direct Loans, and would become the loan holder for Perkins 

Loans held by a school that closes. In the FFEL Program, 

closed school discharge determinations are generally made 
230

by a guaranty agency. Under the current FFEL Program 

regulations, a borrower cannot request a review of a 

guaranty agency’s determination of a borrower’s eligibility 

for a closed school discharge. Proposed 

§682.402(d)(6)(ii)(F) would provide for Departmental review 

of denied closed school discharge claims in the FFEL 

Program in order to provide an opportunity for a more 

complete review of their claims, comparable to that 

provided in current regulations for false certification 

claims.

The proposed amendments to the FFEL, Perkins, and 

Direct Loan regulations, which would require loan holders 

to send borrowers a second closed school application if a 

borrower fails to submit an application within 60 days of 

the date the first application was sent, are intended to 

provide another opportunity to encourage borrowers who may 

be eligible for the closed school discharge to apply.

The Department proposed during negotiated rulemaking

that the Secretary allow closed school discharges to be 

granted without an application in all three loan programs 

if the borrower does not re-enroll in a title IV-eligible 

program within three years. We asserted that such 

borrowers can be assumed to not have completed their 

academic program through a teach-out or transfer, and have 
231

included these provisions in the proposed regulations. We 

also asserted that an application or discharge request in 

these cases should not be necessary. By amending the 

regulations to provide for more outreach, disclosure of a 

borrower’s options in a teach-out situation, and review by 

the Secretary of guaranty agency determinations, we hope to 

increase the number of eligible borrowers who apply for and 

receive a closed school discharge.

Death Discharges (§§674.61(a), 682.402(b)(2), 685.212(a), 

and 686.42(a))

Statute: Section 420N(d)(2) of the HEA provides for the 

Secretary to establish, through regulation, categories of 

extenuating circumstances under which a TEACH Grant 

recipient who is unable to satisfy all or part of the TEACH 

Grant service obligation may be excused from fulfilling 

that portion of the service obligation. 

Section 437(a)(1) of the HEA provides for the 

discharge of a loan made under the FFEL Program if the 

borrower dies. In accordance with section 455(a)(1) of the 

HEA, this discharge provision also applies to loans made 

under the Direct Loan Program.

Section 464(c)(1)(F)(i) provides that the liability to 

repay a Perkins Loan is cancelled upon the death of the 

borrower.
232

Current Regulations: For the Perkins Loan Program, 

§674.61(a) provides that an institution must discharge the 

unpaid balance on a Perkins Loan if the borrower dies. For 

the FFEL Program and the Direct Loan Program, 

§§682.402(b)(2) and 685.212(a)(1), respectively, provide 

for the discharge of a loan based on the death of the 

borrower or, in the case of a PLUS loan made to a parent, 

the death of the student on whose behalf the parent 

borrowed. For the TEACH Grant Program, §686.42(a) 

specifies that the Secretary discharges a grant recipient's 

obligation to complete the agreement to serve if the grant 

recipient dies. For all of these programs, the current 

regulations specify that a death discharge can be granted 

based on an original or certified copy of the borrower’s, 

student’s, or TEACH grant recipient’s death certificate; an 

accurate and complete photocopy of the original or a 

certified copy of the death certificate; or, on a case-bycase basis, other reliable documentation of the 

individual's death.

Proposed Regulations: We propose to amend §§674.61(a), 

682.402(b)(2), 685.212(a), and 686.42(a) to allow for death 

discharges to be granted based on an accurate and complete 

original or certified copy of a death certificate that is 

scanned and submitted electronically or sent by facsimile 
233

transmission, or verification of a borrower's, student's or 

TEACH Grant recipient's death through an authoritative 

Federal or State electronic database that is approved for 

use by the Secretary. The proposed regulations would also 

make minor changes to the current death discharge 

regulatory language to make it more consistent across the 

title IV, HEA programs. 

Reasons: The proposed regulations would streamline the 

death discharge process and reduce administrative burden by 

allowing for death certificates to be submitted 

electronically or by facsimile transmission, and would 

further simplify the process in the future by allowing for 

death discharges to be granted based on verification of an 

individual's death through an authoritative Federal or 

State electronic database that the Secretary authorizes to 

be used for this purpose.

During the negotiations, a non-Federal negotiator 

asked if, under the proposed regulations, it would be 

permissible for a loan holder to automatically grant a 

death discharge based on verification of a borrower’s or 

student’s death in an approved State or Federal electronic 

database, without the loan holder having received a request 

for the death discharge from a family member. The 

Department responded that loan holders can only grant death 
234

discharges after being informed of the borrower’s or 

student’s death by a family member or other representative 

of the deceased individual, but that they can use the 

information in an approved electronic database as the 

necessary supporting documentation for doing so. 

Interest Capitalization (§§682.202(b)(1), 682.410(b)(4), 

and 682.405)

Statute: Section 428H(e)(2) of the HEA allows a FFEL 

Program lender to capitalize interest when the loan enters 

repayment, upon default, and upon the expiration of 

deferment and forbearance, but does not specifically 

authorize the capitalization of interest when a defaulted 

loan is rehabilitated.

Current Regulations: The current FFEL Program regulations 

in §§682.202, 682.405, and 682.410 permit FFEL Program 

lenders to capitalize interest when the borrower enters or 

resumes repayment and requires a guaranty agency to 

capitalize interest when it pays the FFEL Program lender’s 

default claim. However, these regulations do not 

specifically address whether a guaranty agency may 

capitalize interest when the borrower has rehabilitated a 

defaulted FFEL Loan or whether a FFEL Program lender may 

capitalize interest when purchasing a rehabilitated FFEL 

Loan from a guaranty agency.
235

Proposed Regulations: The proposed revisions to the abovereferenced regulations would clarify that the only time 

that a guaranty agency may capitalize interest is when it 

pays the FFEL Program lender’s default claim and, 

therefore, that capitalization by the guaranty agency when 

selling a rehabilitated FFEL Loan is not permitted. 

Similarly, the proposed regulations would clarify that 

capitalization by the FFEL Program lender when purchasing a 

rehabilitated FFEL Loan is not permitted. The proposed 

regulations would also clarify, through a conforming 

change, that, when a guaranty agency holds a defaulted FFEL 

Loan and the guaranty agency has suspended collection 

activity to give the borrower time to submit a closed 

school or false certification discharge application, 

capitalization is not permitted if collection on the loan 

resumes because the borrower does not return the 

appropriate form within the allotted timeframe.

Reasons: Currently, some guaranty agencies and FFEL 

Program lenders capitalize interest when the borrower 

rehabilitates the loan, while others do not. Also, some 

guaranty agencies capitalize interest when resuming 

collection on a defaulted FFEL Loan when a borrower has not 

submitted a closed school or false certification discharge 

with a specific timeframe. The Department does not believe 
236

that interest capitalization in either circumstance is 

warranted, and the Department does not capitalize interest 

on loans that it holds in comparable circumstances. 

Further, the Department believes that FFEL Program lenders, 

in the case of a rehabilitated FFEL Loan, have sufficient 

tools at their disposal to ensure that a rehabilitated loan

that has an outstanding interest balance is repaid in full 

by the end of the applicable repayment period or, in the 

case of the income-based repayment plan, forgiven.

Loan Repayment Rate Warnings and Financial Protection

Disclosures (§668.41)

Statute: Under 20 U.S.C. 1221-3 and 3474, the Secretary is

authorized to adopt such regulations as needed for the 

proper administration of programs.

Current Regulations: Current §668.41 requires institutions 

to make certain general disclosures of information to 

enrolled and prospective students, including availability 

of financial assistance, detailed institutional 

information, retention rate, completion and graduation 

rates, and placement of and types of employment obtained by 

graduates. Section 668.41 further requires specialized 

disclosures related to the “Annual Security Report and 

Annual Fire Safety Report,” the “Report on Completion or 

Graduation Rates for Student-Athletes,” and the “Report on 
237

Athletic Program Participation Rates and Financial Support 

Data.”

Proposed Regulations:

Proprietary Institution Loan Repayment Warning

Proposed §668.41(h) would expand the reporting and 

disclosure requirements under §668.41 to provide that, for 

any fiscal year in which an affected postsecondary 

institution has a loan repayment rate that is less than or 

equal to zero, the institution must deliver a Departmentissued plain language warning to prospective and enrolled

students and place the warning on its Web site and in all 

promotional materials and advertisements. In accordance 

with proposed §668.41(h)(6), the Department would not 

calculate a repayment rate for an institution whose cohort 

is based on fewer than 10 borrowers. An institution with 10 

or more borrowers that receives a failing repayment rate 

will have the opportunity to appeal its rate if the 

institution demonstrates that it has a low participation 

rate under the Direct Loan program by applying, with slight 

modifications, the participation rate index calculation 

described in §668.214(b)(1) that institutions may use to

appeal a loss of eligibility due to high cohort default 

rates or placement on provisional certification.

Consistent with the existing process, in calculating the 
238

participation rate index for the purposes of proposed 

§668.41(h)(6), the institution would divide the number of 

students receiving a Direct Loan to attend the institution 

during a period of enrollment that overlaps any part of a 

12-month period that ended during the six months 

immediately preceding the fiscal year for which the 

Department calculated the loan repayment rate, by the 

number of regular students enrolled at the institution on 

at least a half-time basis during any part of the same 12-

month period. The resulting percentage would then be 

multiplied by 30 percent to yield a participation rate. A 

figure of 30 percent is used because that is the minimum 

cohort default rate that could precipitate a participation 

rate challenge. A participation rate equal to or less than 

0.0625 for a fiscal year in which the Department has 

calculated a loan repayment rate would exempt the 

institution from having to deliver a loan repayment warning

under proposed §668.41(h).

Under proposed §668.41(h)(3), for each fiscal year, 

the Secretary would calculate the loan repayment rate for a 

proprietary institution based on the cohort of borrowers 

whose Direct Loans entered repayment at any time during the 

fifth fiscal year prior to the most recently completed 

fiscal year. The percentage change between what we refer 
239

to as the “original outstanding balance (OOB)” (the amount 

owed, as defined more specifically in proposed 

§668.41(h)(2)(ii), when the borrower enters repayment, 

including any accrued interest) and the “current 

outstanding balance” (including principal and both

capitalized and uncapitalized interest) as of the end of 

the prior fiscal year for each borrower in the cohort would 

be calculated and expressed as a percentage reduction of, 

or increase in, the OOB. For any loan reported as being in 

default status at any time during the “measurement period”

and where there is a percentage reduction of the original 

balance, the difference between the OOB and COB would be 

considered to be zero; and for any loan that defaulted and 

had a percentage increase from the original balance, the 

difference between the OOB and COB would be that percentage 

increase. “Measurement period” is defined in proposed 

§668.41(h)(2)(iv) as the period of time between the date a 

borrower’s loan enters repayment and the end of the fiscal 

year for which the current outstanding balance of that loan 

is determined. The OOB of a loan does not include PLUS 

loans made to parent borrowers, Perkins loans, or TEACH 

Grant-related loans. For consolidation loans, the OOB 

includes only those loans attributable to the borrower’s 

enrollment in the institution. A median value is then 
240

determined on a scale where percentage reductions in 

original outstanding balance are positive values and 

percentage increases in original balance are negative 

values. The median value for all included borrowers at an 

institution is the institution’s loan repayment rate for 

that year. 

Proposed §668.41(h)(4) would provide certain 

exclusions from the above calculation. The Secretary would

exclude a borrower from the calculation if one or more of 

the borrower’s loans were in a military deferment status 

during the last fiscal year of the measurement period; one 

or more of the borrower’s loans are either under 

consideration by the Secretary, or have been approved, for 

discharge on the basis of the borrower’s total and 

permanent disability under §682.402 or §685.213; the 

borrower was enrolled in an institution during the last 

fiscal year of the measurement period; or the borrower 

died.

In proposed §668.41(h)(5), we describe the process by

which the Department would notify an institution of its 

loan repayment rate, and provide the institution an 

opportunity to challenge that rate. Specifically, the 

Department would provide to each institution a list of 

students in the cohort as determined under proposed 
241

§668.41(h)(3), the draft repayment rate for that cohort,

and the information used to calculate the draft rate. The

institution would have 45 days to challenge the accuracy of 

the information used to calculate the draft rate. After 

considering any challenges to the draft rate made by the 

institution, the Department would notify the institution of 

its final repayment rate and whether the institution must 

deliver a loan repayment warning to students.

Financial Protection Disclosure 

Under proposed §668.41(i), institutions that are 

required to provide financial protection, including an 

irrevocable letter of credit or cash under proposed 

§668.175(d) or (f), or set-aside under proposed 

§668.175(h), would have to disclose that status, which 

would include information about why the institution is 

required to provide financial protection, to both enrolled 

and prospective students until released from the obligation 

to provide financial protection by the Department.

Disclosures to Students

Under proposed §668.41(h)(7), an institution that is

subject to the loan repayment warning must provide that 

warning to prospective and enrolled students and place the 

warning on its Web site and in all advertising and

promotional materials in a form and manner prescribed by 
242

the Department in a notice published in the Federal 

Register. Prior to publishing the notice, the Department 

would conduct consumer testing to improve the effectiveness 

of the warning language.

Under proposed §668.41(h)(7), an affected institution 

would be required to provide the loan repayment warning to 

both enrolled and prospective students by hand delivering 

the warning as part of a separate document to the student 

individually or as part of a group presentation. 

Alternatively, an institution could send the warning to a 

student’s primary email address or by another electronic 

communication method used by the institution for 

communicating with the student. In all cases, proposed 

§668.41(h)(7) would require the institution to ensure that 

the warning is the only substantive content in the message, 

unless the Secretary specifies additional, contextual 

language to be included in the message. Institutions would 

be required to provide a prospective student with the 

warning before the student enrolls, registers, or enters 

into a financial obligation with the institution.

Proposed §668.41(h)(8) would also require that all 

promotional and advertising materials prominently include 

the warning. Promotional materials include, but are not 

limited to, an institution’s Web site, catalogs, 
243

invitations, flyers, billboards, and advertising on or 

through radio, television, print media, social media, or 

the Internet. Proposed §668.41(h)(8) would further require 

that all promotional materials, including printed 

materials, about an institution be accurate and current at 

the time they are published, approved by a State agency, or 

broadcast.

Finally, an institution would, under proposed 

§668.41(h)(9), be required to post the warning on the home 

page of the institution’s Web site, in a simple and 

meaningful manner, within 30 days of the date the 

institution is informed by the Department of its final loan 

repayment rate. The warning must remain posted to the 

institution’s Web site until the Department notifies the 

institution that it is no longer under a requirement to do 

so as a result of having a loan repayment rate greater than 

zero percent. 

Under proposed §668.41(i), an affected institution 

would be required to provide the financial protection 

disclosure to enrolled and prospective students in the 

manner described in proposed §668.41(h)(7). An affected 

institution would also be required to post the disclosure 

on the home page of the institution’s Web site in the 

manner described in proposed §668.41(h)(9) no later than 30 
244

days after the date on which the Secretary informs the 

institution of the need to provide financial protection, 

until such time as the Secretary releases the institution 

from the requirement that it provide financial protection.

Reasons: In deciding to enroll or continue attendance at 

any institution of higher education, students are making a 

substantial personal commitment that may mean incurring 

considerable amounts of student loan debt. Such a decision 

should, to the greatest extent possible, be an informed

one. We believe that the warning related to loan repayment 

under proposed §668.41(h) and the financial protection

disclosure under §668.41(i) would provide students with 

important information in making their educational and 

financial decisions.

Loan Repayment Rate

The loan repayment rate warning would provide enrolled 

and prospective students with valuable information about 

the repayment outcomes associated with the Federal student 

loan debt incurred by students who attend a proprietary 

institution. Zero percent or negative loan repayment rates 

indicate that borrowers at the institution are likely to 

have experienced financial distress as they attempted to 

repay their loans and may continue to experience 

difficulty. Loans in negative amortization status are 
245

viewed with concern.

37 Students who borrow to attend 

institutions should reasonably expect to be in a financial 

position that enables them to pay down their loans after 

leaving. Warning students of institutions with

particularly low--zero percent or negative--repayment rates 

will give them critical information on which to base 

enrollment and borrowing decisions.

Based on internal analysis of data from the National 

Student Loan Data System (NSLDS), the typical borrower in 

negative amortization--more than half of those who have 

made no or negative repayment progress five years after 

leaving school--experienced long-term repayment hardship 

such as default. Those borrowers are especially unlikely to 

satisfy their loan debt in the long-term.38, 39 In 

particular, we believe that it strikes an appropriate

balance to measure repayment rates after five years, given 

that those data show that a substantial proportion of 

 

37 Looney, Adam and Constantine Yannelis. “A Crisis in Student Loans? How 

Changes in the Characteristics of Borrowers and in the Institutions 

They Attended Contributed to Rising Loan Defaults.” Brookings 

Institution: http://www.brookings.edu/~/media/projects/bpea/fall2015/pdflooneytextfallbpea.pdf.

38 Borrowers in negative amortization would be considered to have a 

“negative repayment rate” under the proposed regulations.

39 Analysis of NSLDS data was based on a statistical sample of three 

cohorts of borrowers with FFEL Loans and Direct Loans entering 

repayment in 1999, 2004, and 2009, respectively. The repayment statuses 

of the loans were tracked in five -year intervals at five, ten, and

fifteen years after entry into repayment, depending on the age of the 

cohort. 
246

borrowers whose loans are in negative amortization five 

years after entering repayment remain in negative 

amortization or have defaulted on their loans 10 and even

15 years after entering repayment. 

Several non-Federal negotiators expressed concerns 

about the additional administrative burden that would be 

associated with the proposed regulations. Several nonFederal negotiators argued that both the opportunity to 

review and correct data calculated by the Department, as 

well as the obligation to ensure the warnings are properly 

provided to all prospective and enrolled students, would 

add significant burden for those institutions. Some of 

those negotiators suggested that institutions should be 

able to satisfy the warning requirement by providing a link 

from the institution’s Web site to the College Scorecard.

Others recommended that the Department be responsible for 

the dissemination of loan repayment rates and associated 

warnings, perhaps through the Free Application for Federal 

Student Aid (FAFSA). Still others proposed the Department 

explore ways to limit the warning requirement only to those 

institutions that contribute most to negative repayment 

outcomes.

In response to suggestions that the Department assume 

responsibility for disseminating loan repayment rates, we 
247

believe that schools, as the primary and on-the-ground 

communicators with their students and the source of much of 

the information students receive about financial aid, are 

well placed to reach their students and to notify them of 

the potential risks of borrowing at that institution. 

Nonetheless, we recognize the potentially increased 

administrative responsibilities attendant to the proposed

requirement and agree with the negotiators who suggested 

minimizing administrative burden by applying this 

requirement only to the sector of institutions where the 

frequency of poor repayment outcomes is greatest. Analysis 

of repayment performance under the proposed methodology 

shows that zero and negative repayment outcomes are endemic 

to the proprietary sector, but are relatively rare in the 

public and non-profit sectors.40 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 therefore pose

the greatest risk to students and taxpayers.

41, 42 For 

 

40 Analysis of NSLDS data was based on a cohort of borrowers with FFEL

Loans and Direct Loans who entered repayment in 2009. The repayment 

status of loans taken out for attendance at each institution was 

observed five years after entry into repayment.

41 The For-Profit Postsecondary School Sector: Nimble Critters Or Agile 

Predators? www.nber.org/papers/w17710.pdf; and Miller, Ben and 

Antoinette Flores. September 2015. Initial Analysis of College 

Scorecard Earnings and Repayment Data. 

www.americanprogress.org/issues/higher-
248

instance, a preliminary Department analysis of the College 

Scorecard five-year undergraduate repayment rates (using a 

comparable threshold of 50 percent of borrowers or fewer 

making progress on their loans) shows that more than 70 

percent of institutions with a repayment rate below the 

threshold are proprietary institutions, and those 

institutions represent more than two in five of all 

proprietary institutions. On the other hand, at both 

public and private nonprofit institutions, fewer than 10 

percent of institutions had repayment rates below the 

threshold.43 Based on this analysis, the financial risk to 

students is far more severe in the proprietary sector; so 

we propose to limit the burden of the warning requirement 

only to those institutions. Accordingly, the proposed 

warning requirement is tailored to address the sector in 

which these issues are most concentrated. By doing so, we 

would limit burden on postsecondary institutions generally

 

education/news/2015/09/17/121485/initial-analysis-of-college-scorecardearnings-and-repayment-data/.

42 Looney, Adam and Constantine Yannelis. “A Crisis in Student Loans? 

How Changes in the Characteristics of Borrowers and in the Institutions 

They Attended Contributed to Rising Loan Defaults.” Brookings 

Institution: http://www.brookings.edu/~/media/projects/bpea/fall2015/pdflooneytextfallbpea.pdf.

43 Analysis of the Department’s College Scorecard data was based on a 

combined cohort of borrowers with FFEL Loans and Direct Loans who 

entered repayment in 2008 and 2009. At schools where fewer than 50 

percent of borrowers have repaid at least $1 on their loans (as is 

calculated using the Scorecard methodology), the median borrower has 

repaid nothing on his loans.
249

and better target the Department’s efforts to provide 

valuable consumer information. 

Several non-Federal negotiators also expressed

concerns about the methodology for calculating the 

repayment rate. One negotiator, commenting on how the 

cohorts for this proposed repayment rate are determined, 

objected to the use of a five-year horizon on the grounds 

that students progressing directly to graduate study 

following completion of an undergraduate degree may be 

shortly out of school and in forbearance or otherwise have 

accrued interest at the time of the calculation. Another 

negotiator expressed concerns that the proposed new 

methodology would be overly punitive toward institutions 

with historically underserved student populations, and that 

disclosure of resulting loan repayment rates would, to an 

unfair degree, reflect negatively on them.

While we appreciate the concerns and suggestions 

raised by negotiators, we maintain that the loan repayment 

rate methodology in proposed §668.41(h)(3) results in a 

rate that would provide useful new information. 

Specifically, this rate would effectively identify the 

proprietary institutions that are generating zero or 

negative repayment outcomes and that should be providing 

warnings to students as they are assessing the likelihood 
250

of their ability to repay the loan debt they may incur for 

enrollment at a particular institution, based on the 

outcomes of former students who have already entered 

repayment. Other repayment rate methodologies, such as 

those used for the disclosures required under the Gainful 

Employment rule and College Scorecard, calculate the share 

of borrowers who have reduced their principal balance by at 

least one dollar. The rate proposed in this regulation 

would measure the extent to which students repaid their 

loans, identifying those proprietary institutions at which 

students are least likely to repay their loans in full.

Moreover, the Department will look for ways to harmonize 

the multiple repayment rate methodologies, contingent on 

consumer testing and user needs.

We recognize that not all institutions present similar 

risk. Therefore, institutions with low numbers of 

borrowers and low borrowing rates are accordingly exempted 

from the proposed warning requirement. As discussed above, 

proposed §668.41(h)(6) would exempt an institution from the 

warning requirement if its repayment rate is based on fewer 

than 10 borrowers who have entered repayment in the fiscal 

year; or if the institution demonstrates that it has a low 

participation rate under the Direct Loan program. The 

exemption for a repayment rate calculation based on fewer 
251

than 10 borrowers reflects the concern that individuals 

comprising so small a cohort might be able to be 

identified, potentially compromising the privacy of those 

individuals. We propose the low participation rate 

exemption in recognition that, if the number of students 

who borrow Direct Loans constitutes a small percentage of 

the institution’s students, in some cases due to the 

institution’s low tuition costs, the loan repayment 

outcomes of those students may not provide a full picture 

of student experiences at the institution.

Under the proposed calculation, borrowers who default 

at any point during the measurement period on their loans 

and who see a percentage reduction in their loan balances 

are treated as “zero” for the purposes of the repayment 

rate; borrowers who default and see a percentage increase 

in their loan balances are counted by the actual percentage 

increase. Given the significant impact that defaulting has 

on borrowers’ financial circumstances, this provision is 

designed to ensure that institutions are held accountable 

for, and appropriate weight is placed on, those students’ 

loan repayment outcomes. 

In addressing the negotiators’ concerns related to 

basing the cohort on a five-year horizon beyond the fiscal 

year when borrowers entered repayment, and the possibility 
252

that some students may still be enrolled in or have 

recently separated from school, we note that borrowers who 

are enrolled in an institution (either the same or another 

institution) at any time during the last fiscal year of the 

measurement period are excluded from the calculation. Even 

those students recently out of school and remaining in a 

forbearance status (having made no payments on their loans) 

would not be included unless their loans went into 

repayment at some time during the fifth prior fiscal year.

We also believe that the other exceptions included in 

proposed §668.41(h)(4) strengthen the accuracy of the rate.

Regarding concerns that proposed §668.41(h) would

unfairly target institutions whose enrollment is largely 

composed of underserved or economically disadvantaged 

populations, the Department holds that the requirement 

would not identify institutions on the basis that they 

enroll large numbers of underserved or economically 

disadvantaged populations. Rather, it would identify

institutions at which borrowers on average are unable to 

repay their loans and accordingly pose a disproportionate 

risk to both students and taxpayers. Borrowers are 

responsible for managing debt payments, which begin shortly 

after they complete a program, even in the early stages of 

their career, and even if they come from economically 
253

disadvantaged backgrounds. As the U.S. District Court for 

the District of Columbia stated in Association of Private 

Sector Colleges & Universities v. Duncan, 110 F.Supp.3d 

176, 194 (D.D.C. June 23, 2015), “[W]hen graduates get lowpaying jobs and then default on their student loans, nobody 

wins--not the government (which picks up the tab), and not 

the student (who may get back on her feet eventually, but 

who--in the meantime--may be denied credit, miss bill due 

dates, or even file for bankruptcy).” Indeed, the 

Department believes it is even more important to warn

students from disadvantaged populations about the poor 

repayment outcomes of an institution at which they are 

considering enrolling because they will bear the same 

responsibility for managing their debt as everybody else.

One negotiator expressed concerns over the intended 

scope of the term “promotional materials” as now defined in 

proposed §668.41(h)(8), pointing out that, at some large 

institutions, it would be difficult to put reasonable 

parameters around what might be considered promotional 

material. Other negotiators felt that the speed with which 

information about their institutions can be spread using 

social media, and the potential scale of dissemination, 

would make it impossible for them to ensure compliance with 

the proposed regulations.
254

Proposed §668.41(h)(8)(ii) identifies the most 

commonly used methods to promote and advertise an

institution, with the qualification that this list is not 

exhaustive and promotional materials are not limited to 

items on the list. We expect institutions to include the 

required warning in such other comparable media and formats 

in which they promote and advertise themselves. We invite 

comment on ways the Department can ensure that this 

warning, when included in promotional and advertising 

materials, is not hidden or presented in a way that makes 

it difficult for the public to see. Regarding the 

inclusion of social media as promotional material, we 

acknowledge the concerns related to potential burden and 

scope expressed by negotiators. To that end, we clarify 

here that it is not our intention for every “post” on a 

social media site or every individual “Tweet” to be 

considered promotional material. However, an institution’s 

landing page on a social media platform is considered to be 

promotional material, as are any advertisements. On any 

social media profile/page that an institution maintains on 

such a platform, the institution would be required to 

include the warning. 

Financial Protection
255

The proposed financial protection disclosure would 

provide enrolled and prospective students with valuable 

information about the viability of the institution as a 

participant in the Federal financial aid programs. Under 

proposed §668.175(d), (f), or (h), some institutions would 

be required to provide financial protection, such as an 

irrevocable letter of credit, if the institution is not 

financially responsible because of an action or event 

described in proposed §668.171(b) or (c). We believe that 

current and prospective students have a demonstrable 

interest in being made aware of the specific reasons for 

which their institution was required to provide any 

financial protection because these are factors that could 

have a significant impact on a student’s ability to 

complete his or her education at an institution. For the

thousands of students in recent years whose institutions 

have closed their doors precipitously, advance notice that 

those institutions faced significant financial risk and 

compliance issues could have allowed students time to 

reevaluate their decision to remain at an institution and 

choose to instead continue their education without 

interruption at an institution where the prospects for 

completing their education are more certain. We also 

believe that students are entitled to know about any such 
256

event that is significant enough to warrant disclosure to 

investors since students can have an equal, if not greater, 

financial stake in the continued operation of their 

institution.

Method of Delivery

These provisions are designed to ensure that students 

receive any required loan repayment rate warning or 

financial protection disclosure. The information we 

propose to require in the loan repayment rate warning and 

financial protection disclosure pertains to material and 

deeply concerning problems at an institution that create 

significant risk to the educational prospects of students 

enrolling or already enrolled at that institution. Students 

deserve to know information that could have a significant

impact on or relate to their chances of success. 

In addition to our interest in ensuring that students 

have accurate and complete information on which to base 

decisions about attending an institution, the Department 

has a significant interest in ensuring transparency more 

broadly. Recent events involving the closure of several 

large proprietary institutions have shown the need for 

lawmakers, regulatory bodies, State authorizers, taxpayers,

and students to be more broadly aware of circumstances that 

could affect the continued existence of an institution. 
257

Though these additional disclosure requirements are not a 

singular remedy for this problem, we believe them to be an 

important step toward creating a more transparent 

environment in which institutions participate in the title 

IV, HEA programs.

Some negotiators objected to the lack of specificity 

with respect to the wording of the proposed warning. Our 

intent, however, is to build a certain amount of 

flexibility into the proposed regulations to ensure that 

the warning is as meaningful as possible to its intended 

audience. Accordingly, under proposed §668.41(h)(7)(i), 

the Department would conduct consumer testing to help 

improve the effectiveness of the warning language. Upon 

completion of consumer testing, the final language would be 

published in the Federal Register. For illustrative 

purposes, we include examples of possible repayment rate 

warning language below: 

• U.S. Department of Education Warning: A majority of 

borrowers at this school are not likely to repay 

their loans.

• U.S. Department of Education Warning: A majority of 

borrowers at this school have difficulty repaying 

their loans.
258

• U.S. Department of Education Warning: Most of the 

students who attended this school owe more on their 

student loans five years after leaving school than 

they originally borrowed.

During negotiated rulemaking, the Department proposed 

requiring institutions to deliver any loan repayment rate 

warning or financial protection disclosure to prospective 

students at the first contact with those students. 

Negotiators requested clarification of what is considered 

“first contact,” believing it to be particularly difficult 

to establish at large institutions with which potential 

students regularly interact prior to enrolling. We agree 

with the negotiators that, in many cases, a point of first 

contact between an institution and a student may not be 

easy to isolate. Accordingly, we propose in

§668.41(h)(7)(iii) to state that an institution must 

provide the warning or disclosure required under this 

section to a prospective student before that student 

enrolls, registers, or enters into a financial obligation 

with the institution.

Initial and Final Decisions (§668.90) 

Statute: Section 498(d) of the HEA provides that the 

Secretary is authorized to consider the past performance of 
259

an institution or of a person in control of an institution, 

in determining whether an institution has the financial 

capability to participate in the title IV, HEA programs. 

Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094(c)(1)(F), 

provides that the Secretary shall prescribe such 

regulations as may be necessary to provide for the 

limitation, suspension, or termination of the participation 

of an eligible institution in any program under title IV of 

the HEA. 

Current Regulations: When the Department proposes to 

limit, suspend, or terminate a fully certified 

institution’s participation in a title IV, HEA program, the 

institution is entitled to a hearing before a hearing 

official under §668.90. In addition to describing the 

procedures for issuing initial and final decisions, §668.90 

also provides requirements for hearing officials in making 

initial and final decisions in specific circumstances.

These regulations generally provide that the hearing 

official determines whether an adverse action-–a fine, 

limitation, suspension, or termination–-is “warranted,” but 

direct that in specific instances, the sanction must be 

imposed if certain predicate conditions are proven. For 

instance, in an action involving a failure to provide a 

surety in the amount specified by the Secretary under 
260

§668.15, the hearing official is required to consider the 

surety amount demanded to be “appropriate,” unless the 

institution can demonstrate that the amount was 

“unreasonable.” 

Further, §668.90(a)(3)(v) states that, in a 

termination action brought on the grounds that the 

institution is not financially responsible under 

§668.15(c)(1), the hearing official must find that 

termination is warranted unless the conditions in 

§668.15(d)(4) are met. Section 668.15(c)(1) provides that 

an institution is not financially responsible if a person 

with substantial control over that institution exercises or 

exercised substantial control over another institution or 

third-party servicer that owes a liability to the Secretary 

for a violation of any title IV, HEA program requirements, 

and that liability is not being repaid. Section 

668.15(d)(4) provides that the Secretary can nevertheless 

consider the first institution to be financially 

responsible if the person at issue has repaid a portion of 

the liability or the liability is being repaid by others, 

or the institution demonstrates that the person at issue in 

fact currently lacks that ability to control or lacked that 

ability as to the debtor institution. 
261

Proposed Regulations: The Secretary proposes to amend 

§668.90(a)(3)(iii) by substituting the terms “letter of 

credit or other financial protection” for “surety” in 

describing what an institution must provide to demonstrate 

financial responsibility. Additionally, §668.90(a)(3)(iii) 

would be modified to require the hearing official to uphold 

the amount of the letter of credit or financial protection 

demanded by the Secretary, unless the institution 

demonstrates that the events or conditions on which the 

demand is based no longer exist or have been resolved in a 

manner that eliminates the risk they posed to the 

institution’s ability to meet its financial obligations, or 

has now provided the required financial protection. We 

propose to further modify §668.90(a)(3)(v) to list the 

specific circumstances in which a hearing official may find 

that a termination or limitation action brought for a 

failure of financial responsibility for an institution’s 

past performance failure under §668.174(a), or a failure of 

a past performance condition for persons affiliated with an 

institution under §668.174(b)(1), was not warranted. For 

the former, revised §668.90(a)(3)(v) would state that these 

circumstances would be compliant with the provisional 

certification and financial protection alternative in 
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§668.175(f). For the latter, the circumstances would be 

those provided in §668.174(b)(2) or §668.175(g).

Reasons: The proposed changes to §668.90(a)(3)(iii) would 

update the regulations to reflect both the current language 

in §668.175 and proposed changes to that section. The 

changes would also create specific conditions under which 

the hearing official may find that the letter of credit or 

financial protection amount demanded would not be 

warranted. We believe that the new language would provide 

more clarity than the current standard, which only notes

that the institution has to show that the amount was 

“unreasonable.” The proposed language would clearly 

establish that the amount would be unwarranted only if the 

reasons for which the Secretary required the financial 

protection no longer exist or have been resolved, or if 

some other acceptable form of financial protection 

arrangement is in place with the Secretary. 

Our proposed revisions to §668.90(a)(3)(iii) would 

reflect previous, as well as proposed, changes to the 

financial responsibility standards. First, the current 

financial responsibility standards in §668.175 require an 

institution in some instances to provide a letter of credit

in order to be financially responsible. We propose to 

modify §668.90(a)(3)(iii) to reflect that language as well 
263

as changes proposed now to §668.175 by substituting the 

terms “letter of credit or other financial protection” for 

“surety.” Thus, the proposed changes to §668.90 would 

clarify that a limitation, suspension, or termination 

action may involve a failure to provide any of the 

specified forms of financial protection, letter of credit 

or otherwise. 

We further propose to modify §668.90(a)(3)(iii) to 

state the specific grounds on which a hearing official may 

find that a limitation or termination action for failure to 

provide financial protection demanded is not warranted. 

The proposed change would provide that a hearing official 

must adopt the amount of the letter of credit or financial 

protection demanded by the Secretary, unless the 

institution demonstrates that the events or conditions 

forming the grounds for the financial protection or letter 

of credit no longer exist or have been resolved in a manner 

resolving the risk posed to the institution’s ability to 

meet its financial obligations. The institution would be 

permitted to demonstrate that the Department miscalculated 

the amount on which the demand is grounded. However, it

could not claim that the event does not constitute grounds 

for a demand for financial protection or that the amount 

demanded is unreasonable based on the institution’s 
264

assessment of the risk posed by the event or condition. 

The institution could challenge a demand for protection 

based on delinquency on secured debt by proving that the 

delinquency has been cured or a workout satisfactory to the 

secured lender has been arranged. In the case of a demand 

for financial protection based on pending litigation, the 

institution would be permitted to demonstrate that the suit 

was dismissed or settled favorably. Alternatively, the 

institution could demonstrate that it has provided the 

Department with appropriate alternative financial 

protection (cash or a reimbursement funding arrangement 

with the Secretary that will result in set-aside of the 

amount required within an agreed timeframe). 

The proposed changes to §668.90(a)(3)(v) would also

clarify and conform with other existing regulations the 

alternative methods in current regulations by which an 

institution may be able to meet the financial 

responsibility standards, and thus would be able to claim 

that a limitation or termination is unwarranted. Section 

668.90(a)(3)(v) would be revised to state the grounds on 

which a hearing official is authorized to find that a 

termination or limitation action brought for a failure of 

financial responsibility for an institution’s failure of a 

past performance condition under §668.174(a) or a failure 
265

of a past performance condition for persons affiliated with 

an institution under §668.174(b)(1) was not warranted. 

None of these provisions would be changed under these 

proposed regulations. The changes would not add 

substantive new restrictions, but simply conform §668.90 to 

these substantive requirements already in current 

regulations. Thus, as revised, §668.90(a)(3)(v) would 

require the hearing official to find that the limitation or 

termination for adverse past performance by the institution 

itself was warranted, unless the institution met the 

provisional certification and financial protection 

alternative in current §668.175(f). For an action based on 

adverse past performance of a person affiliated with an 

institution, the hearing official would be required to find 

that limitation or termination of the institution was 

warranted unless the institution demonstrated either proof 

of repayment or that the person asserted to have 

substantial control in fact lacks or lacked that control, 

as already provided in §668.174(b)(2), or the institution 

has accepted provisional certification and provided the 

financial protection required under §668.175(g).

Limitation (§668.93) 

Statute: Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094, 

provides that the Secretary shall prescribe such 
266

regulations as may be necessary to provide for the 

limitation, suspension, or termination of an eligible 

institution’s participation in any program under title IV 

of the HEA. 

Current Regulations: Section 668.86 provides that the 

Secretary may limit an institution’s participation in a 

title IV, HEA program, under specific circumstances, and 

describes procedures for a challenge to such a limitation. 

Current §668.93 lists types of specific restrictions that

may be imposed by a limitation action, and includes in 

paragraph (i) “other conditions as may be determined by the 

Secretary to be reasonable and appropriate.” 34 CFR 

668.93(i).

Although a change in an institution’s status from 

fully certified to provisionally certified is not currently 

a limitation listed in §668.93, §668.13(c) provides that 

the Secretary may provisionally certify an institution 

whose participation has been limited or suspended under 

subpart G of part 668, and §668.171(e) provides that the 

Secretary may take action under subpart G to limit or 

terminate the participation of an institution if the 

Secretary determines that the institution is not 

financially responsible under the provisions of §668.171 or 

§668.175. 
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Proposed Regulations: The Secretary proposes to amend 

§668.93 to clarify that a change in an institution’s 

participation status from fully certified to provisionally

certified to participate in a title IV, HEA program under 

§668.13(c) is a type of limitation that may be the subject 

of a limitation proceeding under §668.86.

Reasons: The proposed change to §668.93 would clarify 

current policy and provide for a more complete set of 

limitations covered in §668.93. 

Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) 

Repayment Plans (§685.209(a) and (c))

Statute: Section 455(d)(1)(D) of the HEA authorizes the 

Secretary to offer Direct Loan borrowers (except parent 

PLUS borrowers) an income-contingent repayment (ICR) plan 

with varying annual repayment amounts based on the income 

of the borrower, for a period of time prescribed by the 

Secretary, not to exceed 25 years. Section 455(e)(1) of 

the HEA authorizes the Secretary to establish ICR plan 

repayment schedules through regulations. 

Current Regulations: For the PAYE Plan and the REPAYE 

Plan, current §685.209(a)(1)(ii) and (c)(1)(ii), 

respectively, define “eligible loan” as “any outstanding 

loan made to a borrower under the Direct Loan Program or

the FFEL Program except for a defaulted loan, a Direct PLUS 
268

Loan or Federal PLUS Loan made to a parent borrower, or a 

Direct Consolidation Loan or Federal Consolidation Loan 

that repaid a Direct PLUS Loan or Federal PLUS Loan made to 

a parent borrower.” 

For the REPAYE Plan, current §685.209(c)(2)(ii)(B) 

provides that if a married borrower and the borrower's 

spouse each have eligible loans, the Secretary adjusts the 

borrower’s REPAYE Plan monthly payment amount by 

determining each individual’s percentage of the couple's 

total eligible loan debt and then multiplying the 

borrower's calculated REPAYE Plan monthly payment amount by 

this percentage. 

For the REPAYE Plan, current §685.209(c)(4)(iii)(B) 

specifies that the annual notification to a borrower of the 

requirement to provide updated income and family size 

information explains the consequences, including the 

consequences described in §685.209(c)(4)(vi), if the 

Secretary does not receive the information within 10 days 

following the annual deadline specified in the 

notification. Paragraph (c)(4)(vi) of §685.209 provides 

that if the Secretary removes a borrower from the REPAYE 

Plan because the borrower has failed to provide updated 

income information by the specified deadline, the Secretary 

sends the borrower a written notification containing the 
269

borrower's new monthly payment amount and providing other 

information, including the borrower's option to change to a 

different repayment plan and the conditions under which the 

borrower may return to the REPAYE Plan. 

Proposed Regulations: The proposed regulations make 

technical changes to amend §685.209(a)(1)(ii) of the PAYE 

Plan regulations by adding language to the definition of 

“eligible loan” stating that this term is used for purposes 

of determining whether a borrower has a partial financial 

hardship and adjusting the monthly payment amount for 

certain married borrowers. The definition of “eligible 

loan” in §685.209(c)(1)(ii) of the REPAYE Plan regulations 

would be amended by adding language stating that this 

definition is used for purposes of adjusting the monthly 

payment amount for certain married borrowers.

The proposed regulations would amend 

§685.209(c)(2)(ii)(B) of the REPAYE Plan regulations by 

adding language to provide that there is no adjustment to a 

married borrower's monthly payment amount based on the 

eligible loan debt of the borrower's spouse if the spouse's 

income is excluded from the calculation of the borrower's 

monthly payment amount in accordance with 

§685.209(c)(1)(i)(A) or (B). 
270

The proposed regulations would revise 

§685.209(c)(2)(v) of the REPAYE Plan regulations by 

removing language that refers to the Secretary's 

determination that the borrower does not have a partial 

financial hardship. Finally, the proposed regulations also 

would revise §685.209(c)(4)(iii)(B) of the REPAYE Plan 

regulations by removing the cross-reference to 

§685.209(c)(4)(vi).

Reasons: The language that would be added to the 

definitions of “eligible loan” in the PAYE and REPAYE plan 

regulations is intended to clarify that the inclusion of 

certain types of FFEL Loans in the definitions of “eligible 

loan” does not mean that these loans may be repaid under 

the PAYE or REPAYE plans. The PAYE and REPAYE plans are 

available only for Direct Loans. The proposed language 

would clarify that the FFEL Loans listed in the definitions 

are taken into consideration only for certain purposes 

related to the terms and conditions of the PAYE and REPAYE 

plans. 

The proposed change in §685.209(c)(2)(ii)(B) is needed 

to accurately reflect that the monthly payment amount for a 

married borrower who files a separate Federal income tax 

return from his or her spouse is not adjusted to take into 

account the spouse's eligible loan debt if the spouse's 
271

income is excluded from the calculation of the borrower's 

monthly payment amount in accordance with 

§685.209(c)(1)(i)(A) or (B). Paragraphs (c)(1)(i)(A) and 

(B) provide that only the borrower's income is used to 

calculate the monthly REPAYE Plan payment amount if a 

married borrower filing separately is separated from his or 

her spouse or is unable to reasonably access the spouse's 

income information.

The proposed change in §685.209(c)(4)(iii)(B) removes 

an unnecessary reference to the requirement for the annual 

notification informing a borrower of the need to recertify 

income and family size to provide information about the 

contents of a separate notification required under 

§685.209(c)(4)(vi) that will be sent if the borrower is 

removed from the REPAYE Plan as a result of failure to 

recertify income. The information included in that 

separate notification is not applicable at the time a 

borrower is merely being notified of the requirement to 

annually recertify income and family size. 

The removal of the reference to partial financial 

hardship in §685.209(c)(2)(v) reflects that the concept of 

partial financial hardship does not apply under the terms 

and conditions of the REPAYE Plan. 

False Certification Discharges (§685.215)
272

Statute: Section 437(c) of the HEA provides for the 

discharge of a borrower’s liability to repay a FFEL Loan if 

the student’s eligibility to borrow was falsely certified 

by the school. The false certification discharge 

provisions also apply to Direct Loans, under the parallel 

terms, conditions, and benefits provisions in section 

455(a) of the HEA. Section 484(d) of the HEA specifies the 

requirements that a student who does not have a high school 

diploma or a recognized equivalent of a high school diploma 

must meet to qualify for a title IV, HEA loan. 

Current Regulations: Section 685.215(a)(1)(i) provides

that a Direct Loan borrower may qualify for a false 

certification discharge if the school certified the 

eligibility of a borrower who was admitted on the basis of 

the ability to benefit but the borrower did not in fact 

meet the eligibility requirements in 34 CFR part 668 and 

did not meet the eligibility requirements in section 484(d) 

of the HEA. Section 685.215(a)(1)(iii) provides that a 

borrower may qualify for a false certification discharge if 

the school certified the eligibility of a student who would 

not meet requirements for employment in the occupation for 

which the training program supported by the loan was 

intended due to a physical or mental condition, age, 

criminal record, or other requirement accepted by the 
273

Secretary that was imposed by State law. Section 

685.215(c) and (d) describes the qualifications and 

procedures for receiving a false certification discharge. 

Proposed Regulations: Proposed §685.215(a)(1)(i) would 

eliminate the reference to “ability to benefit” and 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 the 

alternative to graduation from high school requirements 

under section 484(d) of the HEA. 

Under proposed §685.215(a)(1)(ii), if a school 

certified the eligibility of a borrower who is not a high 

school graduate (and does not meet applicable alternative 

to high school graduate requirements) 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. 

Proposed §685.215(a)(1)(iv) would specify that a 

borrower qualifies for a false certification discharge if 

the borrower failed to meet applicable State requirements 

for employment due to a physical or mental condition, age, 

criminal record, or other reason accepted by the Secretary 
274

that would prevent the borrower from obtaining employment 

in the occupation for which the training program supported 

by the loan was intended.

Proposed §685.215(c) would update the information 

specifying how a borrower applies for a false certification 

discharge. It would also specify that the Department would 

notify a borrower who applies but does not meet the 

requirements for a false certification discharge and 

explain why the borrower does not meet the requirements.

Proposed §685.215(c)(1) would describe the 

requirements a borrower must meet to qualify for a 

discharge due to a false certification of high school 

graduation status. 

Proposed §685.215(c)(2) would state the requirements a 

borrower must meet to obtain a discharge based on a 

disqualifying condition, as specified in proposed 

§685.215(a)(1)(iv).

Proposed §685.215(c)(8) would amend the provisions for 

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. 
275

Proposed §685.215(d) would update the procedures for 

applying for a false certification discharge, and describe 

the types of evidence that the Department uses to determine 

eligibility for a false certification discharge. It would 

also provide that the Department will explain to the 

borrower the reasons for a denial of a false certification 

discharge claim, describe the evidence that the 

determination was based on, and provide the borrower with 

an opportunity to submit additional evidence supporting his 

or her claim. The Department would consider the response 

from the borrower, and notify the borrower whether the 

determination of eligibility has changed.

Reasons: We propose to remove the “ability to benefit” 

language from §685.215(a)(1)(i) because there is no longer 

a statutory basis for certifying the eligibility of nonhigh school graduates based on an “ability to benefit.” 

Currently section 484(d) of the HEA establishes different 

standards under which a non-high school graduate may 

qualify for title IV aid. We believe that it is preferable 

to refer to section 484(d) of the HEA by cross-reference, 

rather than incorporate the statutory language in the 

regulations, so that any future changes to that language 

would be incorporated into the regulation. The changes we 

propose to make to §685.215(c)(1) (currently titled 
276

“Ability to benefit”) are intended to conform to these 

changes.

The proposed revisions to §685.215(a)(1)(i) and (ii) 

are intended to state more explicitly that a school’s 

certification of eligibility for a borrower who is not a 

high school graduate, and does not meet the alternative to 

high school graduate requirements, is grounds for a false 

certification discharge. We propose these changes 

specifically to address the problem of schools encouraging 

non-high school graduates to obtain false high school 

diplomas to qualify for Direct Loans. Many non-Federal 

negotiators noted that often borrowers are misled by 

schools. These non-Federal negotiators stated that some 

schools tell borrowers that a high school diploma is not a 

requirement for title IV student aid, or that the borrower 

will be able to earn a high school diploma through the 

program for which the borrower is taking out the student 

loan, so the borrower should answer “Yes” to the high 

school graduation question on the FAFSA. Non-Federal 

negotiators stated that some schools encourage borrowers to 

obtain the services of a third party that will provide them 

with what appears to be a legitimate high school diploma. 

These borrowers often do not understand that the “high 

school diploma” provided by the third party is worthless. 
277

Many non-Federal negotiators were supportive of the 

Department’s efforts to provide relief for borrowers who 

have been victimized in this way. Some of the non-Federal 

negotiators, while supportive of this proposal, noted that 

borrowers themselves may provide false information to the 

schools regarding the borrower’s high school graduation 

status. Unless the school investigates the borrower’s 

claim to be a high school graduate, for instance by 

requesting transcripts, which are harder to falsify, the 

school may unknowingly falsely certify the borrower’s 

eligibility.

To address these situations, the Department proposed 

during the negotiated rulemaking to include the requirement 

in proposed §685.215(a)(1)(i)(A) that the borrower 

“reported” not having a high school diploma or its 

equivalent. If the borrower informed the school that the

borrower was not a high school graduate, and the borrower 

also did not satisfy the alternative to high school 

graduation eligibility criteria, but the school still 

certified the borrower’s eligibility for title IV aid, the 

borrower would qualify for a false certification discharge.

Under proposed §685.215(a)(1)(ii), a borrower would 

qualify for a false certification discharge if the borrower 

was not a high school graduate, and the school certified 
278

the borrower’s eligibility based on falsified high school 

graduation status or based on a high school diploma 

falsified by the school or a third party to which the 

school referred the borrower. The reference in proposed 

§685.215(a)(1)(ii)(B) to cases in which a school refers a 

borrower to a third party to obtain a false high school 

diploma would not refer only to a formal referral 

relationship between the school and the third party. An 

informal relationship involving any level of contact 

between the school and the third party would also qualify 

under the proposed regulations. A school would be 

considered to have “referred the borrower” to the third 

party in any instance in which the school advised or 

encouraged a borrower to obtain a false high school diploma 

from the third party.

The proposed revision to §685.215(a)(1)(iv) would 

clarify that this section refers to a situation in which a 

borrower failed to meet State requirements for employment 

in the occupation for which the training program was 

supported or the loan was intended. These State 

requirements would not necessarily have to be imposed by 

State statutes; they could be requirements established 

through State regulations or other limitations established 

by the State. The Department considered using other 
279

employment standards, such as Federal standards, or 

standards established by non-governmental professional 

associations. However, we were unable to find examples of 

Federal standards for particular professions, other than 

standards specifically for employment in the Federal 

government. The Department believes that employment 

standards established by professional associations could 

vary, and that it would not be practical to require schools 

to determine which professional association standards to 

use.

Some of the non-Federal negotiators recommended 

including limited English proficiency (LEP) as one of the 

characteristics that would disqualify a borrower from 

working in a particular profession and serve as the basis 

for a false certification loan discharge. We reviewed this 

proposal, but determined that it would not be practical to 

determine a borrower’s English language proficiency at the 

time the borrower enrolled in the program. While a 

student’s score on the Test of English as a Foreign 

Language (TOEFL) is a generally accepted indicator of 

English language proficiency, many schools do not 

administer this test, the TOEFL is not required for all 

academic programs, and the scores required to demonstrate 

sufficient proficiency differ between schools. Moreover, 
280

the TOEFL is not intended to measure an individual’s 

language proficiency for any particular profession.

Non-Federal negotiators recommended that the 

Department require schools to certify an LEP student’s 

ability to successfully complete a postsecondary program by 

either administering an evaluative test such as the TOEFL; 

providing the student with complete instruction, 

instructional materials, and exams in her or his native 

language; or providing specific and sufficient 

accommodation through an approved English as a Second 

Language component. The Department expressed concern that 

such a limitation could impede access to postsecondary 

education for some LEP students. The Department also noted 

that certification of LEP students for Direct Loans does 

not constitute false certification of eligibility for title 

IV, HEA program funds. Non-Federal negotiators recommended 

that false certification discharge apply in cases in which 

an LEP student is enrolled in a program for a profession 

that requires English proficiency, or an LEP student is 

told that instruction will be offered in the student’s 

first language or that the student will be provided English 

as a Second Language courses, but after the student takes 

out a Direct Loan and enrolls, no such instruction is 

provided. However, the Department noted that these are 
281

examples of misrepresentation, which would fall under the 

borrower defenses regulations. 

Current §685.215(c) requires the borrower to submit a 

“written request and a sworn statement” to apply for a 

false certification discharge. We propose replacing this 

language with a requirement for a borrower to submit an 

application for discharge on “a form approved by the 

Secretary,” which more accurately reflects current 

practice. The proposed changes to redesignated 

§685.215(c)(8) would add, as an example of information that 

the Department may use to grant a false certification 

discharge without an application, evidence that a school 

has falsified the SAP of its students. Although the 

Department may already do this under the language in 

current §685.215(c)(7), we believe that it is helpful to 

specifically address such cases in the regulatory language. 

This change would put schools on notice that, if the 

Department learns of a school falsifying SAP through a 

program review or an audit, the Department has the 

authority to independently grant false certification 

discharges to affected borrowers at that school.

Some of the non-Federal negotiators recommended that 

we also allow an individual borrower to apply for a false 

certification discharge if the borrower believes that the 
282

school falsified the borrower’s SAP. We examined this 

proposal, and determined that it would be impractical. 

Schools have a great deal of flexibility both in 

determining and implementing SAP standards. There are a 

number of exceptions under which a borrower who fails to 

meet SAP can continue to receive title IV loans. As one of 

the non-Federal negotiators pointed out, borrowers who are 

in danger of losing title IV eligibility due to the failure 

to meet SAP standards often request reconsideration of the 

SAP determination. Schools often work with borrowers in 

good faith efforts to attempt to resolve the situation 

without cutting off the borrowers’ access to title IV 

assistance. We do not believe that a school should be 

penalized for legitimate attempts to help a student who is 

having difficulty meeting SAP standards, nor do we believe 

a student who has successfully appealed a SAP determination 

should then be able to use that initial SAP determination 

to obtain a false certification discharge of his or her 

student loans. In addition, we believe it would be very 

difficult for an individual borrower to sufficiently 

demonstrate that a school violated its own SAP procedures. 

Given these considerations, we propose to limit false 

certification discharges based on falsification of SAP to 

discharges based on “information in the Secretary’s 
283

possession.” Such information would include, for example, 

findings from program reviews, audits, or other 

investigations.

The proposed revisions to §685.215(d)(3) would provide 

more transparency to the process for granting false 

certification discharges. For example, under proposed 

§685.215(d)(3), when the Department denies a false 

certification discharge request, we would explain the 

reasons for the denial to the borrower, provide the 

borrower with the evidence that the decision was based on, 

and provide the borrower the opportunity to provide 

additional information which the Department would evaluate. 

This proposed new language was suggested by one of the nonFederal negotiators, and was generally supported by all of 

the members of the negotiating committee.

In addition to the revisions that we are proposing in

this NPRM, the non-Federal negotiators submitted 

recommendations to the Department for additional revisions 

to the false certification regulations. These included 

recommendations to extend the revisions to the FFEL 

regulations as well as the Direct Loan regulations; to 

allow false certification discharges in cases when a 

program that the borrower is enrolled in fails to meet 

title IV eligibility requirements (although the program was 
284

participating in the title IV, HEA programs at the time the 

loan was made); and to require active confirmation when a 

school notifies a borrower that an additional loan was made 

under the borrower’s previously executed Master Promissory 

Note (MPN), to address issues of possible forgery of 

electronic signatures on an MPN. 

The Department declined to accept these 

recommendations. We are not proposing to extend the 

revisions to the FFEL Program because no new loans are 

being made in the FFEL Program, and we cannot apply these 

changes retroactively. 

False certification discharges are based on a school 

falsely certifying a borrower’s eligibility. They do not 

apply in instances that do not concern a personal 

characteristic or qualification of the borrower, such as

ineligibility of the school or the program offered by the 

school. See 59 FR 22469 (April 28, 1994).

The recommendations regarding active confirmation and 

use of the MPN relate more to the way Direct Loans are 

awarded and disbursed than to the false certification 

requirements, and go beyond the scope of this regulatory 

action.

Direct Consolidation Loans (§685.220)
285

Statute: Section 455(g) of the HEA provides that the loan 

types listed in section 428C(a)(4) may be consolidated into 

a Direct Consolidation Loan. Section 428C(a)(4)(E) of the 

HEA provides that loans made under part E of title VIII of 

the Public Health Service Act are eligible to be 

consolidated into a Federal Consolidation Loan under the 

FFEL Program. Loans made under part E of title VIII of the 

Public Health Service Act include both Nursing Student 

Loans and Nurse Faculty Loans. 

Current Regulations: Current §685.220(b)(21) specifies 

that nursing loans made under subpart II of part B of title 

VIII of the Public Health Service Act may be consolidated 

into a Direct Consolidation Loan. 

Current §685.220(d)(1)(i) states that a borrower may 

obtain a Direct Consolidation Loan if the borrower 

consolidates at least one Direct Loan or FFEL Loan. If the 

borrower has certain other eligible loan types such as a 

Perkins Loan or a loan issued by the U.S. Department of 

Health and Human Services (HHS), the borrower can only 

include these loans in a Direct Consolidation Loan if the 

borrower also includes at least one Direct or FFEL loan. 

Under §685.220(b), loans issued by HHS that may be 

consolidated into a Direct Consolidation Loan, if the 

borrower also includes at least one Direct or FFEL loan, 
286

include Health Professions Student Loans (HPSL), and Loans 

for Disadvantaged Students (LDS), made under subpart II of 

part A of title VII of the Public Health Service Act, 

Health Education Assistance Loans (HEAL), and Nursing Loans 

made under subpart II of part B of title VII of the Public 

Health Service Act.

Proposed Regulations: 

Consolidation of Nursing Loans

The proposed regulations would revise §685.220(b)(21) 

to provide that nursing loans made under part E of title 

VIII of the Public Health Service Act may be consolidated 

into a Direct Consolidation Loan.

Consolidation of Eligible Loans

We propose to remove current §685.220(d)(1)(i) to 

eliminate the requirement that a borrower must consolidate 

at least one FFEL or Direct Program Loan. This would allow 

a borrower to consolidate under the Direct Loan Program, if 

the borrower had any of the eligible loans listed in 

§685.220(b).

Reasons: 

Consolidation of Nursing Loans

The proposed change is needed to conform 

§685.220(b)(21) to the statutory language in section 

428C(a)(4)(E) of the HEA, which allows for the 
287

consolidation of both Nursing Student Loans and Nurse 

Faculty Loans. The current regulatory reference to nursing 

loans “made under subpart II of part B of title VIII of the 

Public Health Service Act” includes Nursing Student Loans, 

but not Nurse Faculty Loans. The current regulatory 

language reflects earlier statutory language that was 

subsequently amended.

Consolidation of Eligible Loans

The proposed change to remove current 

§685.220(d)(1)(i) would eliminate the requirement that a 

borrower must have a Direct Program or FFEL loan to 

consolidate. As a result, other loan types listed in

§685.220(b), such as Perkins Loans and certain loans issued 

by HHS, would also be allowed to access consolidation, even 

if the borrower did not also consolidate a Direct Program 

or FFEL loan. 

The proposed change is necessary to be consistent with 

sections 451(b)(2) and 455(a)(1) of the HEA, which provide 

that, unless otherwise specified, Direct Loans are to have 

the same terms, conditions, and benefits as FFEL Loans. 20 

U.S.C. 1087a(b), 1087e(b)(1). Under the FFEL Program, 

certain loans issued by HHS (HPSL, LDS, HEAL, and Nursing 

loans) and Federal Perkins loans were considered eligible 

student loans for consolidation, without any added 
288

requirement that the borrower also consolidate at least one 

FFEL Loan. 20 U.S.C. 1078-3(a)(4)(B), (D); 34 CFR

§682.100(a)(4). The authority for lenders to make FFEL 

Consolidation Loans expired on June 30, 2010, under section 

428C(e) of the HEA, 20 U.S.C. 1078-3(e). Since current 

§685.220(d)(1)(i) does not allow Federal Perkins loan 

borrowers and borrowers of loans issued by HHS as listed in 

§685.220 to obtain a Direct Consolidation Loan, unless they 

also consolidate either a Direct or FFEL loan, Federal 

Perkins and HHS student loan borrowers who do not also have 

at least one Direct Loan or FFEL Loan do not currently have 

access to consolidation. As a result, these borrowers are 

not receiving the same terms, conditions and benefits in 

the Direct Loan program as in the FFEL Program.

To correct this situation, the Department proposes to 

allow borrowers to obtain a Direct Consolidation Loan 

regardless of whether the borrower is also seeking to 

consolidate a Direct Program or FFEL loan, if the borrower 

has a loan type identified in §685.222(b).

Agreements Between an Eligible School and the Secretary for 

Participation in the Direct Loan Program (§685.300) 

Statute: Section 454(a)(6) of the HEA, 20 U.S.C. 

1087d(a)(6), provides that schools enter into Direct Loan 

Participation Agreements that include provisions needed to 
289

protect the interests of the United States and promote the 

purposes of the Direct Loan Program.

Current Regulations: Section 685.300 states the 

requirements for a school to participate in the Direct Loan 

Program. First, the school must meet the requirements for 

eligibility under the HEA and applicable regulations. 

Second, the school must enter into a written program 

participation agreement with the Secretary. Under the 

agreement, the school agrees to comply with the HEA and 

applicable regulations. Paragraph (b) of §685.300 lists 

several specific provisions of the program participation 

agreement. 

Proposed Regulations: Proposed §685.300(d), (e), (f), (g), 

(h) and (i) would add specific provisions to the Direct 

Loan program participation agreement related to student 

claims and complaints based upon acts or omissions44 of a 

school that are related to the making of a Federal loan or 

the provision of educational services for which the loan 

was provided and that could also form the basis of borrower 

defense claims under §685.206(c) or proposed §685.222.

Specifically, proposed §685.300(d), (e), (f), (g), (h)

and (i) would provide that--

 

44 Unless otherwise noted, we use the phrases “borrower defense-type 

claims” or “potential borrower defenses” to refer to such complaints or 

disputes.
290

• A school may not require any student to pursue a 

complaint based on such acts or omissions through an 

internal institutional process before the student presents 

the complaint to an accrediting agency or government agency 

authorized to hear the complaint;

• The school may not obtain or attempt to enforce a 

waiver of or ban on class action lawsuits regarding 

borrower defense-type claims;

• The school may not compel the borrower to enter 

into a pre-dispute agreement to arbitration of a 

borrower defense-type claim, or attempt to compel a 

borrower to arbitrate such a claim by virtue of an 

existing a pre-dispute arbitration agreement;

45 and

• The school must notify the Secretary of the initial 

filing of such a claim, whether in arbitration or in court, 

and must provide copies of the initial filing, certain 

subsequent filings, and any decisions on such claims. 

Reasons: Through this rulemaking, the Department is 

proposing to address the procedures to be used for a 

borrower to establish a borrower defense based on acts or 

 

45 Unless otherwise noted, we use the phrase “pre-dispute arbitration 

agreement” to refer to agreements providing for arbitration of any 

future disputes between the parties, regardless of the label given the 

agreement, its form or its structure. These could take the form of 

stand-alone agreements, as well as such an agreement that is included 

within, annexed to, incorporated into, or otherwise made a part of a 

larger agreement between the parties. 
291

omissions of a school related to the making of a Direct 

Loan or the provision of educational services for which the 

Direct Loan was provided, and the effect of borrower 

defenses on institutional capability assessments, among 

other things. 80 FR 63479. For disputes involving claims 

that may be potential borrower defenses, we propose to add 

to the Direct Loan program participation agreement 

provisions relating to schools’ current use of certain 

dispute resolution procedures. For the reasons explained 

here, these procedures, individually and collectively, can:

• Affect whether institutions are held accountable 

for the acts and omissions that give rise to borrower 

defense claims;

• Make it more likely that the costs of losses from 

those acts or omissions will be passed on to the 

taxpayer; 

• Reduce the incentive for institutions to engage in 

fair and ethical business practices rather than

practices that give rise to borrower defense claims; 

and 

• Frustrate or reduce the effectiveness of the 

Department’s proposed processes for submitting and 

determining the validity of borrower defense claims. 
292

Accordingly, proposed §685.300(d) through (i), 

individually and collectively, are designed to help ensure 

that the proposed borrower defense and institutional 

accountability regulations will achieve their intended 

goals--to protect students, the Federal government, and 

taxpayers against risks from potential borrower defenses

and potential school liabilities. 

We believe that to protect students, taxpayers, and 

the Federal government from the risk of loss arising from 

borrower defense claims based on the acts or omissions of 

the school, financial responsibility for these risks should 

be placed on the party whose conduct gives rise to the 

risk. To do so, borrowers must be free to present these 

claims to an authority well-situated to consider the merits 

of their claims and provide effective recourse directly 

against the school. Accordingly, we propose regulatory 

changes to §685.300 that would support these objectives in 

separate but complementary ways. In each case, the 

proposed regulations would enhance the opportunities for 

borrowers with borrower defenses to obtain relief directly 

from schools and help ensure that schools are held 

accountable for their acts or omissions that give rise to 

borrower defenses.
293

Specifically, for Direct Loan participants, we propose 

to: 

 Prohibit the use of class action waivers in order 

to, among other things, permit the aggregation of claims 

that may reflect widespread wrongdoing for which 

institutions might not otherwise be held accountable; 

 Bar the use of mandatory pre-dispute arbitration 

agreements, in order to, among other things, prevent 

institutions from suppressing individual student complaints 

and shifting the financial risk associated with 

institutional wrongdoing to the Department and the 

taxpayers; 

 Require institutions to modify existing 

arbitration agreements or notify individuals who have 

already executed arbitration agreements that the 

institution will not attempt to enforce an existing 

arbitration agreement in a manner prohibited by the 

regulations; and

 Require institutions to inform the Secretary of 

the assertion and resolution of potential borrower defense 

claims to enable the Secretary to monitor compliance with 

these requirements, to assess the nature and incidence of 

acts or omissions that form the grounds on which claims are 
294

asserted, to better focus corrective or enforcement 

actions, and to disseminate useful information about the 

nature and frequency of such claims and the judicial and 

arbitral outcomes of these claims. 

We further propose in §685.300(d), regarding 

exhaustion of internal complaint procedures, to prohibit 

the school from requiring or attempting to require students 

to exhaust a school’s internal complaint process before 

contacting or communicating a grievance with the school’s 

accreditor or government agencies – including this 

Department - with authority over the school. 

In proposing these regulatory changes, the Department 

is responding to comments made during negotiated rulemaking 

by the public and by non-Federal negotiators, and to a 

proposal submitted by a negotiator, which was supported by 

a number of other negotiators, in each case relating to the 

use of arbitration by schools. Proposals the Department 

received both from non-Federal negotiators and from the 

public on this issue are available at 

www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.ht

ml. 

During the negotiated rulemaking, we sought comment on 

two alternative options. Both options would bar the use of 

any pre-dispute arbitration agreements that include a 
295

waiver of the student’s right to bring or participate in a 

class action lawsuit for claims that would constitute 

borrower defenses within the scope of §685.206(c) and 

proposed §685.222--in other words, claims related to the 

making of the Direct Loan or the provision of educational 

services for which the loan was intended. Both options 

would also require the school to submit copies of initial 

filings of any such claims and each ruling, award, or 

decision on the claims to the Secretary. Proposed Option A 

would prohibit schools from requiring students to pursue 

complaints, grievances, or disputes for such claims through 

an internal complaint process before presenting the 

complaint, grievance or dispute to an accrediting agency or 

government agency. Option A would allow the school to 

require the arbitration of claims asserted in a class 

action only if a court were to deny class certification or 

dismiss the class claims. This option would further 

require schools to ensure that the arbitration included 

certain procedural protections to increase the transparency 

and fairness of the arbitration proceeding. Option B would 

include provisions regarding class action waivers and 

submission of filings to the Secretary described above, but 

would only have barred the use of pre-dispute arbitration 

agreements. 
296

Nearly all of the negotiators supported the proposed 

Option B. Many negotiators stated that by requiring 

students to arbitrate disputes, arbitration clauses 

function to suppress meritorious student complaints. They 

also noted that many schools’ arbitration agreements 

contain confidentiality clauses. Since arbitration records 

are not public like court records, the negotiators noted 

that potential student claimants and their representatives 

generally may not have access to prior pleadings, awards, 

or arbitrator decisions. Negotiators also noted that many 

school enrollment agreements contain bans on class claims

or have provisions with that effect, which prevents 

evidence of widespread patterns and unlawful practices to 

come to the attention of students, the public, and the 

Department. One negotiator, however, stated that the 

Department’s proposal was outside the notice of issues to 

be considered, and thus beyond the scope of the issues for 

the rulemaking, and was concerned that neither proposed 

Option A or Option B fit within the U.S. Supreme Court 

precedent regarding arbitration. However, the negotiator 

stated that of the two proposed options, Option B was 

preferred. 

As opposed to the options that were proposed by the 

Department at the negotiated rulemaking, in this NPRM, the 
297

Department proposes adding provisions that we believe would

similarly prevent schools’ use of internal complaint 

processes as a barrier to students’ communication of such 

issues to accreditors or government agencies; ban the use 

of class action waivers by schools for potential borrower 

defense claims; prohibit mandatory pre-dispute arbitration 

agreements; and create transparency regarding the conduct 

and outcomes of arbitration proceedings. After evaluating 

the available research on arbitration and the concerns of 

all of the negotiators at the table, the Department has 

chosen to propose a modified version of Option B in this 

NPRM. 

The Direct Loan program participation agreement

The Department proposes to add provisions addressing 

the use of class action waivers, pre-dispute arbitration

agreements, submission of filings, and internal complaint 

processes to the Direct Loan program participation 

agreements. Section 452(b) of the HEA states, “No 

institution of higher education shall have a right to 

participate in the [Direct Loan] programs authorized under 

this part [part D of title IV of the HEA].” 20 U.S.C. 

1087b(b). Rather, an institution may participate only by 

supplying an application containing “such information and 

assurances as the Secretary may require.” 20 U.S.C. 
298

1087c(b)(1). Further, section 454 of the HEA directs that 

a school may participate in the Direct Loan Program only by 

virtue of a “participation agreement.” 20 U.S.C. 1087d. 

Section 454 further states that such program participation 

agreement shall include, among other things, “such other 

provisions as the Secretary determines are necessary to 

protect the interests of the United States and promote the 

purposes of this part [Part D of title IV of the HEA, 

describing the Direct Loan Program].” 20 U.S.C. 

1087d(a)(6). The Direct Loan Agreement described in 

section 454 of the HEA is now included as a separate 

component of the program participation agreement required 

under section 487(a) of the HEA. 20 U.S.C. 1094(a). The 

purpose of the Direct Loan Program is to provide loans to 

students and parents to finance the attendance of students 

in postsecondary education. Loans are not grants, and are 

expected to be repaid. The same part of the HEA, part D, 

also includes the borrower defense provision, section 

455(h) of the HEA, which directs the Department to “specify 

in regulations which acts or omissions of an institution . 

. . a borrower may assert as a defense to repayment” of a 

Direct Loan. 20 U.S.C. 1087e(h).

While section 455(h) of the HEA authorizes the 

Department to establish grounds for a borrower to avoid 
299

repaying a Direct Loan, we believe that the overall 

“purpose” of the Direct Loan Program is to make loans that 

will then be repaid. To be repayable, the loans must be 

enforceable obligations of the borrowers. Acts and 

omissions by schools that give a borrower grounds for 

avoiding repayment of a Direct Loan thereby frustrate the 

achievement of the primary objectives of the Federal loan 

program–-to both finance education and obtain 

repayment. By impeding the ability of borrowers to obtain 

effective relief directly from the school, the practices we 

propose to prohibit in §685.300(d) through (ii) instead 

encourage these borrowers to raise their claims against the 

school to the Department as reasons for not repaying their 

loans, and in so doing, increase the financial risk to the 

taxpayer from the claims themselves. 

Class action waivers

In considering class action waivers, we consider the 

effect that such waivers can and have already had on the 

interests of taxpayers and the achievement of the purposes 

and objectives of the Direct Loan Program. Among other 

things, the Department has reviewed the Notice of Proposed 

Rulemaking recently issued by the CFPB (hereinafter the 

“CFPB Arbitration Agreements NPRM”) and considers the 

analysis and proposals made there as they bear on these 
300

assessments for the Direct Loan Program.46 The CFPB has 

been charged by statute with evaluating the use of 

mandatory, pre-dispute arbitration agreements. 12 U.S.C. 

5518(a). The CFPB conducted a comprehensive three-year 

study of those agreements’ effect on consumers, and has 

made a preliminary determination that a ban on the use of 

mandatory pre-dispute arbitration agreements regarding 

covered consumer financial products and services to

preclude assertion of claims through class action lawsuits 

would benefit consumers, serve the public interest, and be 

consistent with its study.47 The CFPB stated that its 

study, together with the CFPB’s experience and expertise,

resulted in the CFPB’s notice of proposed rulemaking 

regarding class action waivers. The CFPB stated the 

following “preliminary conclusions”:

(1) The evidence is inconclusive on whether 

individual arbitration conducted during the 

Study period is superior or inferior to 

individual litigation in terms of remediating 

consumer harm; (2) individual dispute 

resolution is insufficient as the sole 

 

46 Consumer Financial Protection Bureau, Arbitration Agreements, 80 FR 

32830 (May 24, 2016). 

47 CFPB, SMALL BUSINESS ADVISORY REVIEW PANEL FOR POTENTIAL RULEMAKING ON ARBITRATION 

AGREEMENTS, OCT. 7, 2015 (SBREFA Outline)) at 4. 
301

mechanism available to consumers to enforce 

contracts and the laws applicable to consumer 

financial products and services; (3) class 

actions provide a more effective means of 

securing relief for large numbers of consumers 

affected by common legally questionable 

practices and for changing companies’ 

potentially harmful behaviors; (4) arbitration 

agreements block many class action claims that 

are filed and discourage the filing of others; 

and (5) public enforcement does not obviate 

the need for a private class action mechanism.

CFPB Arbitration Agreements NPRM, 81 FR 32830, 32855. 

The CFPB identified several features of class actions 

in the consumer financial services markets that we consider 

applicable to the postsecondary education market. First, 

the CFPB noted that class actions facilitate relief for 

individual consumers because they “provide a mechanism for 

compensating individuals where the amounts at stake for 

individuals may be so small that separate suits would be 

impracticable.”48 Second, class actions “strengthen 

incentives” for industry members to “engage in robust 

 

48

 CFPB Arbitration Agreements NPRM, at 81 FR 32833; see also SBARP, at 

15.
302

compliance and customer service on an ongoing basis.”49 

While government agencies “can and do bring enforcement 

actions against companies that cause injury to large 

numbers of consumers, government resources to pursue such 

lawsuits are limited.”50 Thus, the CFPB preliminarily 

concludes, “Public enforcement is not a sufficient means to 

enforce consumer protection laws and consumer financial 

contracts.”51 As the CFPB stated, “When companies can be 

called to account for their misconduct, public attention on 

the cases can affect or influence their individual business 

practices and the business practices of other companies 

more broadly.”52 Moreover, the CFPB preliminarily finds 

that “exposure to consumer financial class actions creates 

incentives that encourage companies to change potentially 

illegal practices and to invest more resources in 

 

49 Id. As the CFPB noted in its study, in the 46 consumer class actions 

and six individual suits filed by consumers in which defendant 

companies obtained orders compelling arbitration, in only 12 instances 

did a consumer then pursue arbitration, and none of the 12 were class 

arbitrations. CFPB, ARBITRATION STUDY, March 2015, §6.7.1. 

50 Id. As the CFPB also noted in its study, government enforcement 

authorities brought some 1150 administrative or judicial enforcement 

actions during the 2010-2012 survey period, of which some 133 address 

the same conduct as that on which consumers had brought a class action 

lawsuit; in 71 percent of these instances, the private class action 

preceded the government enforcement action. CFPB ARBITRATION STUDY, March 

2015, §9.1. 

51 CFPB Arbitration Agreements NPRM, at 81 FR 32860.

52 CFPB Considers Proposal to Ban Arbitration Clauses that Allow 

Companies to Avoid Accountability to Their Customers, Oct. 7, 2015, 

available at www.consumerfinance.gov/newsroom
303

compliance in order to avoid being sued.”53 Based on its 

comprehensive study of the use of pre-dispute arbitration 

agreements in the financial services sector, the CFPB now 

proposes to bar the use of arbitration agreements to 

preclude the pursuit of class actions, which includes the 

use of class action waivers in arbitration agreements--

agreements that require consumers in the financial services 

markets to agree to forego class action.54 

The proposed CFPB rule describes the financial 

services markets to which the CFPB rule would apply. 55 We

believe the findings and reasoning of the CFPB support the

protections for Direct Loan borrowers of the kind we 

propose here. Agreements that bar relief by class action 

lawsuits for potential borrower defenses remove the risk to 

a school that the threat of such a class action would pose 

and, thus, they eliminate the financial incentive for the 

school to comply with the law that such a risk of a class 

action would otherwise create.

56 By doing so, class action 

 

53 CFPB Arbitration Agreements NPRM, at 81 FR 32864.

54 www.consumerfinance.gov/about-us/newsroom/consumer-financialprotection-bureau-proposes-prohibiting-mandatory-arbitration-clausesdeny-groups-consumers-their-day-court/ CFPB Arbitration Agreements

NPRM, 81 FR 32830, 32925, to be codified at 12 CFR 1040.4. 

55 See CFPB ARBITRATION AGREEMENTS NPRM, 81 FR 32830, 32925, to be codified 

at 12 CFR 1040.3 (describing covered services); See also: SBREFA 

Outline at 22.

56 The Department makes no distinction between class action waivers 

included in arbitration agreements and such waivers established 
304

waivers impede borrowers from obtaining compensatory relief 

for themselves, and further prevent borrowers from 

obtaining injunctive relief to compel a school, in a timely 

manner, to desist from the conduct that caused them injury 

and could continue to cause other borrowers injury in the 

future. Class action waivers effectively allow a school to 

perpetuate misconduct with much less risk of adverse 

financial consequences than if the school could be held 

accountable in a class action lawsuit. 

Recent history demonstrates the need to address bans 

by postsecondary institutions on class actions for 

potential borrower defense claims. Corinthian Colleges 

included explicit class action waiver provisions in 

enrollment agreements, and used those, with mandatory predispute arbitration clauses, to resist class actions by 

students.57 Government investigations established that 

Corinthian had for years engaged in widespread 

misrepresentations and other abusive conduct. In April 

2015, the Department levied a $30 million fine against 

Heald, a chain owned by Corinthian, for misrepresenting its 

 

otherwise, such as in an enrollment agreement that does not include any 

reference to or agreement regarding arbitration. The negative effects 

of such waivers discussed here hold regardless of where the waiver is 

established.

57 See, e.g., Montgomery v. Corinthian Colleges, C.A. No. 11-C-365 

(N.D.Ill. Mar. 25, 2011); Ferguson v. Corinthian Colleges, Inc., 773 

F.3d 928 (9th Cir. 2013).
305

placement rates, but several days later, Heald and the 

remaining Corinthian-owned schools closed, and Corinthian 

filed for bankruptcy relief. The State of California sued 

Corinthian in September 2013, and obtained a $1.1 billion 

judgment against the company only in March 2016, after the 

company had filed for bankruptcy relief. The CFPB sued 

Corinthian in September 2014, and obtained a $531 million 

judgment against the company only in October 2015--well 

after Corinthian had become insolvent and filed in 

bankruptcy. None of these government actions actually 

achieved affirmative recovery for Corinthian Direct Loan 

borrowers.58 Yet in 2012, a class of students attending 

Corinthian Colleges, including Heald College and Everest 

Institute, Miami, had filed class actions against the 

schools for students who attended the schools since 2005 

(Everest) or 2009 (Heald), for “misrepresenting the quality 

of its education, its accreditation, the career prospects 

for its graduates, and the cost of education.” Ferguson v. 

Corinthian Colleges, 733 F.3d 928 (9th Cir. 

2013). Corinthian defended by claiming that the 

arbitration clause in their enrollment agreements barred 

 

58 This Department and the CFPB did achieve substantial relief in 2015 

for many Corinthian students who had obtained private loans, but only 

through negotiations with the Educational Credit Management 

Corporation, which acquired some of the Corinthian schools. 
306

relief in a class action, and in an August 2013 ruling the 

Ninth Circuit Court of Appeals agreed. Id. Another class 

action filed in 2011 in Illinois against Corinthian 

Colleges by students, alleging deception about placement 

rates, was similarly barred. Montgomery v. Corinthian 

Colleges, C.A. No. 11-C-365 (N.D.Ill. Mar. 25, 

2011). Other Corinthian students unsuccessfully pursued 

relief through individual and class actions against 

Corinthian schools, and, in each instance, Corinthian 

successfully opposed the suits and obtained rulings 

compelling individual arbitration of the student claims.59 

In yet another case, Corinthian opposed recovery by a 

student who had been compelled to arbitrate, and had 

obtained a favorable award from the arbitrator that granted 

relief not only to the individual student but to a class of 

students; Corinthian argued, and the court agreed, that the 

arbitration agreement barred even class arbitrations. Reed 

v. Fla. Metropolitan Univ., 681 F.3d 630 (5th Cir. 2012), 

 

59 Eakins v. Corinthian Colleges, Inc., No. E058330, 2015 WL 758286 

(Cal. Ct. App. Feb. 23, 2015); Okwale v. Corinthian Colleges, No. 1:14-

CV-135-RJS, 2015 WL 730015 (D. Utah Feb. 19, 2015); Kimble v. Rhodes 

College, No. C-10-5786, 2011 WL 2175249 (N.D. Cal. June 2, 2011); 

Miller v. Corinthian Colleges, 769 F.Supp.2d. 1336 (D. Utah 2011); 

Rodriguez v. Corinthian Colleges, Inc., No. 07-CV-02648-EWNMJW, 2008 WL 

2979505 (D. Colo. Aug. 1, 2008); Ballard v. Corinthian Colleges, Inc., 

No. C06-5256 FDB, 2006 WL 2380668 (W.D. Wash. Aug. 16, 2006); Anderson 

v. Corinthian Colleges, Inc., No. C06-5157 FDB, 2006 WL 2380683 (W.D. 

Wash. Aug. 16, 2006).
307

abrogated by Oxford Health Plans LLC v. Sutter, 133 S. Ct. 

2064, 186 L. Ed. 2d 113 (2013). 

If the student class actions had been able to proceed, 

the class actions could have compelled Heald College and 

the Corinthian Colleges, generally, to provide financial 

relief to the students and to change their practices while 

Corinthian was still a viable entity. Instead, impacted 

borrowers with Direct Loans from attendance at any of the 

Corinthian Colleges will only be able to obtain relief by 

raising the schools’ misconduct as a defense to their 

Federal loans through the Department’s current borrower 

defense process under §685.206(c).60 As of the close of 

March 2016, the Department had granted discharge relief in 

the amount of $42,318,574 to 2,048 Direct Loan borrowers 

making claims related to Heald, Everest Institute, and 

Wyotech.

61 As of June 1, the Department had received more 

than 23,000 claims relating to Corinthian and other 

schools. 

Similarly, the inability of borrowers to bring class 

actions removed the deterrent force that the threat of 

 

60 Because Corinthian required pre-dispute arbitration agreements, 

students were unable to successfully pursue individual lawsuits against 

the schools.

61 Third Report of the Special Master for Borrower Defense to the 

Under Secretary, March 25, 2016, available at 

https://www2.ed.gov/documents/press-releases/report-special-masterborrower-defense-3.pdf.
308

being sued in a class action posed to other industry 

members during this same period. Federal and State reviews 

of for-profit school practices over the past five years, 

recounted, for example, in the Department’s notice of 

proposed rulemaking for Program Integrity: Gainful 

Employment, 79 FR 16426 (March 25, 2014), show numerous 

instances in which major for-profit schools engaged in 

deceptive acts of the kind on which students were 

attempting to sue. However, during that same period, 

courts regularly rebuffed the students’ attempts by 

compelling the students to submit their claims to 

arbitration. See, e.g., Rosendahl v. Bridgepoint Educ., 

Inc., No. 11CV61 WQH WVG, 2012 WL 667049 (S.D. Cal. Feb. 

28, 2012). Had students been able to bring class actions 

against Corinthian or other industry members, it is 

reasonable to expect that other schools would have been 

motivated to change their practices to avoid facing the 

risk of similar suits. 

Class action bans eliminate this incentive. By doing 

so, these agreements increase the likelihood that borrowers 

who have such claims will present them solely to the 

Department as defenses to repayment of their taxpayerfunded Federal loans. The Department’s borrower defense 

process gives limited relief for borrowers, providing only 
309

discharge of the borrower’s Federal loan obligation, and 

potential recovery of past payments made to the Secretary, 

rather than compensation in damages from the school for his 

or her losses. Recoveries through the court system --for 

the cost of the loan itself--would eliminate any need to 

seek relief from the Department–-and the taxpayers. In 

addition, recoveries in damages may include other losses 

the borrower incurred as well, such as the tuition an 

individual privately paid or the value of the time spent at 

the institution. In the Department’s experience, borrower 

defense claims are presented to the Department well after 

the underlying act or omission that gave rise to the claim 

has occurred, at a point at which the school may well have 

ceased operations and there may be less reliable evidence 

available to borrowers. That shifts the financial risk of 

a school’s insolvency to the taxpayer, rather than to the 

school as the responsible party. 

We believe that class action lawsuits not only provide 

a vehicle for addressing a multitude of relatively small 

claims that would otherwise not be raised--or raised only 

as borrower defense claims–-but create a strong financial 

incentive for both a defendant school and other similarly 

situated schools to comply with the law in their business 

operations. Pre-dispute arbitration agreements coupled 
310

with class action waivers eliminate this incentive by 

preventing the aggregation of small claims that may reflect 

widespread wrongdoing. We believe that banning class 

action waivers as they pertain to potential borrower 

defense claims would promote direct relief to borrowers 

from the party responsible for injury, encourage schools’ 

self-corrective actions, and, by both these actions, lessen 

the amount of financial risk to the taxpayer in discharging 

loans through the defense to repayment process. 

Pre-dispute arbitration agreements

Because pre-dispute arbitration agreements bar the 

student from bringing an individual lawsuit against the 

school for relief, these agreements pose some of the same 

risks to borrowers and the taxpayer as those posed by class 

action waivers. Even if the borrower were not 

contractually foreclosed from pursuing a class action suit, 

Federal and State rules impose requirements on class 

actions that may well prevent particular borrowers from 

bringing and successfully maintaining a class action. For 

such borrowers, mandatory pre-dispute arbitration 

agreements bar them from seeking judicial relief. .

62 The 

 

62 Fed. R. Civ. Proc. 23 requires, for example, that questions of law 

or fact common to members of the class predominate over issues 

affecting only individual members. Fed. R. Civ. P. 23(b)(3). Courts 
311

ability to compel arbitration allows the school to bar the 

individual from bringing a suit, either individually or, by 

joinder, with other borrowers, and thereby avoid the 

publicity and financial risks described earlier that follow 

from class actions. Similarly, foreclosing individual or 

joinder actions eliminates, for other industry members, the 

risk that a well-publicized lawsuit will inspire similar 

individual or joinder actions against those schools, and 

therefore dampens or eliminates the incentive for other 

schools to comply with the law in their business dealings 

with their student customers. In addition, a wellpublicized lawsuit is more likely to attract the attention 

and risk of compensatory or prophylactic enforcement action 

by this Department and other government agencies. 

 

have not infrequently denied class certification for student loan 

borrowers raising class action fraud claims against schools:

When students who seek to be named as plaintiffs in a proposed 

class action may have considered a variety of factors in 

deciding to enroll in a school alleged to have defrauded them, 

absent are typical and predominant questions whether such 

plaintiffs relied upon misrepresentations made by the school 

in deciding to enroll therein; class certification must 

therefore be denied. Rodriguez v. McKinney, 156 F.R.D. 112, 

116 (E.D.Pa. 1994) (no predominance); Graham v. Sec. Sav. & 

Loan, 125 F.R.D. 687, 691 n. 4 (N.D.Ind. 1989) (no 

typicality), aff'd sub nom. Veal v. First Am. Sav. Bank, 914 

F.2d 909 (7th Cir. 1990); see Torres v. CareerCom Corp., 1992 

WL 245923, at *5 (E.D.Pa. Sept. 18, 1992) (no predominance); 

see generally Seiler Jr. v. E.F. Hutton & Co., 102 F.R.D. 880, 

890 (D.N.J. 1984) (no typicality).

Morgan v. Markerdowne Corp., 201 F.R.D. 341, 348 (D.N.J. 2001).
312

Foreclosing individual student lawsuits removes this risk, 

much like class action waivers. Accordingly, mandated 

arbitration can be expected to frustrate the Federal and 

Direct Loan interests for the same reasons, though to a 

lesser degree, than class action waivers. 

We note that the CFPB considered a ban on mandatory 

pre-dispute arbitration agreements, and in light of its 

mandate, preliminarily found the evidence to be 

“inconclusive whether individual arbitration conducted 

during the Study period is superior or inferior to 

individual litigation in remediating consumer harm. . .” 

81 FR 32830, 32855, 32921. The CFPB did acknowledge that a 

ban on pre-dispute arbitration agreements would “give[ ] 

providers [of financial services the] same incentives to 

comply with the law as the proposed rule [banning class 

action waivers]. 81 FR 32830, 32921. Section 1028(b) of 

the Dodd-Frank Act provides that the mandate of the CFPB 

with respect to any regulation the CFPB adopts regarding 

arbitration is to determine whether, it would be in the 

“public interest and for the protection of consumers” to 

“prohibit or impose limitations on the use of an agreement 

. . . for a consumer financial product or service providing 

for arbitration of any future dispute between the parties. 
313

. .” 12 U.S.C. 5518(b). Also, under section 1028(b), “the 

findings in such rule shall be consistent with the study.”

The Department proposes to act under a different 

mandate, under section 454(a)(6) of the HEA, to adopt 

“provisions as the Secretary determines are necessary to 

protect the interests of the United States and to promote 

the purposes of this part [the Direct Loan Program under 

Part D of title IV of the HEA].” 20 U.S.C. 1087d(a)(6). 

As discussed above, the interests at stake in this 

determination are not the interests of the “public” and 

“consumers,” but the interests of the Federal taxpayers 

whose funds are at risk for borrower defense claims 

asserted on Federal Direct Loans, and the objective at 

stake here, as discussed, is the successful financing of 

postsecondary education by providing loans repayable by 

current recipients for the benefit of future generations of 

borrowers. Because the interests at stake in regard to 

Direct Loans, though not inconsistent with those prescribed 

in the Dodd-Frank Act, are different, the Department, for 

the reasons stated here, considers individual litigation a 

better tool to protect the taxpayers’ interests in the 

Direct Loan program than individual arbitration. 

The current regulations in §685.206(c) require 

Department decision makers to apply the State law 
314

applicable to the variety of causes of action that 

constitute borrower defenses to repayment. Under the 

proposed regulations, this standard would continue to apply 

to grievances by borrowers related to existing Direct Loans 

and, thus, continue to require Department officials to 

acquire sufficient familiarity with the law of the States 

to properly apply that law to thousands of borrower defense 

claims. The Federal interest, and the purposes of the 

Direct Loan program, are frustrated to the extent that 

schools are able to bar individuals with Direct Loanrelated grievances from having those claims adjudicated by 

State courts, which are well-situated to adjudicate these 

claims under judicial procedures that assure appellate 

review of trial court rulings. We recognize the 

desirability of this option by retaining, under the 

proposed new standard in §685.222, the option to obtain 

borrower relief based on a favorable judgment of a court of 

competent jurisdiction, even if the judgment rests on a 

State law-based cause of action. By requiring institutions 

to permit individual borrowers access to judicial forums 

for claims that may constitute borrower defenses, the 

proposed regulations would allow borrower claims based on 

State law causes of action to be resolved locally, by 

tribunals well versed in that law, and whose decisions are 
315

subject to appellate review, unlike the far more narrow 

review to which arbitral awards are subject.63 Permitting 

this access would promote a balanced evolution of the 

borrower defense standard, assuring that borrowers with 

meritorious State law claims will be able to pursue those 

in an appropriate forum, thereby reducing both the 

incentive for borrowers to assert their claims only through 

the Department process, and the burden on the Federal 

administrative process to continue to evaluate those 

claims. 

Accordingly, we propose to prohibit a Direct Loan 

participating school from requiring the student to agree, 

prior to a dispute about a potential borrower defense 

claim, to arbitrate such a dispute. We refer to such 

agreements as “mandatory pre-dispute arbitration 

agreements” and define those agreements as “mandatory” if 

the school requires the student to agree to arbitrate 

either as part of the enrollment agreement or in any other 

form the student is required to execute in order to enroll

or continue in school. We recognize that some pre-dispute 

arbitration agreements allow the consumer within a set 

period to affirmatively opt-out of an agreement to 

 

63 See 9 U.S.C. 10. 
316

arbitrate. We include in the proposed definition that such 

agreements are binding unless the student affirmatively 

opts out of the agreement, and we invite comment on whether 

opt-out agreements should be considered “mandatory” 

agreements. 

Transparency of the arbitral process and outcomes

The Department currently has little opportunity to 

monitor, and more importantly timely respond to, grievances 

that borrowers present in arbitration and even private 

suits, and the defenses and arguments raised by title IV 

participants in opposing relief. We propose, therefore, to 

require schools to provide us, in a timely manner, with 

copies of initial and certain subsequent filings in 

judicial or arbitral tribunals, and decisions and awards 

rendered in those proceedings. 

The CFPB also proposes to require companies that use 

pre-dispute arbitration agreements to submit to the CFPB 

copies of initial arbitration claim filings made or 

received by the companies, arbitration awards, and certain 

other records.

64 The CFPB states that it is considering 

whether to make these available to the public by posting 

them to its Web site. The CFPB notes that this would 

 

64 CFPB Arbitration Agreements NPRM, 81 FR 32830, 32926 (May 24, 2016), 

to be codified at 12 CFR 1040.4(b)(1). 
317

permit the CFPB and the public to monitor arbitrations on 

an ongoing basis and identify trends that might “indicate 

problematic business practices that harm consumers, 

particularly since many claims settle before an award is 

rendered.”65

We propose the same kind of requirement here, for 

similar reasons. Lack of timely notice and confidentiality 

provisions make it difficult for the Department to discern 

patterns and practices that may generate borrower defense 

claims, involve misuse of title IV, HEA funds, or

constitute misrepresentations of the kind that the HEA 

authorizes the Department to remedy by fines and other 

actions. Without knowledge of the kinds of claims and 

relief granted, we cannot evaluate whether further measures 

are needed, or whether the school is resisting class action 

complaints on claims that would constitute borrower 

defenses under the proposed regulations.

The proposed submission requirement for institutions 

that use arbitration agreements would enable the Department 

to analyze the claims that may also be potential borrower 

defense claims, the schools’ responses, and the outcomes of 

the claims in arbitration. We would be able then, as 

 

65 SBREFA Outline, at 20
318

needed, to publicize both the kinds of potential borrower 

defense claims asserted and the decisions on those claims, 

and to decide whether either an immediate response or 

intervention was needed, or whether systemic correction 

action was warranted.

66 We would also be better able to 

evaluate the merits of a claim that a borrower later raises 

as a borrower defense to repayment. We believe that 

proposed §685.300(g), which would require schools to submit 

copies of filings for arbitration, responses, awards, and 

certain other documents within 60 days of the filing or 

receipt by the school, as applicable, is needed to enable 

the Secretary to monitor and evaluate these claims and 

thereby protect the interests of the United States and 

 

66 Schools and other institutions participating in the title IV, HEA 

programs have defended suits by borrowers by contending that borrowers 

cannot rely on State law to redress conduct by a defendant that also 

violates an HEA requirement, because, they argue, enforcement of HEA 

requirements is vested solely in the Secretary, not in private parties. 

See, e.g., Sanchez v. ASA College Inc., in which the defendant school 

raised this argument:

Defendants also assert that dismissal is warranted because the 

HEA grants the Secretary “exclusive authority” to remedy any 

Title IV violations and, thus, that the HEA precludes 

Plaintiffs' claims based on failures to comply with its 

provisions. (Defs. Mem. 10–15). 

Sanchez v. ASA Coll., Inc., No. 14-CV-5006 JMF, 2015 WL 3540836, at *4 

(S.D.N.Y. June 5, 2015). The Department, with timely notice in that 

instance, was able to file a statement of interest to rebut this 

serious misconception that a party injured by conduct that violates an 

HEA requirement of law cannot sue for relief for that injury in 

reliance on a State law that would allow a party to sue for relief for 

that conduct. A suit for relief based on State law in such a situation 

is not an attempt to find a private right of action for relief under 

the HEA. 
319

promote the purposes of the Direct Loan Program.67 In 

contrast, the Secretary has a far greater and more 

immediate interest in claims and defenses asserted in 

litigation, because court rulings on those assertions may 

construe the HEA and Department regulations, and thus have 

far greater effect than arbitration decisions. The issues 

will be joined as early as 20 days after the service of the 

complaint, when the defendant must answer or move to 

dismiss the complaint. To participate in a timely manner 

in litigation in which the parties assert their 

interpretations of the HEA and regulations, the Department 

needs prompt notice of these filings, in order to identify 

those that raise these kinds of assertions, and we propose 

in §685.300(h) that the school submit copies of each

complaint, any counterclaim, any dispositive motion filed 

by either party, any ruling on a dispositive motion, and 

any judgment, within 30 days of receipt or filing by the 

school. We believe the proposed submission requirements 

are appropriate for the reasons stated above. However, we 

seek comment on whether the Department should adopt 

different submission, transparency, or procedural fairness 

 

67 The 60-day submission requirement is the same period as proposed by 

the CFPB for submission of arbitral filings. CFPB Arbitration 

Agreements NPRM, 81 FR 32830, 32926, to be codified at 12 CFR

1040.4(b)(2).
320

requirements, and if so, what the supporting rationale for 

those requirements would be, and why those other 

requirements would meet the objectives outlined in this 

section. 

To the extent that a school may now include in its 

arbitration agreements a confidentiality provision, the 

rule would require the school to remove that provision or 

modify its use to the extent needed to make these 

disclosures. 

Federal Arbitration Act

A negotiator asserted that the Department does not 

have the authority to proscribe waivers of class action 

litigation or use of mandatory pre-dispute arbitration 

agreements, citing recent Supreme Court rulings upholding 

contractual agreements to arbitrate that held that the 

Federal Arbitration Act (FAA) protects enforceable 

arbitration agreements and expresses a “liberal Federal 

policy favoring arbitration.”68 The FAA protects the 

validity and enforceability of arbitration agreements. 

Section 2 of the FAA states: “[a] written provision in any 

. . . contract . . . to settle by arbitration a controversy 

thereafter arising out of such contract . . . shall be 

 

68 AT&T Mobility v. Concepcion, 563 U.S. 333 (2011).
321

valid, irrevocable, and enforceable, save upon such grounds 

as exist at law or in equity for the revocation of any 

contract.” 9 U.S.C. 2. This act was intended to reverse 

judicial hostility to arbitration and to put arbitration 

agreements on an equal footing with other contracts.69 The 

negotiator contended that the FAA as applied in case law 

barred the Department from adopting a rule that would ban 

either such class action waivers or mandatory pre-dispute 

arbitration agreements. 

The Department does not have the authority, and does 

not propose, to displace or diminish the effect of the FAA. 

However, the Department has clear authority to regulate the 

conduct of institutions that wish to participate in the 

Direct Loan Program. As noted earlier, section 452(b) of 

the HEA states, “No institution of higher education shall 

have a right to participate in the [Direct Loan] programs 

authorized under this part [part D of title IV of the 

HEA].” 20 U.S.C. 1087b(b). If a school chooses to 

participate in the Direct Loan Program, it must enter into 

a Direct Loan Program participation agreement. 20 U.S.C. 

1087d. Section 454(a)(6) of the HEA authorizes the 

Department to include in that participation agreement 

 

69 Id. at 342.
322

“provisions that the Secretary determines are necessary to 

protect the interests of the United States and to promote 

the purposes of” the Direct Loan Program. 20 U.S.C. 

1087d(a)(6). We propose to adopt regulations that limit 

the use of arbitration agreements under this authority. We 

discuss earlier the reasons we consider the proposed limits 

on arbitration to be necessary to protect the interests of 

the United States and promote the purposes of the Direct 

Loan Program. Under proposed §685.300(f), an institution 

would remain free to require students to enter into 

mandatory pre-dispute arbitration agreements, so long as 

those agreements exclude any requirement to arbitrate a 

potential borrower defense. An institution that does not 

choose to accept these provisions is free to include 

arbitration requirements in its enrollment agreements, and 

to exercise its contractual rights under such agreements to 

compel arbitration. However, under the proposed 

regulations, the institution would not be permitted to 

obtain or exercise such agreements and continue to 

participate in the Direct Loan Program unless those 

agreements exclude any requirement that the student 

arbitrate a potential borrower defense claim. 

Implementation for agreements regarding arbitration
323

Institutions that intend to mandate pre-dispute 

arbitration agreements or obtain class action waivers from 

students after the effective date of the proposed 

regulations will be required to include provisions in those 

agreements that exclude from any class action waiver or 

commitment to arbitrate those claims that relate to the 

making of the Direct Loan or the provision of educational 

services by the institution. The proposed regulations 

include provisions explaining the institution’s commitment 

not to attempt to compel arbitration or resist class 

actions, as applicable, for claims that are potential

borrower defense claims.

We recognize that many agreements regarding 

arbitration or class action waivers have already been 

executed and more may be executed prior to the date on 

which the proposed regulations may be issued in final and 

take effect. The proposed regulations therefore require 

that an institution that has such agreements not only to 

comply with the regulations that would bar the institution 

from attempting to exercise mandatory pre-dispute 

arbitration agreements or class action waivers regarding 

borrower defense-type claims, but also to either amend the 

agreements, or at least notify, the students who executed 

those agreements that the institution would not attempt to
324

exercise those agreements in a manner proscribed by the 

regulations. 

The institution would be required to notify students 

who had already executed a non-compliant arbitration or 

class action waiver agreement no later than the date on 

which the institution provides exit counseling, which 

provides a useful context in which to explain the change. 

For those who have executed a non-compliant arbitration or 

class action waiver but whom the institution has already 

provided exit counseling that included or accompanied the 

notice or amendment, the proposed rule would require the 

institution to provide the notice or amendment within 60 

days of the date on which the institution receives a 

complaint in a lawsuit by a former student that raised 

borrower defense claims, or a demand for arbitration of a 

borrower defense claim. As proposed here, the institution 

would be barred from opposing such a lawsuit on the ground 

that the borrower had already agreed to waive class action 

relief or individual lawsuit for relief for such a claim. 

We request comment on whether the institution should 

provide notice to currently-enrolled students or to former 

students, and if so, when and to whom those notices should 

be required

Severability
325

While the Department is confident that the provisions 

addressing arbitration in §685.300(d), (e), (f), (g), (h)

and (i) would not violate the FAA, it has carefully 

considered the negotiator’s view, and the possibility that 

a court might rule that any of these provisions is invalid 

based on the FAA or any other reason. The Department 

considers the separate provisions barring waivers of class 

actions, barring mandatory pre-dispute arbitration 

agreements, and requiring the institution to provide to the 

Department copies of initial filings and subsequent 

filings, awards, and decisions in borrower defense suits or 

arbitrations, to be valuable independently and to operate 

independently and to serve separate but complementary 

objectives. Accordingly, in an abundance of caution, we 

propose in §685.309 to specify the Department’s intent that 

if any provision of subpart C of part 685 is held invalid, 

the remaining parts shall not be affected. 

Executive Orders 12866 and 13563 

Regulatory Impact Analysis

Introduction

Under Executive Order 12866, it must be determined

whether this regulatory action is “significant” and, 

therefore, subject to the requirements of the Executive 

order and subject to review by the Office of Management and 
326

Budget (OMB). Section 3(f) of Executive Order 12866 

defines a “significant regulatory action” as an action 

likely to result in a rule that may--

(1) Have an annual effect on the economy of $100 

million or more, or adversely affect a sector of the 

economy, productivity, competition, jobs, the environment, 

public health or safety, or State, local, or tribal 

governments or communities in a material way (also referred 

to as an “economically significant” rule);

(2) Create serious inconsistency or otherwise 

interfere with an action taken or planned by another 

agency;

(3) Materially alter the budgetary impacts of 

entitlement grants, user fees, or loan programs or the 

rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of 

legal mandates, the President's priorities, or the 

principles stated in the Executive order.

This proposed regulatory action would have an annual 

effect on the economy of more than $100 million because the 

proposed regulations would have annual federal budget 

impacts of approximately $199 million in the low impact 

scenario to $4.2323 billion in the high impact scenario at 

3 percent discounting and $198 million and $4.17 billion at 
327

7 percent discounting, additional transfers from affected 

institutions to student borrowers via reimbursements to the 

Federal government, and annual quantified costs of $14.9

million related to paperwork burden. Therefore, this 

proposed action is “economically significant” and subject 

to review by OMB under section 3(f) of Executive Order 

12866. Notwithstanding this determination, we have 

assessed the potential costs and benefits, both 

quantitative and qualitative, of this proposed regulatory 

action and have determined that the benefits would justify 

the costs. 

We have also reviewed these regulations under 

Executive Order 13563, which supplements and explicitly 

reaffirms the principles, structures, and definitions 

governing regulatory review established in Executive Order 

12866. To the extent permitted by law, Executive Order 

13563 requires that an agency--

(1) Propose or adopt regulations only on a reasoned 

determination that their benefits justify their costs 

(recognizing that some benefits and costs are difficult to 

quantify);

(2) Tailor its regulations to impose the least burden 

on society, consistent with obtaining regulatory objectives 
328

and taking into account--among other things and to the 

extent practicable--the costs of cumulative regulations;

(3) In choosing among alternative regulatory 

approaches, select those approaches that maximize net 

benefits (including potential economic, environmental, 

public health and safety, and other advantages; 

distributive impacts; and equity);

(4) To the extent feasible, specify performance 

objectives, rather than the behavior or manner of 

compliance a regulated entity must adopt; and

(5) Identify and assess available alternatives to 

direct regulation, including economic incentives--such as 

user fees or marketable permits--to encourage the desired 

behavior, or provide information that enables the public to 

make choices.

Executive Order 13563 also requires an agency “to use 

the best available techniques to quantify anticipated 

present and future benefits and costs as accurately as 

possible.” The Office of Information and Regulatory 

Affairs of OMB has emphasized that these techniques may 

include “identifying changing future compliance costs that 

might result from technological innovation or anticipated 

behavioral changes.”
329

We are issuing these proposed regulations only on a 

reasoned determination that their benefits would justify 

their costs. In choosing among alternative regulatory 

approaches, we selected those approaches that maximize net 

benefits. Based on the analysis that follows, the 

Department believes that these proposed regulations are 

consistent with the principles in Executive Order 13563.

We also have determined that this regulatory action 

would not unduly interfere with State, local, and tribal 

governments in the exercise of their governmental 

functions.

In this regulatory impact analysis we discuss the need 

for regulatory action, the potential costs and benefits, 

net budget impacts, assumptions, limitations, and data 

sources, as well as regulatory alternatives we considered.

Under “Initial Regulatory Flexibility Act Analysis,” 

we consider the effect of the proposed regulations on small 

entities.

Need for Regulatory Action

The proposed regulations address several topics 

related to the administration of title IV, HEA student aid 

programs and benefits and options for borrowers. As stated 

in the preamble, the Department first implemented borrower 

defense regulations for the Direct Loan Program in the 
330

1995-1996 academic year to protect borrowers. The 

Department’s original intent was for this rule to be in 

place for the 1995-1996 academic year, and then to develop 

a more extensive rule for both the Direct and FFEL loan 

programs through negotiated rulemaking in the following 

year. 

However, based on the recommendation of non-Federal 

negotiators in the spring of 1995, the Secretary decided 

not to develop further regulations for the Direct Loan and 

FFEL programs. As a result, the regulations have not been 

updated in two decades to establish appropriate processes 

or provide other necessary information to allow borrowers 

to effectively utilize borrower defenses.

For instance, the current regulations require an 

analysis of State law in order to determine the validity of 

a borrower defense claim. This approach creates 

complexities in determining which State law applies and 

potential inequities, as students in one State may receive

different relief than students in another State, despite 

having common facts and claims.

For example, the landscape of higher education has 

changed significantly over the past 20 years. In 

particular, the role of distance education in the higher 

education sector has grown substantially. In the 1999-2000 
331

academic year, about eight percent of students were 

enrolled in at least one distance education course; by the 

2007-2008 academic year, that number had grown to 20

percent.

70 Recent IPEDS data indicate that in the fall of

2013, 26.4 percent of students at degree-granting, title IV 

participating institutions were enrolled in at least one 

distance education class.

71 Much of this growth occurred 

within, and coincided with, the growth of the proprietary 

higher education sector. In the fall of 1995, degreegranting, for-profit institutions enrolled approximately 

240,000 students. In the fall of 2014, degree-granting, 

for-profit schools enrolled over 1.5 million students.72

These changes to the higher education industry have allowed 

students to enroll in colleges based in other States and 

jurisdictions with relative ease. 

These changes have also had an impact on the 

Department’s ability to apply its borrower defense 

 

70 Learning at a Distance: Undergraduate Enrollment in Distance 

Education Courses and Degree Programs 

(http://nces.ed.gov/pubs2012/2012154.pdf).

71 2014 Digest of Education Statistics: Table 311.15: Number and 

percentage of students enrolled in degree-granting postsecondary 

institutions, by distance education participation, location of student, 

level of enrollment, and control and level of institution: fall 2012 

and fall 2013.

72 2015 Digest of Education Statistics: Table 303.10: Total fall 

enrollment in degree-granting postsecondary institutions, by attendance 

status, sex of student, and control of institution: Selected years, 

1947 through 2025

(http://nces.ed.gov/programs/digest/d14/tables/dt14_303.10.asp?current=

yes}.
332

regulations. The current borrower defense regulations do 

not identify which State’s law is considered the 

“applicable” State law on which the borrower’s claim can be 

based.73 Generally, the regulation was assumed to refer to 

the laws of the State in which the institution was located; 

we did not have much occasion to address differences in 

protection for borrowers in States that offer little 

protection from school misconduct or borrowers who reside 

in one State but are enrolled via distance education in a 

program based in another State. Some States have extended 

their rules to protect these students, while others have 

not.

As noted in the preamble, Corinthian, a publicly 

traded for-profit higher education company that enrolled 

over 70,000 students at more than 100 campuses nationwide, 

filed for bankruptcy in 2015 after being the subject of

multiple investigations and actions by Federal and State 

governments. While the Department is committed to ensuring

that students harmed by Corinthian’s misrepresentations 

receive the relief to which they are entitled under the 

current borrower defense and closed school discharge 

regulations, the Department also recognized that the 

 

73 In the few instances prior to 2015 in which claims have been 

recognized under current regulations, borrowers and the school were 

typically located in the same State.
333

existing rules made this process burdensome, both for 

borrowers and for the Department. As the Department began

to determine the best process for dealing with the fall-out 

of the Corinthian bankruptcy, it became apparent that under 

the current process, significant Department resources would 

be required to review individual State laws to determine 

the law that would be applicable to claims that might be 

received from many of these individual borrowers. In order 

to create and oversee a process to provide debt relief for 

these Corinthian students who applied for Federal student 

loan discharges based on claims against Corinthian, the 

Department appointed a Special Master in June of 2015.

As a result of this experience, the Department is 

proposing new regulations that would develop a Federal 

standard for borrower defense to help ensure that all 

Direct Loan borrowers have a process to obtain adequate 

loan relief for injury caused by the acts or omissions of 

the institutions they attended. The proposed regulations 

would also provide clarity to the process by which a 

borrower defense is asserted and resolved. To protect 

taxpayers and the Federal government, the Department also 

seeks to hold institutions responsible for their acts and 

omissions that give rise to borrower defenses. The 

proposed regulations would also limit required arbitration 
334

or internal institutional dispute resolution processes for 

borrower defense claims. 

Additionally, to enhance and clarify other existing 

protections for students, the proposed regulations would 

update the basis for obtaining a false certification 

discharge, clarify the processes for false certification 

and closed school discharges, require institutions to 

provide applications and explain the benefits and 

consequences of a closed school discharge, and establish a 

process for a closed school discharge without an 

application for students who do not re-enroll in a title 

IV-participating institution within three years of an 

institution’s closure. The proposed regulations would also 

codify the Department’s practice that a discharge based on 

school closure, false certification, unpaid refund, or 

defense to repayment will result in the elimination or 

recalculation of the subsidized usage period associated 

with the loan discharged.

The Department also proposes to amend the regulations 

governing the consolidation of Nursing Student Loans and 

Nurse Faculty Loans so that they align with the statutory 

requirements of section 428C(a)(4)(E) of the HEA; clarify 

rules regulating the capitalization of interest on 

defaulted FFEL Loans; require that proprietary schools with 
335

zero or negative loan repayment rates warn prospective and 

enrolled students of those repayment rate outcomes; require 

that a school disclose on its Web site and to prospective 

and enrolled students if it is required to provide 

financial protection to the Department; clarify the 

treatment of spousal income in the PAYE and REPAYE plans;

and make other changes that we do not expect to have a 

significant economic impact. 

We believe that our proposals in this NPRM represent 

our best efforts to engage all sectors of the postsecondary 

industry and develop regulations that are both effective 

and practical. 

Summary of Proposed Regulations

The table below briefly summarizes the major 

provisions of the proposed regulations.

Table 2: Summary of Proposed Regulations

Provision Reg 

Section

Description of Provision

Borrower Defense to Repayment

Applicability §685.206 Clarifies that existing 

regulations apply to loans 

first disbursed before July 

1, 2017. 

State Law §685.206 Clarifies that a borrower 

defense claim may be asserted 

if an institution violates 

applicable State law as it 
336

relates to the making of the 

loan or the provision of 

educational services.

Federal Standard

and Process

§685.222 Adds a new section addressing 

borrower defenses for loans 

first disbursed on or after 

July 1, 2017, and defines 

circumstances under which a 

borrower defense may be 

established. Establishes a 

process for asserting and 

determining a borrower 

defense claim for loans first 

disbursed before and after 

July 1, 2017.

Misrepresentation §668.71

§685.222

(d)(2)

Amends the definition of 

“misrepresentation” for what 

the Secretary may consider in 

determining whether schools 

engaged in misrepresentation 

for §668.71, adopts the 

definition for §685.222, and 

in §685.222 requires that a 

borrower must have reasonably

relied on the 

misrepresentation.

Remedial Action 

and Recovery from 

the Institution

§685.206

§685.222

(e)

Removes provision that the 

Secretary will not initiate 

action to recover after the 

end of the three-year record 

retention period.

Establishes that the 

Secretary may initiate an 

action to recover for the 

amount of relief resulting 

from an individually filed 

and determined borrower 

defense application.
337

§685.222

(h)(5)

§685.308

Indicates that the Secretary 

will recover the amount of 

relief resulting from a group 

process for borrower defenses 

with respect to loans made to 

attend an open school.

Revises to describe grounds 

on which an institution 

causes a loss for which the 

Secretary holds schools 

accountable, along with the 

procedures to establish and 

enforce that liability.

Administrative 

Forbearance

§685.205

(b)(6)

§682.211

Adds a mandatory 

administrative forbearance

during the period when the 

Secretary is determining the 

borrower’s eligibility for a 

borrower defense discharge.

Mirrors the Direct Loan 

mandatory administrative 

forbearance for FFEL program 

loans.

Limits on Dispute 

Resolution 

Procedures

§685.300

(b)(11), 

(d)-(i)

Adds to Direct Loan program 

participation agreement 

provisions relating to 

schools’ use of certain 

dispute resolution 

procedures. Under these 

proposed provisions, schools 

may not: (1) require students 

to pursue borrower defense 

complaints through an 

internal institutional 

process before the student 

presents the complaint to an 

accrediting agency or 

government agency; (2)
338

require arbitration of a 

potential borrower defense 

claim asserted through a 

class action lawsuit until a 

court has denied class 

certification or dismissed 

the class claim, and, if that 

ruling may be subject to 

appellate review on an 

interlocutory basis, the time 

to seek such review has 

elapsed or the review has 

been resolved, or (3) compel 

a student to enter into a 

pre-dispute agreement to 

arbitrate a borrower defense 

claim, or to rely in any way 

on a pre-dispute arbitration 

agreement with respect to any 

aspect of a borrower defense 

claim.

Requires institutions to 

include the notices and 

provisions in §685.300(e)(3) 

in any agreements entered 

into after effective date of 

this regulation with a 

student recipient of a Direct 

Loan for attendance at the 

school, or, with respect to a 

Parent PLUS Loan, a student 

for whom the PLUS loan was 

obtained, including any 

agreement regarding 

arbitration.

Requires institutions to

notify the Secretary of the 

initial filing of the claim, 

whether in court or in 

arbitration, and provide 
339

copies of the complaint and 

any counterclaim, any predispute arbitration agreement 

filed with the arbitrator or 

arbitration administrator, 

any dispositive motion filed 

by a party to the suit, and 

the ruling on any dispositive 

motion and the judgment 

issued by the court. 

For agreements executed 

before the effective date of 

the proposed regulation, 

requires institutions to 

comply with the regulations 

and either amend the 

agreements or notify students 

that the institution would 

not attempt to exercise those 

agreements in a manner 

proscribed by the proposed 

regulations. Notification 

would occur no later than 

exit counseling, or in the 

case of previously enrolled 

students who did not receive 

the updated exit counseling 

and who sue or file for 

arbitration, the date on 

which the institution files 

its initial response or 

answer to a complaint in a 

lawsuit or demand for 

arbitration made by a student 

who was not already provided 

with notice or amendment.

Closed School Discharge

Provide §668.14( Requires a school to provide 

to all enrolled students, 
340

Application b)(32) after the Department 

initiates any action to 

terminate the school’s 

participation, a closed 

school discharge application 

and a written disclosure of 

the benefits and consequences 

of a closed school discharge 

as an alternative to a teachout.

Departmental 

Review of Guaranty

Agency Denials

§682.402

(d)(6)(i

i)(F)

Requires guaranty agency that 

denies a closed school 

discharge request to inform 

borrower of opportunity for 

review by the Secretary.

Discharge without 

Application

§674.33(

g)(3)(ii

i); 

§682.402

(d)(8)(i

ii); 

§685.214

(c)(2)

Authorizes the Department or

a guaranty agency acting with 

the Department’s permission 

to grant a closed school 

discharge without borrower 

application based on evidence 

in the Department’s or 

guaranty agency’s possession 

that the borrower did not 

subsequently re-enroll in a 

title IV institution within 

three years after the school 

closed.

False Certification Discharge

Basis for 

Discharge

§685.215 Eliminates references to 

“ability-to-benefit” and 

establishes as grounds for a 

false certification discharge

the certification of 

eligibility of a student who 

is not a high school graduate

or the improper certification

of a borrower’s satisfactory 
341

academic progress.

Borrower can also qualify for 

false certification discharge 

if the borrower failed to 

meet applicable State 

requirements for employment 

due to physical or mental 

condition, age, criminal 

record, or other reason 

accepted by the Secretary 

that would prevent the 

borrower from obtaining 

employment in the field for 

which the training program 

supported by the loan was 

intended. 

Process §685.215

(d)

Updates procedures and 

describes evidence the 

Department uses to determine 

eligibility for a false 

certification discharge. 

Also requires the Department 

to: explain to the borrower 

the reasons for a denial and

the evidence the 

determination was based on;

provide the borrower with an 

opportunity to submit 

additional evidence; and 

notify the borrower if the 

determination changes based 

on the additional evidence 

submitted.

Other Provisions

Disclosures and 

Warnings

§668.41(

h) and 

(i)

Requires warning to enrolled 

and prospective students by a 

proprietary institution that 

does not qualify for a low 
342

borrowing exemption if its

loan repayment rate is equal 

to or below zero percent. 

Requires disclosure by an

institution from any sector 

that is required to provide 

financial protection to the 

Secretary such as an 

irrevocable letter of credit 

or cash under §668.175(d) or 

(f), or to establish a setaside under §668.175(h).

Specifies manner in which 

such disclosures must be 

made. 

Interest 

Capitalization 

§682.202

(b)(1); 

§682.410

(b)(4); 

§682.405

Clarifies that interest 

capitalization when a 

guaranty agency sells a 

rehabilitated loan is not 

permitted. Also clarifies

that when a guaranty agency 

holds a defaulted FFEL Loan 

and the guaranty agency has 

suspended collection activity 

to give the borrower time to 

submit a closed school or 

false certification discharge 

application, capitalization 

is not permitted if 

collection on the loan

resumes because the borrower 

does not return the 

appropriate form within the 

allotted timeframe.

150 Percent Direct 

Subsidized Loan 

Limit

§682.202 Codifies Department’s current 

practice that a discharge 

based on school closure, 

false certification, unpaid 

refund, or defense to 

repayment will lead to the 
343

elimination (for full 

discharge) or recalculation 

(for partial discharge) of 

the subsidized usage period 

that is associated with the 

loan or loan discharged. If 

the discharge results in a 

remaining eligibility period 

greater than zero, the 

borrower is no longer 

responsible for interest that 

accrues on a Direct 

Subsidized Loan or portion of 

a Direct Consolidation Loan 

that repaid a Direct 

Subsidized Loan, unless the 

borrower again exceeds the 

150 percent limit with 

additional borrowing.

Electronic Death 

Certificate

§674.61(

a); 

§682.402

(b)(2); 

§685.212

(a); 

§686.42(

a)

Allows death discharges to be 

based on an accurate and 

complete original or 

certified copy of the death 

certificate that is scanned 

and submitted electronically

or through verification of 

the death through an 

authoritative Federal or 

State electronic database 

approved by the Secretary.

Debt Compromise 

Authority

34 CFR 

30.70

Reflects increased debt 

compromise authority to 

$100,000.

Clarifies that generally 

applicable limit does not 

apply to claims arising under 

FFEL, Direct Loans, or 

Perkins Loan programs and 

requires that the Department 
344

seek DOJ review for 

resolution of such claims 

over $1,000,000.

PAYE and REPAYE 

Clarifications

§685.209

(a) and 

(c)

For REPAYE, removes language 

regarding, and crossreferences to, partial 

financial hardship. 

For REPAYE, makes it clear 

that no adjustment is made to 

a borrower’s monthly payment 

for a spouse’s eligible loan 

debt if the spouse’s income 

is excluded from the 

calculation of the borrower’s 

monthly payment.

For PAYE and REPAYE, makes it 

clear that the inclusion of 

FFEL Loans in the definition 

of “eligible loans” is to 

take them into consideration 

for certain terms and 

conditions of the PAYE and 

REPAYE plans, but does not 

allow FFEL program loans to 

be repaid under these plans. 

Nurse Faculty 

Loan, Federal 

Perkins, or Health 

Professions 

Student Loan

Consolidation

§685.220 Provides that nurse faculty 

loans made under part E of 

title VIII of the Public 

Health Service Act may be 

consolidated into a Direct 

Consolidation Loan. Reflects 

updates to statutory 

language.

Revises §685.220(d)(1)(i) to 

allow a borrower to obtain a 

Direct Consolidation Loan if 

the borrower consolidates at 

least one eligible loan under 
345

§685.222(b). This reflects 

the Department’s longstanding policy that

generally Direct Program 

Loans should be given the 

same treatment for parallel 

aspects of FFEL Loans, unless 

otherwise provided for in the 

HEA or the Department’s 

regulations.

Discussion of Costs and Benefits

The primary potential benefits of the proposed 

regulations are: (1) an updated and clarified process and 

a Federal standard to improve the borrower defense process 

and usage of the borrower defense process and to increase 

protections for students; (2) increased financial 

protections for taxpayers and the Federal government; (3) 

additional information to help students, prospective 

students, and their families make educated decisions based 

on information about an institution’s financial soundness 

and its borrowers’ loan repayment outcomes; (4) improved

conduct of schools by holding individual institutions 

accountable and thereby deterring misconduct by other 

schools; (5) improved awareness and usage, where 

appropriate, of closed school and false certification 

discharges; and (6) technical changes to improve the 

administration of the title IV, HEA programs. 
346

We have considered and determined the primary costs 

and benefits of the proposed regulations for the following 

groups or entities that we expect to be impacted by the 

proposed regulations:

 Students and borrowers

 Institutions

 Guaranty agencies and loan servicers

 Federal, State, and local government

Borrower Defense, Closed School Discharges, and False 

Certification Discharges

Students and Borrowers

Borrowers would be the primary beneficiary of the 

proposed regulations. The proposed regulations would allow 

borrowers to navigate the borrower defense process more 

efficiently and effectively. A simplified process may 

encourage borrowers who may have been unaware of the 

process, or intimidated by the complexity of the process in 

the past, to file a claim. 

Furthermore, these proposed changes could reduce the 

number of borrowers who are struggling to meet their 

student loan obligations. During the public comment 

periods of the negotiated rulemaking sessions, many public 

commenters who were borrowers mentioned that they felt that 
347

they had been defrauded by their institutions of higher 

education and were unable to pay their student loans or 

obtain debt relief under the current regulations. Future 

borrowers are less likely to face these misrepresentations, 

since the financial consequences to schools would be dire.

Providing an automatic forbearance with an option for 

the borrower to decline the temporary relief and continue 

making payments would reduce the potential burden on 

borrowers pursuing borrower defenses. These borrowers 

would be able to focus on supplying the information needed 

to process their borrower defense claims without the 

pressure of continuing to make payments on loans for which 

they are currently seeking relief. When claims are 

successful, there will be a transfer between the Federal 

government and affected student borrowers as balances are 

forgiven and some past payments are returned. In the 

scenarios described in the Net Budget Impacts section of 

this analysis, those transfers range from $182 million to 

$5.8 billion annually.

Borrowers who ultimately have their loans discharged 

will be relieved of debts they may not have been able to 

repay, and that debt relief can ultimately allow them to

become bigger participants in the economy, possibly buying 

a home, saving for retirement, or paying for daycare. They 
348

also will be able to return into the higher education 

marketplace and pursue credentials they need for career 

advancement. To the extent borrowers have subsidized 

loans, the elimination or recalculation of the borrowers’ 

subsidized usage period could relieve them of their 

responsibility for accrued interest and make them eligible 

for additional subsidized loans, which could make returning 

to higher education a more acceptable option.

The proposed regulations would also give borrowers 

more information with which they can make informed 

decisions about the institutions they choose to attend. An 

institution would be required to disclose the reasons that 

it was required to obtain a letter of credit. Recent 

events involving closure of several large proprietary

institutions have shown the need for lawmakers, regulatory 

bodies, State authorizers, taxpayers, and students to be 

more broadly aware of circumstances that could affect the 

continued existence of an institution. The disclosure of 

institutions’ status as being required to provide financial 

protection would allow borrowers to receive early warning 

signs that an institution’s financial or accreditation 

status may be at risk, and therefore borrowers may be able 

to withdraw or transfer to an institution in better 
349

standing in lieu of continuing to work towards earning 

credentials that may have limited value.

Proprietary institutions would also be required to

provide a warning to prospective and enrolled students if 

their repayment rate is equal to or below zero percent. To 

estimate the effect of the repayment rate warning on 

institutions, the Department analyzed College Scorecard 

data and found that 493 of 1,174 proprietary institutions 

with repayment rates in the data had rates less than or 

equal to 50 percent, roughly equivalent to a repayment rate 

of zero percent or below, which would trigger the warning

requirement under the proposed regulations. This analysis 

does not take into account the low borrowing exemption, and 

does not include graduate students.

Institutions

Institutions would bear many of the costs of the 

proposed regulations, which fall into three categories: 

paperwork costs associated with compliance with the 

regulations; other compliance costs that may be incurred as

institutions adapt their business practices and training to 

ensure compliance with the regulations; and costs 

associated with obtaining letters of credit or suitable 

equivalents if required by the institution’s performance 

under a variety of triggers. Additionally, there may be a 
350

potentially significant amount of funds transferred between 

institutions and the Federal government as reimbursement 

for successful claims. Some institutions may close some or 

all of their programs if their activities generate large 

numbers of borrower defense claims.

A key consideration in evaluating the effect on 

institutions is the distribution of the impact. While all 

institutions participating in title IV loan programs are 

subject to the possibility of borrower defense, closed 

school, and false certification claims and the reporting 

requirements in the proposed regulations, the Department 

expects that fewer institutions will engage in conduct that 

generates borrower defense claims. Eventually, the 

proposed regulations can be expected to reduce the number 

of schools that would face the most significant costs to 

come into compliance, transfers to reimburse the government 

for successful claims, costs to obtain required letters of 

credit, and disclosure of borrower defense claims against 

the schools. In the scenarios described in the Net Budget 

Impacts section of this analysis, the annual transfers from 

institutions to students, via the Federal government, as 

reimbursement for successful claims ranges from $55 million 

to $3.8 billion. On the other hand, it is possible that 

high-quality, compliant institutions, especially in the 
351

for-profit sector, will see benefits if the overall 

reputation of the sector improves as a result of (1) more 

trust that enforcement against bad actors will be 

effective, and (2) the removal of bad schools from the 

higher education marketplace, freeing up market share for 

the remaining schools. 

The accountability framework in the proposed 

regulations requiring institutions to provide financial 

protection in response to various triggers would generate 

costs for institutions. Some of the triggering provisions 

would affect institutions differently depending upon their 

type and control, as, for example, only publicly traded 

institutions are subject to delisting or SEC suspension of 

trading, only proprietary institutions are subject to the 

90/10 rule, and public institutions are not subject to the 

financial protection requirements. To the extent data were 

available, the Department evaluated the financial 

protection triggers to analyze the expected impact on 

institutions. Several of the triggers are based on 

existing performance measures and are aimed at identifying 

institutions that may face sanctions and experience 

difficulty meeting their financial obligations. The 

triggers and their potential consequences are discussed in 

Table 3.
352

Table 3: Automatic Triggers

Trigger Description Impact

Automatic Triggers (institution found to be not financially 

responsible under §668.171 and must qualify under an 

alternative standard)

State or 

Federal 

agency 

actions

If currently or in 

three most recently 

completed award years 

an institution has to 

repay a debt or 

liability arising from 

an investigation by a 

State, Federal, or 

other oversight 

entity, or settles or 

resolves a suit 

brought by one of 

those entities related 

to the making of a 

Federal loan or the 

provision of 

educational services, 

or has been sued by a 

government agency for 

such claims, unless 

that suit has since 

been dismissed. 

Material if amount 

exceeds the audit 

threshold in 2 CFR 

part 200, currently 

$750,000, or 10 

percent of current 

assets.

For judgments entered 

against the 

institution in most 

Since 2010, at least 

25 institutions have 

been investigated or 

reached settlements 

with State AGs, with 

some being involved in 

actions by multiple 

States. Federal 

agencies, including 

the Department, DOJ, 

FTC, CFPB, and the SEC 

have been involved in 

actions against at 

least 20 institutions, 

with multiple actions 

against some schools. 

Amount of financial 

protection calculated 

as 10 percent or more, 

as determined by the 

Secretary, of the 

amount of Direct Loans 

received by the 

institution in the 

most recently 

completed fiscal year. 
353

recent fiscal year in 

suit by government 

agency, if amount 

exceeds thresholds 

above. 

For suits by State, 

Federal, or other 

oversight entities 

unrelated to Federal 

loans or provision of 

educational services, 

if the potential 

damages exceed 10 

percent of current 

assets.

For pending qui tam 

suits or suits by 

private parties 

related to borrower 

defense-type claims if 

the suit has survived 

a motion for summary 

judgment and the suit 

seeks recovery of 10 

percent of current 

assets or more.

Repayments 

to the 

Secretary

Currently or at any 

time in the three most 

recently completed 

award years, the 

institution was 

required to repay the 

Secretary for any 

losses from borrower 

defense claims that 

exceeded the lesser of 

the audit threshold 

amount in 2 CFR part 

200 (currently 

Amount of required 

financial protection

calculated as the 

greatest annual loss 

incurred in the last 

three completed award 

years plus the portion 

of outstanding claims 

represented by the 

ratio of successful 

borrower claims to 

total claims over the 

three most recently 
354

$750,000) or 10 

percent of current 

assets.

completed award years.

Accrediting 

Agency 

Actions

If currently or at any 

time in the three most 

recently completed 

award years, the 

institution’s primary 

accrediting agency 

required the 

institution to submit 

a teach-out plan for 

itself or any 

additional branches or 

locations or placed 

the institution on 

probation, issued a 

show-cause order, or 

placed the institution 

in a similar

accreditation status 

for failing to meet 

one or more of the 

agency’s standards, 

and the accrediting 

agency does not notify 

the Secretary within 

six months that the 

institution has come 

into compliance.

In the past three

fiscal years, 52 nonpublic institutions 

have lost eligibility 

based on accreditation 

issues and 54 were put 

on heightened cash 

monitoring level two.

Loan 

Agreements 

and 

Obligations

If an institution 

discloses in a note in

its most recently 

audited financial 

statement that it 

violated a provision 

or requirement in a 

loan agreement with 

its largest secured 

creditor or failed to 
355

make a payment for 

more than 120 days to 

its largest secured 

creditor. Also, the 

occurrence of a 

monetary or 

nonmonetary default or 

delinquency event, as 

defined under the 

terms of a security or 

loan agreement between 

the institution and 

the creditor with the 

largest secured 

extension of credit to 

the institution, or 

the occurrence of any 

other event as 

provided under such an 

agreement that 

triggers or provides a 

recourse by the 

creditor for an 

increase in 

collateral, changes in 

contractual 

obligations, an 

increase in interest 

rates or payments, or 

imposes some sanction, 

penalty, or fee upon 

the institution.

Non-Title IV 

Revenue

If the institution 

fails the 90/10 

revenue test in the 

most recently 

completed fiscal year. 

Applies to proprietary 

institutions only.

In the most recent 

90/10 report, 14 

institutions received 

90 percent or more of 

their revenues from 

title IV funds. The 

total title IV funding 

for those institutions 
356

in award year (AY) 

2013-14 was $57 

million.

Publicly 

Traded 

Institutions

If the institution’s 

stock is involuntarily 

delisted from the 

exchange on which it 

is traded, the SEC 

warns the institution 

it will suspend 

trading on the 

institution’s stock, 

or the institution 

fails to file a 

required annual or 

quarterly report with 

the SEC on time, or 

the institution 

disclosed or was 

required to disclose 

in a report filed with 

the SEC a judicial or 

administrative 

proceeding not covered 

under the triggers 

listed above.

Gainful 

Employment 

For institutions where 

over 50 percent of 

students who receive 

title IV aid are 

enrolled in GE 

programs, if more than 

50 percent of those 

enrolled in GE 

programs are in 

programs that failed 

or are in the zone

under the D/E rates 

measure.

The Department found 

that of 3,958 

institutions that 

reported GE programs 

for 2013-14, 1,059 

institutions had a D/E 

rate in our 2011 GE 

Informational Rates 

and over 50 percent of 

their enrollment in GE 

programs. Of these, 

107 non-public

institutions had more 

than 50 percent of 
357

their GE enrollment in 

zone or failing 

programs. Title IV 

aid received by these 

institutions in 

AY2014-15 totaled 

$1.02 billion. The 

Department will 

continue to monitor 

this trigger as more 

recent D/E rates 

become available.

Withdrawal 

of Owner’s 

Equity

For institutions with 

a composite score 

under 1.5, any 

withdrawal of owner’s 

equity from the 

institution by any 

means, including by 

declaring a dividend.

Cohort 

Default 

Rates

Institution’s two most 

recent cohort default 

rates are 30 percent 

or greater. Does not 

apply if institution 

files a challenge, 

request for 

adjustment, or appeal 

with respect to its 

CDR, and that action 

results in reducing 

the CDR below 30 

percent or the 

institution not losing 

eligibility or not 

being placed on 

provisional 

certification.

From the most recently 

released official CDR 

rates, for AY2012-13 

and AY2011-12, 37 of 

3,081 non-public

institutions that had 

CDR rates in both 

years were over 30 

percent in both years. 

Title IV aid received 

by these institutions 

in AY2014-15 totaled 

$27.8 million.
358

Discretionary Triggers

Significant 

Fluctuation 

in Direct 

Loan or Pell 

Grant 

Volumes 

There are significant 

fluctuations in Direct 

Loan or Pell Grant

funds, or a 

combination of those 

funds, received by the 

institution in 

consecutive award 

years that cannot be 

explained by changes 

in the institutions’ 

programs. No specific 

threshold is 

established.

The Department looked 

at fluctuations in 

Direct Loan amounts 

and found that 991 of 

3,590 non-public

institutions had an 

absolute change in 

Direct Loan volume of 

25 percent or more 

between the 2013-14 

and 2014-15 award 

years.

High Annual 

Dropout 

Rates

High dropout rates as

calculated by the 

Secretary. No 

specific threshold is 

established.

The Department 

analyzed College 

Scorecard data to 

develop a withdrawal 

rate within six years. 

Of 928 proprietary 

institutions with 

data, 482 had rates 

from 0 to 20 percent, 

415 from 20 to 40 

percent, 30 from 40 to 

60 percent, and 1 from 

60 to 80 percent. Of 

1,058 private not-forprofit institutions 

with data, 679 had 

rates from 0 to 20 per 

cent, 328 from 20 to 

40 percent, 51 from 40 

to 60 percent, and 

none above 60 percent. 

Of 1,476 public 

institutions with 

data, 857 had rates 

from 0 to 20 per cent, 
359

587 from 20 to 40 

percent, 32 from 40 to 

60 percent, and none 

above 60 percent. 

State 

Licensing 

Agency

Institution is cited 

by State licensing or 

authorizing agency for 

failing State or 

agency requirements.

Financial 

Stress Test

The institution fails 

a financial stress 

test used to evaluate 

whether the 

institution has 

sufficient resources 

to absorb losses that 

may be incurred as a 

result of adverse 

conditions and 

continue to meet its 

obligations to 

students and to the 

Secretary.

Credit 

Rating

Institution or 

corporate parent has 

non-investment grade 

bond or credit rating.

According to Moody’s 

Investors Services, it 

rates over 500 

universities 

representing the 

majority of debt in 

the sector. This 

includes over 230 

four-year public 

institutions, which 

are exempt from the 

financial protection

triggers, and almost 

275 private colleges 

and universities. Of 

these, only 12 were 
360

below the Baa3 rating 

for investment grade 

as of December 2014, 

but the report did 

note that downgrades 

were more common than 

upgrades.74

SEC 8-K 

Reporting

If an institution 

reports an adverse

event to the SEC on a 

Form 8-K 

At least eight

publicly traded 

institutions have 

reported events in 

Form 8-K filings, with 

most reporting 

multiple events in the 

past five years.

In addition to any resources institutions would devote 

to training or changes in business practices to improve 

compliance with the proposed regulations, institutions 

would incur costs associated with the reporting and 

disclosure requirements of the proposed regulations. This 

additional workload is discussed in more detail under 

Paperwork Reduction Act of 1995. In total, the proposed 

regulations are estimated to increase burden on 

institutions participating in the title IV, HEA programs by 

 

74 See Moody’s Investors Service, The Financial & Strategic Outlook for 

Private Colleges, January 5, 2015, available at www.cic.edu/News-andPublications/MultimediaLibrary/CICConferencePresentations/2015%20Presidents%20Institute/201501

05-

The%20Financial%20and%20Strategic%20Outlook%20for%20Private%20Colleges%

205.pdf.
361

384,293 hours. The monetized cost of this burden on 

institutions, using wage data developed using BLS data 

available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is 

$14,045,915. This cost was based on an hourly rate of 

$36.55. 

Guaranty Agencies and Loan Servicers

Several provisions may impose a cost on guaranty 

agencies or lenders, particularly the limits on interest 

capitalization. Loan servicers may have to update their 

process to accept electronic death certificates, but 

increased use of electronic documents should be more

efficient over the long term. As indicated in the 

Paperwork Reduction Act of 1995 section of this preamble, 

the proposed regulations are estimated to increase burden 

on guaranty agencies and loan servicers by 7,622 hours 

related to the mandatory forbearance for FFEL borrowers 

considering consolidation for a borrower defense claim and 

reviews of denied closed school claims. The monetized cost 

of this burden on guaranty agencies and loan servicers, 

using wage data developed using BLS data available at 

www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is $278,584. This 

cost was based on an hourly rate of $36.55.

Federal, State, and Local Governments
362

In addition to the costs detailed in the Net Budget 

Impacts section of this analysis, the proposed regulations 

would affect the Federal government’s administration of the 

title IV, HEA programs. The borrower defense process in 

the proposed regulations would provide a framework for 

handling claims in the event of significant institutional 

wrongdoing. The Department may incur some administrative 

costs or shifting of resources from other activities if the 

number of applications increases significantly and a large 

number of claims require hearings. Additionally, to the 

extent borrower defense claims are not reimbursed by 

institutions, Federal government resources that could have 

been used for other purposes will be transferred to 

affected borrowers. Taxpayers will bear the burden of these 

unreimbursed claims. In the scenarios presented in the Net 

Budget Impacts section of this analysis, annualized 

unreimbursed claims range from $64 million to $4.1 billion. 

The accountability framework and financial protection

triggers would provide some protection for taxpayers as 

well as potential direction for the Department and other 

Federal and State investigatory agencies to focus their 

enforcement efforts. The financial protection triggers may 

potentially assist the Department as it seeks to identify, 

and take action regarding, material actions and events that 
363

are likely to have an adverse impact on the financial 

condition or operations of an institution. In addition to 

the current process where, for the most part, the 

Department determines annually whether an institution is 

financially responsible based on its audited financial 

statements, under these proposed regulations the Department 

may determine at the time a material action or event occurs 

that the institution is not financially responsible.

Other Provisions

The technical corrections and additional changes in 

the proposed regulations should benefit student borrowers 

and the Federal government’s administration of the title 

IV, HEA programs. Updates to the acceptable forms of 

certification for a death discharge would be more 

convenient for borrowers’ families or estates and the 

Department. The provision for consolidation of Nurse 

Faculty Loans reflects current practice and gives those 

borrowers a way to combine the servicing of all their 

loans. Many of these technical corrections and changes 

involve relationships between the student borrowers and the 

Federal government, such as the clarification in the REPAYE 

treatment of spousal income and debt, and they are not 

expected to significantly impact institutions.

Net Budget Impacts
364

The proposed regulations are estimated to have a net 

budget impact in costs over the 2017-2026 loan cohorts 

ranging between $1.997 billion in the lowest impact 

scenario to $42.698 billion in the highest impact scenario. 

A cohort reflects all loans originated in a given fiscal 

year. Consistent with the requirements of the Credit 

Reform Act of 1990, budget cost estimates for the student 

loan programs reflect the estimated net present value of 

all future non-administrative Federal costs associated with 

a cohort of loans.

The provisions most responsible for the costs of the 

proposed regulations are those related to the discharge of 

borrowers’ loans, especially the changes to borrower 

defense and closed school discharges. When an institution 

engages in behavior that could result in successful 

borrower defense claims against it, there are several 

possible methods borrowers could pursue to obtain relief

under the proposed regulations. If the level of misconduct 

and resulting investigations and demands for financial 

protection lead to the closure of the institution, 

borrowers that fall within the applicable timeframes may 

choose a closed school discharge. If applicable, borrowers 

could also consider a false certification discharge based 

on the institution falsely certifying the borrower’s high 
365

school diploma or satisfactory academic progress. The cost 

of these two options is discussed in the Closed School and 

False Certification Discharges discussion of this Net 

Budget Impacts section. If the institution does not close, 

the borrower cannot or does not pursue closed school or 

false certification discharges, or the Secretary determines 

the borrower’s claim is better suited to a borrower defense 

group process, the borrower may pursue a borrower defense 

claim. 

Borrower Defense Discharges

The proposed regulations would establish a Federal 

standard for borrower defense claims related to loans first 

disbursed on or after July 1, 2017, as well as describe the

process for the assertion and resolution of all borrower 

defense claims--both those made for Direct Loans first 

disbursed prior to July 1, 2017, and for those made under 

the proposed regulations after that date. As indicated in 

this preamble, while regulations governing borrower defense 

claims have existed since 1995, those regulations have 

rarely been used. Therefore, the Department has used the 

limited data it has available on borrower defense claims, 

especially information about the results of the collapse of 

Corinthian, projected loan volumes, Departmental expertise, 

the discussions at negotiated rulemaking, and information 
366

about past investigations into the type of institutional 

acts or omissions that would give rise to borrower defense 

claims to develop scenarios that the Department believes 

will capture the range of net budget impacts associated 

with the borrower defense proposed regulations. The 

Department will continue to refine these estimates,

welcomes comments about the assumptions used in developing 

them, and will consider those comments as the final 

regulations are developed.

While there are many factors and details that will 

determine the cost of the proposed regulations, ultimately 

a borrower defense claim entered into the student loan 

model (SLM) by risk group, loan type, and cohort will 

result in a reduced stream of cash flows compared to what 

the Department would have expected from a particular 

cohort, risk group, and loan type. The net present value 

of the difference in those cash flow streams generates the 

expected cost of the proposed regulations. In order to 

generate an expected level of claims for processing in the 

SLM, the Department used President’s Budget 2017 (PB2017) 

loan volume estimates to identify the maximum potential 

exposure to borrower defense claims for each cohort, loan 

type, and sector. While all of the PB2017 projected Direct 

Loan volume for the 2017 to 2026 cohorts of over $1 
367

trillion is subject to the proposed regulations, the 

Department expects only a fraction of that amount to be 

affected by institutional behavior that results in a 

borrower defense claim (labeled as “Misrep Scenario” in 

Table 4). Additionally, while FFEL, Perkins, and certain 

other Federal student loan borrowers are able to claim

relief under the Direct Loan process by consolidating into 

a Direct Loan, borrowers may choose not to consolidate 

because they may lose some benefits in doing so or because 

they have determined that their chances of success under 

the borrower defense process may not warrant the step of 

consolidation. As a result, the percentage of that volume 

that consolidates will also affect the estimated net budget 

impact. The budget impact would be further affected by the 

percentage of potentially eligible borrowers who 

successfully pursue a claim (labeled as “Borr Claim Pct” in 

Table 4) and the level of recoveries the Department is able 

to receive from institutions subject to borrower defense 

claims (labeled as “Recovery Pct” in Table 4). The 

scenarios presented in this budget estimate involve 

assumptions about these factors as shown in Table 4. The 

Department also faced a challenge in establishing the 

appropriate baseline against which to compare the costs of 

the regulation. Due to the limited history of borrower 
368

defense claims, existing budget estimates contain no data 

from which to devise a baseline. While many borrowers who 

will pursue a claim through the new process would have been 

able to do so under the existing standard, the Department 

is attributing their claims to the proposed regulations. 

That is, while the costs we are describing here are the 

actual projected costs of borrower defense discharges, not 

all of them are attributable to the new standard proposed 

in this regulation. Another factor that could mitigate the 

costs to the Federal government of the proposed regulations

(and change the nature of the costs experienced by affected 

institutions) is that elimination or modification of the 

practices giving rise to borrower defense claims could 

improve outcomes for student borrowers. In the scenarios, 

we assume that 4-year institutions may be able to implement 

training or practice changes faster than some smaller 2-

year institutions, resulting in a lower upper end of the 

range for the Misrep Scenario 2. To avoid underestimating

the potential cost of the proposed regulations, the 

Department did not explicitly adjust its estimates for this 

factor. 

Table 4: Assumptions for Budget Scenarios

Sector Misrep 

Scenario 

1 (% of 

Misrep 

Scenari

o 2 (% 

Borr 

Claim 

Pct A

Borr 

Claim 

Pct B

Recovery 

Pct 1

(% of 

Recove

ry Pct 

2
369

volume) of 

volume)

(% of 

volum

e)

(% of 

volume

)

claim) (% of 

claim)

2yr or 

less 

public

0.5% 2% 10% 75% 30% 65%

2yr or 

less 

privat

e notforprofit

0.5% 2% 10% 75% 30% 65%

2yr or 

less 

privat

e for 

profit

5% 25% 10% 75% 30% 65%

4yr 

public

0.5% 1% 10% 75% 30% 65%

4yr 

privat

e notforprofit

0.5% 1% 10% 75% 30% 65%

4yr 

privat

e for 

profit

5% 20% 10% 75% 30% 65%

The combined application of these assumptions created 

the eight (= two Misrep Scenarios × two Borr Claim Pct × 

two Recovery Pct) scenarios evaluated in the SLM as an 

increase in the claims rate. Scenario 1A2, the lowest 

Federal budget impact scenario, assumes that institutional 

misconduct is not widespread, but instead limited to actors 

representing a small share of loan volume. It also assumes 

that the increased information about the availability of 
370

borrower defense relief does not lead to a significant 

increase in the percentage of borrowers making a claim, and 

that the Department recovers a substantial portion of 

successful claims from institutions. As shown in Table 4, 

the other end of the range is represented by Scenario 2B1,

in which a high percentage of borrowers from institutions 

representing a significant percent of loan volume make 

successful claims and the Department is unable to recover a 

significant amount from institutions. The Department also 

estimated the impact if the Department received no 

recoveries from institutions for each combination of 

misrepresentation and borrower claim percentage scenario, 

the results of which are discussed after Table 5. 

The Department does not specify how many institutions 

are represented in each scenario, as the scenario could 

represent a substantial number of institutions engaging in 

acts giving rise to borrower defense claims or could 

represent a small number of institutions with significant 

loan volume subject to a large number of claims. According 

to Federal Student Aid data center loan volume reports,

75

the five largest proprietary institutions in loan volume

received 26 percent of Direct Loans disbursed in the 

 

7575 Federal Student Aid, Student Aid Data: Title IV Program Volume by 

School, available at https://studentaid.ed.gov/sa/about/datacenter/student/title-iv.
371

proprietary sector in award year 2014-15 and the 50 largest

represent 69 percent. The Department has not assigned 

specific probabilities to any of the scenarios and the 

results in Table 5 and the likelihood of any one scenario 

will depend on how institutions conduct their activities to 

ensure compliance, how much borrowers’ awareness of their 

options increases, and the extent of the deterrent effect 

that the Department’s and other agencies’ efforts to

uncover and sanction misconduct through investigations and 

enforcement may have on the industry. 

 Table 5: Budget Estimates for Borrower Defense 

Scenarios

Scenario Estimated 

Costs for 

Cohorts 

2017-2026 

($mns)

Annualized 

Cost to 

Federal 

Gov’t (3% 

discounting)

Annualized 

Cost to 

Federal 

Gov’t (7% 

discounting)

1A1: $1,297 $128 $127

1A2: $646 $64 $63

1B1: $10,174 $1,007 $993

1B2: $5,072 $502 $446
372

2A1: $5,498 $544 $537

2A2: $2,752 $272 $269

2B1: $41,347 $4,092 $4,039

2B2: $20,674 $2,046 $2,020

The transfers among the Federal government and 

affected borrowers and institutions associated with each 

scenario above are included in Table 6, with the difference 

in amounts transferred to borrowers and received from 

institutions generating the budget impact in Table 5. In 

the absence of any recovery from institutions, taxpayers 

would bear the full cost of successful claims from affected 

borrowers. At a 3 percent discount rate, the annualized 

costs with no recovery are approximately $184 million for 

Misrep_Scenario_1 and Borr Claim_Pct_A, $1.44 billion for 

Misrep_Scenario_1 and Borr Claim_Pct_B, $778 million for 

Misrep_Scenario_2 and Borr Claim_Pct_A, and $5.85 billion 

for Misrep_Scenario_2 and Borr Claim_Pct_B. At a 7 percent 

discount rate, the annualized costs with no recovery are 

approximately $180 million for Misrep_Scenario_1 and Borr 

Claim_Pct_A, $1.42 billion for Misrep_Scenario_1 and Borr 

Claim_Pct_B, $768 million for Misrep_Scenario_2 and Borr 
373

Claim_Pct_A, and $5.77 billion for Misrep_Scenario_2 and 

Borr Claim_Pct_B. This potential increase in costs 

demonstrates the significant effect that recoveries from 

institutions have on the net budget impact of the borrower 

defense provisions.

Closed School Discharge and False Certification 

Discharges

In addition to the provisions previously discussed, 

the proposed regulations also would make changes to the 

closed school discharge process, which are estimated to 

cost $1.351 billion for cohorts 2017-2026. The proposed 

regulations include requirements to inform students of the 

consequences, benefits, requirements, and procedures of the 

closed school discharge option, including providing 

students with an application form, and establishes a 

Secretary-led discharge process for borrowers who qualify 

but do not apply and, according to the Department’s 

information, did not subsequently re-enroll in any title 

IV-eligible institution within three years from the date 

the school closed. The increased information about and 

automatic application of the closed school discharge option 

and possible increase in school closures related to the 

institutional accountability provisions in the proposed 

regulations are likely to increase closed school claims. 
374

Chart 1 provides the history of closed schools, which 

totals 12,040 schools through April 2016.

Chart 1: History of School Closures

In order to estimate the effect of the proposed changes to 

the discharge process that would grant relief without an

application after a three-year period, the Department 

looked at all Direct Loan borrowers at schools that closed 

from 2008-2011 to see what percentage of them had not 

received a closed school discharge and had no record of 

title-IV aided enrollment in the three years following 

their school’s closure. Of 2,287 borrowers in the file, 47 

percent had no record of a discharge or subsequent title IV 

aid. This does not necessarily mean they did not re-enroll 

at a title IV institution, so this assumption may overstate 

the potential effect of the three-year discharge provision. 

0

100

200

300

400

500

600

700

800

900

1000

1985 1990 1995 2000 2005 2010 2015

School Closures

Domestic Foreign
375

The Department used this information and the high end of 

closed school claims in recent years to estimate the effect 

of the proposed regulations related to closed school 

discharges. The resulting estimated cost to the Federal 

government of the closed school provisions is $1.351 

billion over the 2017 to 2026 loan cohorts.

The proposed regulations would also change the false 

certification discharge process to include instances in 

which schools certified the eligibility of a borrower who 

is not a high school graduate (and does not meet applicable

alternative to high school graduate requirements) where 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. Under existing 

regulations, false certification discharges represent a 

very low share of discharges granted to borrowers. The 

proposed regulations would replace the explicit reference 

to ability to benefit requirements in the false 

certification discharge regulations with a more general 

reference to requirements for admission without a high 

school diploma as applicable when the individual was 

admitted, and specify how an institution’s certification of
376

the eligibility of a borrower who is not a high school 

graduate (and does not meet applicable alternative to high 

school graduate requirements) could give rise to a false 

certification discharge claim. However, the Department 

does not expect an increase in false certification 

discharge claims to result in a significant budget impact 

from this change. We believe that schools that comply with 

the current ability to benefit assessment requirement and 

that honor the current high school graduation requirements 

will continue to comply in the manner they now do, and we 

have no basis to believe that changing the terminology or 

adding false certification of SAP as an example of a reason 

the Secretary may grant a false certification discharge 

without an application will lead to an increase in claims 

that will result in a significant net budget impact. The 

Department will continue to evaluate the changes to the 

false certification discharge regulations and welcomes 

comments to consider as the final analysis of the proposed 

regulations is developed. 

Other Provisions

In addition to the provisions previously discussed, 

the proposed regulations would also make a number of 

technical changes related to the PAYE and REPAYE repayment 

plans and the consolidation of Nurse Faculty Loans, update 
377

the regulations describing the Department’s authority to 

compromise debt, and update the acceptable forms of 

verification of death for discharge of title IV loans or 

TEACH Grant obligations. The technical changes to the 

REPAYE and PAYE plans were already reflected in the 

Department’s budget estimates for those regulations, so no 

additional budget effects are included here. While some 

borrowers may be eligible for additional subsidized loans 

and no longer be responsible for accrued interest on their 

subsidized loans as a result of their subsidized usage 

period being eliminated or recalculated because of a closed 

school, false certification, unpaid refund, or defense to 

repayment discharge, the institutions primarily affected by 

the 150 percent subsidized usage regulation are not those 

expected to generate many of the applicable discharges, so 

this reflection of current practice is not expected to have 

a significant budget impact. Allowing death discharges 

based on death certificates submitted or verified through 

additional means is convenient for borrowers, but is not 

estimated to substantially change the amount of death 

discharges. The proposed updates to the debt compromise 

limits reflect statutory changes and the Secretary’s 

existing authority to compromise debt, so we do not 

estimate a significant change in current practices. 
378

Revising the regulations to expressly permit the 

consolidation of Nurse Faculty Loans is not expected to 

have a significant budget impact, as this technical change 

reflects current practices. According to Department of 

Health and Human Services budget documents, approximately 

$26.5 million in grants are available annually for schools 

to make Nurse Faculty Loans, and borrowers would lose 

access to generous forgiveness terms if they choose to 

consolidate those loans. Therefore, we would expect the 

volume of consolidation to be very small, and do not 

estimate any significant budget impact from this provision. 

Assumptions, Limitations, and Data Sources

In developing these estimates, a wide range of data 

sources were used, including data from the National Student 

Loan Data System; operational and financial data from 

Department systems; and data from a range of surveys 

conducted by the National Center for Education Statistics 

such as the 2012 National Postsecondary Student Aid Survey. 

Data from other sources, such as the U.S. Census Bureau, 

were also used.

Accounting Statement

As required by OMB Circular A-4 (available at 

www.whitehouse.gov/sites/default/files/omb/assets/omb/circu

lars/a004/a-4.pdf), in the following table, we have 
379

prepared an accounting statement showing the classification 

of the expenditures associated with the provisions of these 

regulations. This table provides our best estimate of the 

changes in annual monetized costs and transfers as a result 

of these proposed regulations. Expenditures are classified 

as transfers from the Federal Government to affected 

student loan borrowers or from affected institutions to

students (via the Federal government), as noted.

Table 6: Accounting Statement: Classification of Estimated 

Expenditures (in millions) with discount rates of three

percent and seven percent

Category Benefits

Updated and 

clarified borrower 

defense process and 

Federal standard to 

increase protection 

for student 

borrowers and 

taxpayers

not quantified

Improved awareness 

and usage of closed 

school and false 

certification 

discharges

not quantified

Improved consumer 

information about 

institutions' 

performance and 

practices

not quantified

Category Costs

3% 7%
380

Costs of obtaining 

Letters of credit or 

equivalents

not quantified

Costs of compliance 

with paperwork 

requirements

14.95 14.91

Category Transfers

3% 7%

Borrower Defense 

claims from the 

Federal government 

to affected 

borrowers (partially 

borne by affected 

institutions, via 

reimbursements)

SC1A1 184 181

SC1A2 182 180

SC1B1 1,438 1,419

SC1B2 1,434 1,415

SC2A1 777 767

SC2A2 778 768

SC2B1 5,846 5,770

SC2B2

5,846 5,770

Reimbursements of 

borrower defense 

claims from affected 

institutions to 

affected student 

borrowers, via the 

Federal government

SC1A1 55 54

SC1A2 119 117

SC1B1 431 426

SC1B2 932 920

SC2A1 233 230

SC2A2 506 499

SC2B1 1,754 1,731

SC2B2 3,800 3,751

Closed school 

discharges from the 

Federal government 

to affected students

135 135

Alternatives Considered

In the interest of promoting good governance and 

ensuring that these proposed regulations produce the best 

possible outcome, the Department reviewed and considered 

various proposals from internal sources as well as from 
381

non-Federal negotiators and the public. We summarize below 

the major proposals that we considered but which we 

ultimately declined to implement in these proposed 

regulations.

Areas of significant discussion between the Department 

and the non-Federal negotiators included the group 

discharge process for borrower defense claims, the 

limitation periods, the appropriate procedure for 

considering borrower defense claims including the role of 

State AGs, legal assistance organizations, the Department, 

borrowers, and institutions, and the continued use of or 

adoption of certain State standards for borrower defense 

claims and the process of the Department’s recovery from 

schools for any liabilities to the Department for borrower 

defense claims. The extensive discussion of these issues 

is summarized in the preamble sections related to each 

topic. In developing the proposed regulations, the 

Department considered the budgetary impact, administrative 

burden, and effectiveness of the options it considered.

Clarity of the Regulations

Executive Order 12866 and the Presidential memorandum 

“Plain Language in Government Writing” require each agency 

to write regulations that are easy to understand.
382

The Secretary invites comments on how to make these 

proposed regulations easier to understand, including 

answers to questions such as the following:

• Are the requirements in the proposed regulations 

clearly stated?

• Do the proposed regulations contain technical terms 

or other wording that interferes with their clarity?

• Does the format of the proposed regulations 

(grouping and order of sections, use of headings, 

paragraphing, etc.) aid or reduce their clarity?

• Would the proposed regulations be easier to 

understand if we divided them into more (but shorter) 

sections? (A "section" is preceded by the symbol "§" and a 

numbered heading; for example, §668.16.)

• Could the description of the proposed regulations 

in the SUPPLEMENTARY INFORMATION section of this preamble 

be more helpful in making the proposed regulations easier 

to understand? If so, how?

• What else could we do to make the proposed 

regulations easier to understand?

To send any comments that concern how the Department 

could make these proposed regulations easier to understand, 

see the instructions in the ADDRESSES section.

Initial Regulatory Flexibility Analysis 
383

Description of the Reasons that Action by the Agency Is 

Being Considered

The Secretary is proposing to amend the regulations 

governing the Direct Loan Program to establish a new 

Federal standard, limitation periods, and a process for 

determining whether a borrower has a borrower defense based 

on an act or omission of a school. We also propose to 

amend the Student Assistance General Provisions regulations 

to revise the financial responsibility standards and add 

disclosure requirements for schools. Finally, we propose 

to amend the discharge provisions in the Perkins Loan, 

Direct Loan, FFEL Program, and TEACH Grant programs. The 

proposed changes would 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.

The U.S. Small Business Administration Size Standards 

define “for-profit institutions” as “small businesses” if 

they are independently owned and operated and not dominant 

in their field of operation with total annual revenue below 

$7,000,000. The standards define “non-profit institutions” 

as “small organizations” if they are independently owned 

and operated and not dominant in their field of operation, 
384

or as “small entities” if they are institutions controlled 

by governmental entities with populations below 50,000. 

Under these definitions, an estimated 4,365 institutions of 

higher education subject to the paperwork compliance 

provisions of the proposed regulations are small entities. 

Accordingly, we have prepared this initial regulatory 

flexibility analysis to present an estimate of the effect 

of the proposed regulations on small entities. The 

Department welcomes comments on this analysis and requests 

additional information to refine it.

Succinct Statement of the Objectives of, and Legal 

Basis for, the Proposed Regulations

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. Current regulations

in §685.206(c) governing defenses to repayment have been in 

place since 1995, but rarely used. Those regulations 

specify that a borrower may assert as a defense to 

repayment any “act or omission of the school attended by 

the student that would give rise to a cause of action 

against the school under applicable State law.” In 

response to the collapse of Corinthian, the Secretary 

announced in June of 2015 that the Department would develop 
385

new regulations to clarify and streamline the borrower 

defense process, in a manner that would protect borrowers

and allow the Department to hold schools accountable for 

actions that result in loan discharges. 

Description of and, Where Feasible, an Estimate of the

Number of Small Entities to which the Regulations Will 

Apply

These proposed regulations would affect institutions 

of higher education that participate in the Federal Direct 

Loan Program and borrowers. Approximately 60 percent of 

IHEs qualify as small entities, even though the range of 

revenues at the non-profit institutions varies greatly. 

Using data from the Integrated Postsecondary Education Data 

System, the Department estimates that approximately 4,365 

IHEs qualify as small entities--1,891 are not-for-profit 

institutions, 2,196 are for-profit institutions with 

programs of two years or less, and 278 are for-profit 

institutions with four-year programs.

Description of the Projected Reporting, Recordkeeping,

and Other Compliance Requirements of the Regulations, 

Including an Estimate of the Classes of Small Entities 

that Will Be Subject to the Requirement and the Type 

of Professional Skills Necessary for Preparation of 

the Report or Record
386

Table 7 relates the estimated burden of each 

information collection requirement to the hours and costs 

estimated in the Paperwork Reduction Act of 1995 section of 

the preamble. This additional workload is discussed in 

more detail under the Paperwork Reduction Act of 1995

section of the preamble. Additional workload would 

normally be expected to result in estimated costs 

associated with either the hiring of additional employees 

or opportunity costs related to the reassignment of 

existing staff from other activities. In total, these 

changes are estimated to increase burden on small entities 

participating in the title IV, HEA programs by 171,250

hours. The monetized cost of this additional burden on 

institutions, using wage data developed using BLS data 

available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is 

$6,259,193. This cost was based on an hourly rate of 

$36.55.

Table 7: Paperwork Reduction Act for Small Entities

Reg 

Section

OMB 

Control # Hours Cost
387

Program 

Participation 

Agreement -

requires school to 

provide enrolled 

students a closed 

school discharge 

application and 

written disclosure 

of the benefits of 

consequences of the 

discharge as an 

alternative to 

completing their 

educational program 

through a teachout. 668.14OMB 1845-

0022

 

939 $ 34,308 

Reporting and 

Disclosure of 

repayment rate 

outcomes and 

letters of credit 

to enrolled and 

prospective 

students 668.41

OMB 1845-

0004

 

64,084 $2,342,270 

Financial 

Responsibility -

reporting of 

actions or 

triggering events 

in 668.171(c) no 

later than 10 days 

after action or 

event occurs 668.171

OMB 1845-

0022

 

1,617 $ 59,094 

Alternative 

Standards and 

Requirements - ties 

amount of letter of 

credit to action or 

triggering event in 

668.171(c) 668.175

OMB 1845-

0022

 

32,336 $1,181,881 
388

Borrower defense 

process - provides 

a framework for the 

borrower defense 

process. 

Institutions could 

engage in factfinding, provide 

evidence related to 

claims and appeal 

decisions. 685.222

OMB 1845-

NEW

 

530 $ 19,372 

Agreements between 

an eligible school 

and the Secretary 

for participation 

in the Direct Loan 

Program - prohibits 

pre-dispute 

arbitration 

agreements for 

borrower defense 

claims, specifies 

required agreement 

and notification 

language, and 

requires schools to 

provide copies of 

arbitral and 

judicial filings to 

the Secretary. 685.300

OMB 1845-

NEW2

 

71,745 $2,622,268 

Identification, to the Extent Practicable, of All 

Relevant Federal Regulations that May Duplicate, 

Overlap, or Conflict with the Regulations

The proposed regulations are unlikely to conflict with 

or duplicate existing Federal regulations.

Alternatives Considered
389

As described above, the Department participated in 

negotiated rulemaking when developing the proposed 

regulations, and considered a number of options for some of 

the provisions. Issues considered include the group 

discharge process for borrower defense claims, the 

limitation periods, the appropriate procedure for 

considering borrower defense claims including the role of 

State AGs, the Department, borrowers, and institutions, and 

the continued use of State standards for borrower defense 

claims. While no alternatives were aimed specifically at 

small entities, limiting repayment rate warnings to 

affected proprietary institutions will reduce the burden on 

the private not-for-profit institutions that are a 

significant portion of small entities that would be 

affected by the proposed regulations.

Paperwork Reduction Act of 1995 

As part of its continuing effort to reduce paperwork 

and respondent burden, the Department provides the general 

public and Federal agencies with an opportunity to comment 

on proposed and continuing collections of information in 

accordance with the Paperwork Reduction Act of 1995 (PRA) 

(44 U.S.C. 3506(c)(2)(A)). This helps ensure that: the 

public understands the Department’s collection 

instructions, respondents can provide the requested data in 
390

the desired format, reporting burden (time and financial 

resources) is minimized, collection instruments are clearly 

understood, and the Department can properly assess the 

impact of collection requirements on respondents. 

Sections 668.14, 668.41, 668.171, 668.175, 682.211, 

682.402, 685.222, and 685.300 contain information 

collection requirements. Under the PRA, the Department has 

submitted a copy of these sections and an Information 

Collections Request to OMB for its review.

A Federal agency may not conduct or sponsor a 

collection of information unless OMB approves the 

collection under the PRA and the corresponding information 

collection instrument displays a currently valid OMB 

control number. Notwithstanding any other provision of 

law, no person is required to comply with, or is subject to 

penalty for failure to comply with, a collection of 

information if the collection instrument does not display a 

currently valid OMB control number.

In the final regulations, we will display the control 

numbers assigned by OMB to any information collection 

requirements proposed in this NPRM and adopted in the final 

regulations.

Discussion

Section §668.14--Program participation agreement.
391

Requirements: 

Proposed §668.14(b)(32) would require, as part of the 

program participation agreement, a school to provide to all 

enrolled students a closed school discharge application and 

a written disclosure, describing the benefits and the 

consequences of a closed school discharge as an alternative 

to completing their educational program through a teach-out 

plan after the Department initiates any action to terminate 

the participation of the school in any title IV, HEA 

program or after the occurrence of any of the events 

specified in §668.14(b)(31) that would require the 

institution to submit a teach-out plan.

Burden Calculation: 

From AY 2011-12 to 2014-15 there were 182 institutions 

that closed (30 private, 150 proprietary, and 2 public). 

The number of students who were enrolled at the 

institutions at the time of the closure was 43,299 (5,322 

at the private institutions, 37,959 at the proprietary 

institutions, and 18 at the public institutions). With 

these figures as a base, we estimate that there could be 46 

schools closing in a given award year (182 institutions 

divided by 4 = 45.5) with an average 238 students per 

institution (43,299 divided by 182 = 237.9). 
392

We estimate that an institution will require two hours 

to prepare and process the required written disclosure with

a copy of the closed school discharge application and the 

necessary mailing list for currently enrolled students. We 

anticipate that most schools will provide this information 

electronically to their students, thus decreasing burden 

and cost.

On average, we estimate that it will take the

estimated 8 private institutions that will close a total of 

324 hours (1,904 students x .17 (10 minutes)) to prepare 

and process the required written disclosure with a copy of 

the closed school discharge application and the necessary 

mailing list for the estimated 1,904 enrolled students.

On average, we estimate that it will take the

estimated 38 proprietary institutions that will close a 

total of 1,537 hours (9,044 students x .17 (10 minutes)) to 

prepare and process the required written disclosure with a 

copy of the closed school discharge application and the 

necessary mailing list for the estimated 9,044 enrolled 

students.

For §668.14, the total increase in burden will be 

1,861 hours under OMB Control Number 1845-0022.

Section §668.41--Reporting and disclosure of information.

Requirements: 
393

Proposed §668.41(h) would expand the reporting and 

disclosure requirements under §668.41 to provide that, for 

any fiscal year in which a proprietary institution’s loan 

repayment rate is equal to or less than zero, the 

institution must deliver a warning about its repayment 

outcomes to enrolled and prospective students. 

Institutions with fewer than 10 borrowers, or that meet the 

threshold for a low borrowing rate exemption, would not be 

required to make the disclosure.

The process through which a proprietary institution 

would be informed of its repayment rate, and provided the 

opportunity to challenge that rate, is included in proposed 

§668.41(h)(5). Initially, the Department provides to each 

institution a list composed of students selected in 

accordance with the methodology in proposed §668.41(h)(3) 

and discussed above, as well as the draft repayment rate 

and the underlying data used to make the calculation. A 

period of 45 days is allowed for institution to make 

corrections to the underlying data. The institution has 45 

days following the date it receives notification of its 

draft loan repayment rate to challenge the accuracy of the 

information used by the Department to calculate the draft 

rate. After considering any challenges to its draft loan 
394

repayment rate, the Department notifies the institution of 

its final repayment rate.

Under proposed §668.41(i), institutions that are

required to provide financial protection, including an 

irrevocable letter of credit or cash under proposed 

§668.175(d), or set-aside under proposed §668.175(h), would 

have to disclose information about that requirement to both 

enrolled and prospective students until released from the 

letter of credit, or obligation to provide alternative 

financial protection, by the Department.

The loan repayment warning under proposed §668.41(h)

and the financial protection disclosure under proposed

§668.41(i) must be provided to both enrolled 

(§668.41(h)(7)(ii)) and prospective students 

(§668.41(h)(7)(iii)) by hand delivery as part of a separate 

document to the student individually or as part of a group 

presentation. Alternatively, the warning or disclosure may 

be sent to the primary email address or other electronic 

communication method used by the institution for 

communicating with the student. In all cases, the 

institution must ensure that the warning or disclosure is 

the only substantive content in the message unless the 

Secretary specifies additional, contextual language to be 

included in the message. Prospective students must be 
395

provided with the warning or disclosure before the student 

enrolls, registers, or enters into a financial obligation 

with the institution. 

Under proposed §668.41(h)(8), all promotional 

materials made available by or on behalf of an institution 

to prospective students must prominently include the loan 

repayment warning. All promotional materials, including 

printed materials, about an institution must be accurate 

and current at the time they are published, approved by a 

State agency or broadcast.

Burden Calculation: 

There will be burden on schools to review the list 

identified in §668.41(h)(5)(i)(A) and to submit challenges 

to the accuracy of the information used to calculate the 

draft loan repayment rate, as provided in 

§668.41(h)(5)(iii). Based on an analysis of College 

Scorecard repayment rate data for 1,174 proprietary 

institutions, we estimate that 493 proprietary institutions 

would not meet the zero percent or less threshold for the 

loan repayment rate calculations. 

We estimate that it will take institutional staff 20 

hours to review the listing of students included in the 

initial loan repayment rate calculations. We estimate that 

it will take institutional staff another 35 hours to review 
396

the draft loan repayment rate produced by the Secretary 

when challenging the accuracy of the information used to 

calculate that draft rate. We are estimating a total of 55 

hours burden per institution for institutional activities 

under proposed §668.41(h)(5).

We estimate that it will take proprietary institutions 

a total of 27,115 hours (493 institutions x 55 hours) for 

an initial review and subsequent challenge to information 

used in the calculation of the institution’s repayment 

rate.

For §668.41(h)(5), the total increase in burden 

related to the calculation, issuance, and challenges of the

loan repayment rate will be 27,115 hours under OMB Control 

Number 1845-0004.

There will be burden on schools to deliver the loan 

repayment warning and the financial repayment disclosure to 

enrolled and prospective students under this proposed 

regulation. 

For the loan repayment warning, under proposed

§668.41(h)(7)(i), the Department commits to consumer test 

the language of the warning, which the Secretary will 

publish in a Federal Register notice. We anticipate that 

it will take proprietary institutions a total of 32,045

hours (493 institutions x 65 hours) to produce and provide 
397

the loan repayment warnings to current and prospective 

students, ensure that promotional materials include the 

warning, and update the institution’s Web site. 

For §668.41(h)(7), the total increase in burden

related to the production and dissemination of the loan 

repayment warnings is 32,045 hours under OMB Control Number 

1845-0004.

For the financial protection disclosure, we estimate 

that it will take institutions an additional 50 hours to 

produce and provide the required financial protection 

disclosures to current and prospective students and update 

the institution’s Web site. We estimate that 169 private 

institutions may have 2 events requiring such reporting for 

a total burden of 16,900 hours (169 institutions x 2 events 

x 50 hours). We estimate that 392 proprietary institutions 

may have 3 events requiring such reporting for a total 

burden of 58,800 hours (392 institutions x 3 events x 50). 

For §668.41(i), the total increase in burden related 

to the production and dissemination of the financial 

protection disclosures is 75,700 hours under OMB Control 

Number 1845-0004.

The combined total increase in burden under OMB 

Control Number 1845-0004 for proposed §668.41 will be 

134,860 hours.
398

Financial responsibility.

General (34 CFR 668.171).

Requirements: 

Under proposed §668.171(d), in accordance with 

procedures to be established by the Secretary, an 

institution would notify the Secretary of any action or 

triggering event described in proposed §668.171(c) no later 

than 10 days after that action or event occurs. 

In that notice, the institution may show that 

certain actions or events are not material or that 

those actions are resolved. Specifically: 

• The institution may explain why a judicial or 

administrative proceeding the institution disclosed to 

the SEC does not constitute a material event. 

• The institution may demonstrate that a

withdrawal of owner’s equity was used solely to meet 

tax liabilities of the institution or its owners. Or, 

where the composite score is calculated based on the 

consolidated financial statements of a group of 

institutions, the amount withdrawn from one 

institution in the group was transferred to another 

entity within that group. 

• The institution may show that the creditor 

waived a violation of a loan agreement. If the 
399

creditor imposes additional constraints or 

requirements as a condition of waiving the violation 

and continuing with the loan, the institution must 

identify and describe those constraints or 

requirements. In addition, if a default or 

delinquency event occurs or other events occur that 

trigger, or enable the creditor to require or impose, 

additional constraints or penalties on the 

institution, the institution would be permitted to 

show why these actions would not have an adverse 

financial impact on the institution.

Burden Calculation: 

There will be burden on schools to provide the notice 

to the Secretary when one of the actions or triggering 

events identified in §668.171(c) occurs. We estimate that 

an institution will take two hours per action or triggering 

event to prepare the appropriate notice and provide it to 

the Secretary. We estimate that 169 private institutions 

may have 2 events annually to report for a total burden of 

676 hours (169 institutions x 2 events x 2 hours). We 

estimate that 392 proprietary institutions may have 3 

events annually to report for total burden of 2,352 hours 

(392 institutions x 3 events x 2 hours). We estimate that 

91 public institutions may have 1 event annually to report 
400

for a total burden of 182 hours (91 institutions x 1 event 

x 2 hours). This total burden of 3,210 hours will be 

assessed under OMB Control Number 1845-0022.

Alternative standards and requirements (34 CFR 668.175).

Requirements: 

Under the provisional certification alternative in 

§668.175, we propose to add a new paragraph (f)(4) that 

ties the amount of the financial protection that an 

institution must submit to the Secretary to an action or 

triggering event described in proposed §668.171(c). 

Specifically, under this alternative, an institution would 

be required to provide the Secretary financial protection, 

such as an irrevocable letter of credit, for an amount that

is:

• For a State or Federal action under proposed 

§668.171(c)(1)(i)(A) or (B), 10 percent or more, as 

determined by the Secretary, of the amount of Direct Loan 

program funds received by the institution during its most 

recently completed fiscal year; and

• For repayments to the Secretary for losses from 

borrower defense claims under proposed §668.171(c)(2), the 

greatest annual loss incurred by the Secretary during the 

three most recently completed award years to resolve those 

claims or the amount of losses incurred by the Secretary 
401

during the most recently completed award year, whichever is

greater, plus a portion of the amount of any outstanding or

pending claims based on the ratio of the total value of 

claims resolved in favor of borrowers during the three most 

recently completed award years to the total value of claims 

adjudicated during the three most completed award years;

• For any other action or triggering event 

described in proposed §668.171(c), if the institution’s 

composite score is less than 1.0, or the institution no 

longer qualifies under the zone alternative, 10 percent 

or more, as determined by the Secretary, of the total 

amount of title IV, HEA program funds received by the 

institution during its most recently completed fiscal

year.

Burden Calculation: 

There will be burden on schools to provide the 

required financial protection, such as a letter of credit,

to the Secretary to utilize the provisional certification 

alternative. We estimate that an institution will take 40 

hours per action or triggering event to obtain the required 

financial protections and provide it to the Secretary. We 

estimate that 169 private not-for-profit institutions may 

have 2 events annually to report for a total burden of 

13,520 hours (169 institutions x 2 events x 40 hours). We 
402

estimate that 392 proprietary institutions may have 3 

events annually to report for total burden of 47,040 hours 

(392 institutions x 3 events x 40 hours). We estimate that 

91 public institutions may have 1 event annually to report 

for a total burden of 3,640 hours (91 institutions x 1 

event x 40 hours). This total burden of 64,200 hours will 

be assessed under OMB Control Number 1845-0022.

The combined total increase in burden under OMB 

Control Number 1845-0004 for proposed §668.41 will be

134,860 (27,115 + 32,045 + 75,700) hours. 

The combined total increase in burden under OMB 

Control Number 1845-0022 for proposed §668.14, §668.171,

and §668.175 will be 69,271 (1,861 + 3,210 + 64,200) hours.

Mandatory administrative forbearance for FFEL Program 

borrowers (§682.211).

Requirements: 

Under proposed §682.211(i)(7), a lender would be 

required to grant a mandatory administrative forbearance to 

a borrower upon being notified by the Secretary that the 

borrower has submitted an application for a borrower 

defense discharge related to a FFEL Loan that the borrower 

intends to pay off through a Direct Loan Program 

Consolidation Loan for the purpose of obtaining relief 

under proposed §685.212(k). The administrative forbearance 
403

would remain in effect until the Secretary notifies the 

lender that a determination has been made as to the 

borrower’s eligibility for a borrower defense discharge. 

If the Secretary notifies the borrower that the borrower 

would qualify for a borrower defense discharge if the 

borrower were to consolidate, the borrower would then be 

able to consolidate the loan(s) to which the defense 

applies and, if the borrower were to do so, the Secretary 

would recognize the defense and discharge that portion of 

the Consolidation Loan that paid off the FFEL Loan in 

question. 

Burden Calculation: 

There will be burden for the current 1,446 FFEL 

lenders to track the required mandatory administrative 

forbearance when they are notified by the Secretary of the 

borrower’s intention to enter their FFEL Loans into a 

Direct Consolidation Loan to obtain a borrower defense 

discharge. We estimate that it will take each lender 

approximately four hours to develop and program the needed 

tracking into their current systems. There will be an 

estimated burden of 5,480 hours on the 1,370 for-profit 

lenders (1,370 x 4 = 5,480 hours). There will be an 

estimated burden of 304 hours on the 76 not-for-profit 
404

lenders (76 x 4 = 304 hours). The total burden of 5,784 

hours will be assessed under OMB Control Number 1845-0020.

Closed school discharges--§682.402.

Requirements:

Proposed §682.402(d)(6)(ii)(F) would provide a second 

level of Departmental review for denied closed school 

discharge claims in the FFEL Program. The proposed 

regulations would require a guaranty agency that denies a 

closed school discharge request to inform the borrower of 

the opportunity for a review of the guaranty agency’s 

decision by the Secretary, and an explanation of how the 

borrower may request such a review.

Proposed §682.402(d)(6)(ii)(I) would require the 

guaranty agency or the Department, upon resuming 

collection, to provide a FFEL borrower with another closed 

school discharge application, and an explanation of the 

requirements and procedures for obtaining the discharge.

Proposed §682.402(d)(6)(ii)(K) would describe the 

responsibilities of the guaranty agency if the borrower 

requests such a review.

Proposed §682.402(d)(8)(iii) would authorize the 

Department, or a guaranty agency with the Department’s 

permission, to grant a closed school discharge to a FFEL 

borrower without a borrower application based on 
405

information in the Department’s or guaranty agency’s 

possession that the borrower did not subsequently re-enroll 

in any title IV-eligible institution within a period of 

three years after the school closed. 

Burden Calculation: 

There will be burden on guaranty agencies to provide 

information to borrowers denied closed school discharge 

regarding the opportunity for further review of the 

discharge request by the Secretary. We estimate that it 

will take the 27 guaranty agencies 4 hours to update their 

notifications and establish a process for forwarding any 

requests for escalated reviews to the Secretary. There 

will be an estimated burden of 68 hours on the 17 public 

guaranty agencies (17 x 4 hours = 68 hours). There will be 

an estimated burden of 40 hours on the 10 not-for-profit 

guaranty agencies (10 x 4 hours = 40 hours). The total 

burden of 108 hours will be assessed under OMB Control 

Number 1845-0020.

There will be burden on guaranty agencies to, upon 

receipt of the request for escalated review from the 

borrower, forward to the Secretary the discharge form and 

any relevant documents. For the period between 2011 and 

2015 there were 43,268 students attending closed schools,

of which 9,606 students received a closed school discharge. 
406

It is estimated that 5 percent of the 43,268, or 2,163,

closed school applications were denied. We estimate that 

10 percent or 216 of those borrowers whose application was 

denied will request escalated review by the Secretary. We 

estimate that the process to forward the discharge request 

and any relevant documentation to the Secretary will take 

.5 hours (30 minutes) per request. There will be an 

estimated burden of 58 hours on the 17 public guaranty 

agencies based on an estimated 116 requests (116 X .5 hours 

= 58 hours). There will be an estimated burden of 50 hours 

on the 10 not-for-profit guaranty agencies (100 x .5 hours 

= 50 hours). The total burden of 108 hours will be 

assessed under OMB Control Number 1845-0020.

The guaranty agencies will have burden assessed based 

on these proposed regulations to provide another discharge 

application to a borrower upon resuming collection 

activities with explanation of process and requirements for 

obtaining a discharge. We estimate that for the 2,163 

closed school applications that were denied, it will take 

the guaranty agencies .5 hours (30 minutes) to provide the 

borrower with another discharge application and 

instructions for filing the application again. There will 

be an estimated burden of 582 hours on the 17 public 

guaranty agencies based on an estimated 1,163 borrowers 
407

(1,163 x .5 hours = 582 hours). There will be an estimated 

burden of 500 hours on the 10 not-for-profit guaranty 

agencies (1,000 x .5 hours = 500 hours). The total burden 

of 1,082 will be assessed under OMB Control Number 1845-

0020.

There will be burden assessed the guaranty agencies to 

determine the eligibility of a borrower for a closed school 

discharge without the borrower submitting such an 

application. This requires a review of those borrowers who 

attended a closed school but did not apply for a closed 

school discharge to determine if the borrower re-enrolled 

in any other institution within three years of the school 

closure. We estimate that there will be 20 hours of 

programming to allow for a guaranty agency to establish a 

process to review its records for borrowers who attended a 

closed school and to determine if any of those borrowers 

reenrolled in a title IV-eligible institution within three 

years. There will be an estimated burden of 340 hours on 

the 17 public guaranty agencies for this programming (17 x 

20 hours = 340 hours rounded up). There will be an 

estimated burden of 200 hours on the not-for-profit 

guaranty agencies for this programming (10 x 20 hours = 200 

hours). The total burden of 540 hours will be assessed 

under OMB Control Number 1845-0020.
408

The total burden of 1,838 hours for §682.402 will be 

assessed under OMB Control Number 1845-0020.

The combined total increase in burden under OMB 

Control Number 1845-0020 for proposed §682.211 and §682.402

will be 7,622 hours (5,784 + 108 + 540 + 108 + 1,082).

Process for individual borrowers (34 CFR 685.222(e)).

Requirements:

Proposed §685.222(e)(1) would describe the steps an 

individual borrower must take to initiate a borrower 

defense claim. First, an individual borrower would submit 

an application to the Secretary, on a form approved by the 

Secretary. In the application, the borrower would certify 

that he or she received the proceeds of a loan to attend a 

school; may provide evidence that supports the borrower 

defense; and would indicate whether he or she has made a 

claim with respect to the information underlying the 

borrower defense with any third party, and, if so, the 

amount of any payment received by the borrower or credited 

to the borrower's loan obligation. The borrower would also 

be required to provide any other information or supporting 

documentation reasonably requested by the Secretary. 

While the decision of the Department official would be 

final as to the merits of the claim and any relief that may 

be warranted on the claim, if the borrower defense is 
409

denied in full or in part, the borrower would be permitted 

to request that the Secretary reconsider the borrower 

defense upon the identification of new evidence in support 

of the borrower’s claim. “New evidence” would be defined 

as relevant evidence that the borrower did not previously 

provide and that was not identified by the Department 

official as evidence that was relied upon for the final 

decision.

Burden Calculation:

There will be burden associated with the filing of the 

Departmental form by the borrower asserting a borrower 

defense claim. We are conducting a separate information 

collection review process for the proposed form to provide 

for public comment on the form as well as the estimated 

burden. A separate information collection review package 

will be published in the Federal Register and available 

through Regulations.gov for review and comment. 

Additionally there will be burden on any borrower 

whose borrower defense claim is denied, if they elect to 

request reconsideration from the Secretary based on new 

evidence in support of the borrower’s claim. We estimate 

that two percent of borrower defense claims received would 

be denied and those borrowers would then request 

reconsideration by presenting new evidence to support their 
410

claim. As of April 27, 2016, 18,688 borrower defense 

claims had been received. Of that number, we estimate that 

467 borrowers, including those that opt out of a successful 

borrower defense group relief, would require .5 hours (30 

minutes) to submit the request for reconsideration to the 

Secretary for a total of 234 burden hours (467 x .5 hours). 

This burden will be assessed under OMB Control Number 1845-

NEW.

Group process for borrower defenses--General (34 CFR 

685.222(f)).

Requirements:

Proposed §685.222(f) would provide a framework for the 

borrower defense group process, including descriptions of 

the circumstances under which group borrower defense claims 

could be considered, and the process the Department would 

follow for borrower defenses for a group. 

Once a group of borrowers with common facts and claims 

has been identified, the Secretary would designate a 

Department official to present the group’s common borrower 

defense in the fact-finding process, and would provide each 

identified member of the group with notice that allows the 

borrower to opt out of the proceeding. 

Burden Calculation:
411

There will be burden on any borrower who elects to opt 

out of the group process after the Secretary has identified 

them as a member of a group for purposes of borrower 

defense. We estimate that one percent of borrowers who are 

identified as part of a group process for borrower defense 

claims would opt out of the group claim process. As of 

April 27, 2016, 18,688 borrower defense claims had been 

received. Of that number, we estimate that 187 borrowers 

would require .08 hours (5 minutes) to submit the request 

to opt out of the group process to the Secretary for a 

total of 15 burden hours (187 x .08 hours). This burden 

will be assessed under OMB Control Number 1845-NEW.

Group process for borrower defense–-Closed school (34 CFR 

685.222(g)).

Requirements:

Section 685.222(g) of the proposed regulations would 

establish a process for review and determination of a 

borrower defense for groups identified by the Secretary for 

which the borrower defense is made with respect to Direct 

Loans to attend a school that has closed and has provided 

no financial protection currently available to the 

Secretary from which to recover any losses based on 

borrower defense claims, and for which there is no 
412

appropriate entity from which the Secretary can otherwise 

practicably recover such losses.

Under proposed §685.222(g)(1), a hearing official 

would review the Department official’s basis for 

identifying the group and resolve the claim through a factfinding process. As part of that process, the hearing 

official would consider any evidence and argument presented 

by the Department official on behalf of the group and on 

behalf of individual members of the group. The hearing 

official would consider any additional information the 

Department official considers necessary, including any 

Department records or response from the school or a person 

affiliated with the school as described §668.174(b) as 

reported to the Department or as recorded in the 

Department’s records if practicable. 

Burden Calculation:

There will be burden on any school which elects to 

provide records or response to the hearing official’s fact 

finding. We anticipate that each group would represent a 

single institution. We estimate that there will be four

potential groups involving closed schools. We estimate 

that the fact-finding process would require 50 hours from 1 

private closed school or persons affiliated with that 

closed school (1 private institution x 50 hours). We 
413

estimate that the fact-finding process would require 150 

hours from 3 proprietary closed schools or persons 

affiliated with that closed school (3 proprietary 

institutions x 50 hours). We estimate the burden to be 200 

hours (4 institutions x 50 hours). This burden will be 

assessed under OMB Control Number 1845-NEW.

Group process for borrower defense–-Open school (34 CFR 

685.222(h)).

Requirements:

Proposed §685.222(h) would establish the process for

groups identified by the Secretary for which the borrower 

defense is asserted with respect to Direct Loans to attend 

an open school.

A hearing official would resolve the borrower defense 

and determine any liability of the school through a factfinding process. As part of the process, the hearing 

official would consider any evidence and argument presented 

by the school and the Department official on behalf of the 

group and, as necessary, evidence presented on behalf of 

individual group members. 

The hearing official would issue a written decision. 

If the hearing official approves the borrower defense, that 

decision would describe the basis for the determination, 

notify the members of the group of the relief provided on 
414

the basis of the borrower defense, and notify the school of 

any liability to the Secretary for the amounts discharged 

and reimbursed.

If the hearing official denies the borrower defense in 

full or in part, the written decision would state the 

reasons for the denial, the evidence that was relied upon, 

the portion of the loans that are due and payable to the 

Secretary, and whether reimbursement of amounts previously 

collected is granted, and would inform the borrowers that 

their loans will return to their statuses prior to the 

group borrower defense process. It also would notify the 

school of any liability to the Secretary for any amounts 

discharged. The Secretary would provide copies of the 

written decision to the members of the group, the 

Department official and the school. 

The hearing official’s decision would become final as 

to the merits of the group borrower defense claim and any 

relief that may be granted within 30 days after the 

decision is issued and received by the Department official 

and the school unless, within that 30-day period, the 

school or the Department official appeals the decision to 

the Secretary. A decision of the hearing official would 

not take effect pending the appeal. The Secretary would 
415

render a final decision following consideration of any 

appeal. 

After a final decision has been issued, if relief for 

the group has been denied in full or in part, a borrower 

may file an individual claim for relief for amounts not 

discharged in the group process. In addition, the 

Secretary may reopen a borrower defense application at any 

time to consider new evidence, as discussed above.

Burden Calculation:

There will be burden on any school that provides 

evidence and responds to any argument made to the hearing 

official’s fact finding and if the school elects to appeal 

the final decision of the hearing official regarding the 

group claim. We anticipate that each group would represent 

claims from a single institution. We estimate that there 

will be six potential groups involving open schools. We 

estimate that the fact-finding process would require 150 

hours from the 3 open private institutions or persons 

affiliated with that school (3 institutions x 50 hours).

We estimate that the fact-finding process would require 150 

hours from the 3 open proprietary institutions or persons 

affiliated with that school (3 institutions x 50 hours).

We estimate the burden to be 300 hours (6 institutions x 50 

hours).
416

We further estimate that the appeal process would 

require 150 hours from the 3 open private institutions or 

persons affiliated with that school (3 institutions x 50 

hours). We estimate that the appeal process would require 

150 hours from the 3 open proprietary institutions or 

persons affiliated with that school (3 institutions x 50 

hours). We estimate the burden to be 300 hours (6 

institutions x 50 hours). The total estimated burden for 

this section will be 600 hours assessed under OMB Control 

Number 1845-NEW.

Additionally, any borrower whose borrower defense 

claim is denied under the group claim may request 

reconsideration based on new evidence to support the 

individual claim. We believe that the estimate for the 

total universe of denied claims in §685.222(e) includes 

these borrowers.

The combined total increase in burden under OMB 

Control Number 1845-NEW for proposed §685.222 will be 1,049

hours (234 + 15 + 200 + 600).

Section 685.300–-Agreements between an eligible school 

and the Secretary for participation in the Direct Loan

Program. 

Requirements:
417

Proposed §685.300(e) requires institutions that, after 

the effective date of the proposed regulations, incorporate

pre-dispute arbitration or any other pre-dispute agreement 

addressing class actions in any agreements with Direct Loan 

Program borrowers to include specific language regarding a 

borrower’s right to file or be a member of a class action 

suit against the institution when the class action concerns 

acts or omissions surrounding the making of the Direct Loan 

or provision of educational services purchased with the 

Direct Loan. Additionally, in the case of institutions 

that, prior to the effective date of the proposed 

regulations, incorporated pre-dispute arbitration or any 

other pre-dispute agreement addressing class actions in any 

agreements with Direct Loan Program borrowers, the proposed 

regulations would require institutions to provide to 

borrowers agreements or notices with specific language 

regarding a borrower’s right to file or be a member of a 

class action suit against the institution when the class 

action concerns acts or omissions surrounding the making of 

the Direct Loan or provision of educational services 

purchased with the Direct Loan. Institutions would be 

required to provide such notices or agreements to such 

borrowers no later than at the time of the loan exit 

counseling for current students or the date the school 
418

files an initial response to an arbitration demand or 

complaint suit from a student who hasn’t received such 

agreement or notice.

Proposed §685.300(f) would require institutions that, 

after the effective date of the proposed regulations, 

incorporate pre-dispute arbitration agreements with Direct 

Loan Program borrowers to include specific language 

regarding a borrower’s right to file a lawsuit against the 

institution when it concerns acts or omissions surrounding 

the making of the Direct Loan or provision of educational 

services purchased with the Direct Loan. Additionally, in 

the case of institutions that, prior to the effective date 

of the proposed regulations, incorporated pre-dispute 

arbitration agreements with Direct Loan Program borrowers,

the proposed regulations would require institutions to 

provide to borrowers agreements or notices with specific 

language regarding a borrower’s right to file a lawsuit 

against the institution when the class action concerns acts 

or omissions surrounding the making of the Direct Loan or 

provision of educational services purchased with the Direct 

Loan. Institutions would be required to provide such 

agreements or notices to such borrowers no later than at 

the time of the loan exit counseling for current students 

or the date the school files an initial response to an 
419

arbitration demand or complaint suit from a student who 

hasn’t received such agreement or notice. 

Burden Calculation:

There will be burden on any school that meets the 

conditions for supplying students with the changes to any 

agreements. Based on the AY 2014-2015 Direct Loan 

information available, there were 1,528,714 Unsubsidized 

Direct Loan recipients at proprietary institutions. 

Assuming 66 percent of these students would continue to be 

enrolled at the time these regulations become effective 

there would be 1,008,951 students who would be required to 

receive the agreements or notices required by proposed

§685.300(e) or (f). We anticipate that it will take 

proprietary institutions .17 hours (10 minutes) per student 

to research who is required to receive these agreements or 

notices, prepare them, and forward the information 

accordingly for a total burden of 171,522 hours (1,008,951 

students x .17 hours) assessed under OMB Control Number 

1845-NEW2.

Requirements:

Proposed §685.300(g) requires institutions to provide 

to the Secretary copies of specified records connected to a 

claim filed in arbitration by or against the school 

regarding a borrower defense claim. The school must submit 
420

any records within 60 days of the filing by the school of 

such records to an arbitrator or upon receipt by the school 

of such records that were filed by someone other than the 

school, such as an arbitrator or student regarding a claim.

Proposed §685.300(h) requires institutions to provide 

to the Secretary copies of specified records connected to a 

claim filed in a lawsuit by the school, a student, or any 

party against the school regarding a borrower defense

claim. The school must submit any records within 30 days 

of the filing or receipt of the complaint by the school or 

upon receipt by the school of rulings on a dipositive 

motion or final judgement.

Burden Calculation:

There will be burden on any school that must provide 

to the Secretary copies of specified records connected to a 

claim filed in arbitration by or against the school 

regarding a borrower defense claim. We estimate that 5 

percent of the 1,959 proprietary schools, or 98 schools,

would be required to submit documentation to the Secretary 

to comply with the proposed regulations. We anticipate 

that each of the 98 schools would have an average of 4 

filings, with an average of four submissions for each 

filing. Because these are copies of documents required to 

be submitted to other parties we anticipate 5 burden hours 
421

to produce the copies and submit to the Secretary for a 

total of 7,840 hours (98 institutions x 4 filings x 4 

submissions/filing x 5 hours) assessed under OMB Control 

Number 1845-NEW2.

The combined total increase in burden under OMB 

Control Number 1845-NEW2 for proposed §685.300 will be 

179,362 hours (171,522 + 7,840).

Consistent with the discussion above, the following 

chart describes the sections of the proposed regulations 

involving information collections, the information being 

collected, and the collections that the Department will 

submit to OMB for approval and public comment under the 

PRA, and the estimated costs associated with the 

information collections. The monetized net costs of the 

increased burden on institutions, lenders, guaranty 

agencies, and borrowers, using wage data developed using 

BLS data, available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, 

is $ 14,328,558 as shown in the chart below. This cost was 

based on an hourly rate of $36.55 for institutions, 

lenders, and guaranty agencies and $16.30 for borrowers.

Collection of Information
422

Regulatory 

Section Information Collection 

OMB Control 

Number and 

Estimated 

Burden 

[change in 

burden]

Estimated 

Costs

§668.14 -

Program 

participation 

agreement.

The proposed regulation 

would require, as part of 

the program participation 

agreement, a school to 

provide to all enrolled 

students with a closed 

school discharge 

application and a written 

disclosure, describing the 

benefits and the 

consequences of a closed 

school discharge as an 

alternative to completing 

their educational program 

through a teach-out plan 

after the Department 

initiates any action to 

terminate the 

participation of the 

school in any title IV, 

HEA program or after the 

occurrence of any of the 

events specified in 

§668.14(b)(31) that would 

require the institution to 

submit a teach-out plan.

1845-0022 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

1,861 hours.

$68,025
423

§668.41 –

Reporting and 

disclosure of 

information.

The proposed regulation 

would provide that, for 

any fiscal year in which a

proprietary institution’s 

loan repayment rate is 

zero percent or less, the 

institution must provide a 

warning to enrolled and 

prospective students about 

that institution’s 

repayment outcomes. If an 

institution is required to 

provide financial 

protection to the 

Secretary, such as an 

irrevocable letter of 

credit or cash under 

§668.175(d) or (f), or to 

establish a set-aside 

under §668.175(h), the 

institution must disclose

that protection to 

enrolled and prospective 

students.

1845-0004 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

134,860

hours.

$

4,929,133
424

§668.171 -

Financial 

responsibilit

y - General 

The proposed regulations

add a new paragraph (d) 

under which, in accordance 

with procedures to be 

established by the 

Secretary, an institution 

would notify the Secretary 

of any action or 

triggering event described 

in §668.171(c) no later 

than 10 days after that 

action or event occurs.

1845-0022 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

3,210 hours.

$117,326
425

§668.175 -

Alternative 

standards and 

requirements 

The proposed regulations 

would add a new paragraph 

(f)(4) that ties the 

amount of the letter of 

credit that an institution 

must submit to the 

Secretary to an action or 

triggering event described 

in §668.171(c).

1845-0022 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

64,200 hours.

$2,346,510
426

§682.211 –

Forbearance.

The proposed regulations 

would add a new paragraph 

§682.211(i)(7) that 

requires a lender to grant 

a mandatory administrative 

forbearance to a borrower 

upon being notified by the 

Secretary that the 

borrower has submitted an 

application for a borrower 

defense discharge related 

to a FFEL Loan that the 

borrower intends to pay 

off through a Direct Loan 

Program Consolidation Loan 

for the purpose of 

obtaining relief under 

proposed §685.212(k).

1845-0020 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

5,784 hours.

$211,405
427

§682.402 -

Death, 

disability, 

closed 

school, false 

certification

, unpaid 

refunds, and 

bankruptcy 

payments.

The proposed regulations 

would provide a second 

level of Departmental 

review for denied closed 

school discharge claims in 

the FFEL Program. The 

proposed language would 

require a guaranty agency 

that denies a closed 

school discharge request 

to inform the borrower of 

the opportunity for a 

review of the guaranty 

agency’s decision by the 

Department, and an 

explanation of how the 

borrower may request such 

a review.

The proposed regulations 

would require the guaranty 

agency or the Department, 

upon resuming collection, 

to provide a FFEL borrower 

with another closed school 

discharge application, and 

an explanation of the 

requirements and 

procedures for obtaining 

the discharge.

The proposed regulations 

would describe the 

responsibilities of the 

guaranty agency if the 

borrower requests such a 

review.

The proposed regulations 

would authorize the 

Department, or a guaranty 

agency with the 

Department’s permission, 

to grant a closed school 

discharge to a FFEL 

borrower without a 

borrower application based 

on information in the 

Department’s or guaranty 

agency’s possession that 

1845-0020 –

This would be 

a revised 

collection. 

We estimate 

burden would 

increase by 

1,838 hours.

$67,179
428

the borrower did not 

subsequently re-enroll in 

any title IV-eligible 

institution within a 

period of three years 

after the school closed. 
429

§685.222 –

Borrower 

defenses

The proposed regulation 

would describe the steps 

an individual borrower 

must take to initiate a 

borrower defense claim. 

The proposed regulations 

also would provide a 

framework for the borrower 

defense group process, 

including descriptions of 

the circumstances under 

which group borrower 

defense claims could be 

considered, and the 

process the Department 

would follow for borrower 

defenses for a group.

The proposed regulations 

would establish a process 

for review and 

determination of a 

borrower defense for 

groups identified by the 

Secretary for which the 

borrower defense is made 

with respect to Direct 

Loans to attend a school 

that has closed and has 

provided no financial 

protection currently 

available to the Secretary 

from which to recover any 

losses based on borrower 

defense claims, and for 

which there is no 

appropriate entity from 

which the Secretary can 

otherwise practicably 

recover such losses. The 

proposed regulation would 

establish the process for 

groups identified by the 

Secretary for which the 

borrower defense is 

asserted with respect to 

Direct Loans to attend an 

open school.

1845-NEW –

This would be 

a new 

collection. 

We estimate 

burden would 

increase by 

1,049 hours.

$

33,299
430

685.300 

Agreements 

between an 

eligible 

school and 

the Secretary 

for 

participation 

in the Direct 

Loan Program.

The proposed regulations 

would require 

institutions, following 

the effective date of the 

regulations, to 

incorporate language into 

agreements allowing

participation by Direct 

Loan students in class 

action lawsuits as well as 

pre-dispute arbitration 

agreements. There is 

required agreement and 

notification language to 

be provided to affected 

students. Additionally, 

the proposed regulations 

would require institutions 

to submit to the Secretary 

copies of arbitral records 

and judicial records 

within specified 

timeframes when the 

actions concern a borrower 

defense claim.

1845-NEW2 –

This would be 

a new 

collection. 

We estimate 

burden would 

increase by

179,362 hours

$6,555,681

The total burden hours and change in burden hours 

associated with each OMB Control number affected by the 

proposed regulations follows:

Control number Total Proposed 

Burden Hours

Proposed Change in 

Burden Hours

1845-0004 153,530 134,860

1845-0020 8,249,520 +7,622

1845-0022 2,285,241 +69,271

1845-NEW 1,049 +1,049

1845-NEW2 179,362 +179,362

Total 10,868,702 +392,164

We have prepared Information Collection Requests for 

these information collection requirements. If you want to 

review and comment on the Information Collection Requests, 
431

please follow the instructions in the ADDRESSES section of 

this NPRM.

Note: The Office of Information and Regulatory Affairs in 

OMB and the Department review all comments posted at 

www.regulations.gov. 

In preparing your comments, you may want to review the 

Information Collection Requests, including the supporting 

materials, in www.regulations.gov by using the Docket ID 

number specified in this NPRM. These proposed collections 

are identified as proposed collections 1845-0004, 1845-

0020, 1845-0022, 1845-NEW, and 1845-NEW2. 

We consider your comments on these proposed 

collections of information in--

• Deciding whether the proposed collections are 

necessary for the proper performance of our functions, 

including whether the information will have practical use;

• Evaluating the accuracy of our estimate of the 

burden of the proposed collections, including the validity 

of our methodology and assumptions;

• Enhancing the quality, usefulness, and clarity of 

the information we collect; and

• Minimizing the burden on those who must respond. 

This includes exploring the use of appropriate automated, 

electronic, mechanical, or other technological collection 
432

techniques.

Between 30 and 60 days after publication of this 

document in the Federal Register, OMB is required to make a 

decision concerning the collections of information

contained in these proposed regulations. Therefore, to 

ensure that OMB gives your comments full consideration, it 

is important that OMB receives your comments on these 

Information Collection Requests by [INSERT DATE 30 DAYS 

AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]. This 

does not affect the deadline for your comments to us on the 

proposed regulations.

If your comments relate to the Information Collection 

Requests for these proposed regulations, please specify the 

Docket ID number and indicate “Information Collection 

Comments” on the top of your comments.

Intergovernmental Review

These programs are not subject to Executive Order 

12372 and the regulations in 34 CFR part 79.

Assessment of Educational Impact

In accordance with section 411 of the General 

Education Provisions Act, 20 U.S.C. 1221e–4, the Secretary 

particularly requests comments on whether these proposed 

regulations would require transmission of information that 
433

any other agency or authority of the United States gathers 

or makes available.

Accessible Format: Individuals with disabilities can 

obtain this document in an accessible format (e.g., 

braille, large print, audiotape, or compact disc) on 

request to one of the persons listed under FOR FURTHER 

INFORMATION CONTACT.

Electronic Access to This Document: The official version 

of this document is the document published in the Federal 

Register. Free Internet access to the official edition of 

the Federal Register and the Code of Federal Regulations is 

available via the Federal Digital System at: 

www.gpo.gov/fdsys. At this site you can view this 

document, as well as all other documents of this Department 

published in the Federal Register, in text or PDF. To use 

PDF you must have Adobe Acrobat Reader, which is available 

free at the site.

You may also access documents of the Department 

published in the Federal Register by using the article 

search feature at: www.federalregister.gov. Specifically, 

through the advanced search feature at this site, you can 

limit your search to documents published by the Department.

(Catalog of Federal Domestic Assistance Number does not 

apply.)
434

List of Subjects

34 CFR Part 30

Claims, Income taxes.

34 CFR Part 668

Administrative practice and procedure, Colleges and 

universities, Consumer protection, Grant programseducation, Loan programs-education, Reporting and 

recordkeeping requirements, Selective Service System, 

Student aid, Vocational education.

34 CFR Part 674

Loan programs-education, Reporting and recordkeeping, 

Student aid.

34 CFR Parts 682 and 685

Administrative practice and procedure, Colleges and 

universities, Loan programs-education, Reporting and 

recordkeeping requirements, Student aid, Vocational 

education.
435

34 CFR Part 686

Administrative practice and procedure, Colleges and 

universities, Education, Elementary and secondary 

education, Grant programs-education, Reporting and 

recordkeeping requirements, Student aid.

Dated: June 9, 2016

____________________________

John B. King, Jr.

Secretary of Education. 
436

For the reasons discussed in the preamble, the 

Secretary of Education proposes to amend parts 30, 668, 

674, 682, 685, and 686 of title 34 of the Code of Federal 

Regulations as follows:

PART 30--DEBT COLLECTION

1. The authority citation for part 30 continues to 

read as follows: 

AUTHORITY: 20 U.S.C. 1221e-3(a)(1), and 1226a-1, 31 

U.S.C. 3711(e), 31 U.S.C. 3716(b) and 3720A, unless 

otherwise noted.

2. Section 30.70 is revised to read as follows:

§30.70 How does the Secretary exercise discretion to 

compromise a debt or to suspend or terminate collection of 

a debt?

(a)(1) The Secretary uses the standards in the FCCS,

31 CFR part 902, to determine whether compromise of a debt 

is appropriate if the debt arises under a program 

administered by the Department, unless compromise of the 

debt is subject to paragraph (b) of this section. 

(2) If the amount of the debt is more than $100,000, 

or such higher amount as the Department of Justice may 

prescribe, the Secretary refers a proposed compromise of 

the debt to the Department of Justice for approval, unless 

the compromise is subject to paragraph (b) of this section 
437

or the debt is one described in paragraph (e) of this 

section. 

(b) Under the provisions in 34 CFR 81.36, the 

Secretary may enter into certain compromises of debts 

arising because a recipient of a grant or cooperative 

agreement under an applicable Department program has spent 

some of these funds in a manner that is not allowable. For 

purposes of this section, neither a program authorized 

under the Higher Education Act of 1965, as amended (HEA), 

nor the Impact Aid Program is an applicable Department

program.

(c)(1) The Secretary uses the standards in the FCCS, 

31 CFR part 903, to determine whether suspension or 

termination of collection action on a debt is appropriate.

(2) Except as provided in paragraph (e), the 

Secretary--

(i) Refers the debt to the Department of Justice to 

decide whether to suspend or terminate collection action if 

the amount of the debt outstanding at the time of the 

referral is more than $100,000 or such higher amount as the 

Department of Justice may prescribe; or

(ii) May suspend or terminate collection action if 

the amount of the debt outstanding at the time of the 

Secretary’s determination that suspension or termination is 
438

warranted is less than or equal to $100,000 or such higher 

amount as the Department of Justice may prescribe.

(d) In determining the amount of a debt under 

paragraph (a), (b), or (c) of this section, the Secretary 

deducts any partial payments or recoveries already 

received, and excludes interest, penalties, and 

administrative costs.

(e)(1) Subject to paragraph (e)(2) of this section, 

under the provisions of 31 CFR part 902 or 903, the 

Secretary may compromise a debt in any amount, or suspend 

or terminate collection of a debt in any amount, if the 

debt arises under the Federal Family Education Loan Program 

authorized under title IV, part B, of the HEA, the William 

D. Ford Federal Direct Loan Program authorized under title 

IV, part D of the HEA, or the Perkins Loan Program 

authorized under title IV, part E, of the HEA.

(2) The Secretary refers a proposed compromise, or

suspension or termination of collection, of a debt that 

exceeds $1,000,000 and that arises under a loan program 

described in paragraph (e)(1) of this section to the 

Department of Justice for review. The Secretary does not 

compromise, or suspend or terminate collection of, a debt 

referred to the Department of Justice for review until the 
439

Department of Justice has provided a response to that 

request. 

(f) The Secretary refers a proposed resolution of a 

debt to the Government Accountability Office (GAO) for 

review and approval before referring the debt to the 

Department of Justice if--

(1) The debt arose from an audit exception taken by 

GAO to a payment made by the Department; and

(2) The GAO has not granted an exception from the GAO 

referral requirement.

(g) Nothing in this section precludes--

(1) A contracting officer from exercising his 

authority under applicable statutes, regulations, or common 

law to settle disputed claims relating to a contract; or

(2) The Secretary from redetermining a claim.

(h) Nothing in this section authorizes the Secretary 

to compromise, or suspend or terminate collection of, a 

debt--

(1) Based in whole or in part on conduct in violation 

of the antitrust laws; or 

(2) Involving fraud, the presentation of a false 

claim, or misrepresentation on the part of the debtor or 

any party having an interest in the claim.
440

(Authority: 20 U.S.C. 1082(a) (5) and (6), 1087a, 1087hh, 

1221e-3(a)(1), 1226a-1, and 1234a, 31 U.S.C. 3711)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

3. The authority citation for part 668 is revised to

read as follows: 

AUTHORITY: 20 U.S.C. 1001-1003, 1070g, 1085, 1088, 

1091, 1092, 1094, 1099c, 1099c-1, 1221-3, and 1231a, unless 

otherwise noted. 

4. Section 668.14 is amended by:

A. In paragraph (b)(30)(ii)(C), removing the word 

“and”.

B. In paragraph (b)(31)(v), removing the period and 

adding, in its place, the punctuation and word “; and”.

C. Adding a new paragraph (b)(32).

The addition reads as follows:

§668.14 Program participation agreement.

* * * * * 

(b) * * *

(32) The institution will provide all enrolled 

students with a closed school discharge application and a 

written disclosure, describing the benefits and 

consequences of a closed school discharge as an alternative 

to completing their educational program through a teach-out 

agreement, as defined in 34 CFR 602.3, immediately upon 
441

submitting a teach-out plan after the occurrence of any of 

the following events:

(i) The initiation by the Secretary of an action to 

terminate the participation of an institution in any title 

IV, HEA program under 34 CFR 600.41 or subpart G of this 

part or the initiation of an emergency action under 

§668.83; or

(ii) The occurrence of any of the events in paragraph 

(b)(31)(ii)–(v) of this section.

* * * * * 

5. Section 668.41 is amended by:

A. Adding new paragraphs (h) and (i).

B. Revising the authority citation.

The additions and revision read as follows:

§§668.41 Reporting and disclosure of information.

* * * * *

(h) Loan repayment warning for proprietary 

institutions—(1) General. For any fiscal year in which a 

proprietary institution’s loan repayment rate is equal to 

or less than zero, the institution must deliver a warning

to enrolled and prospective students in the manner 

described in paragraphs (h)(7) and (8) of this section. 

(2) Definitions. For purposes of this section, the 

term--
442

(i) “Fiscal year” means the 12-month period beginning 

on October 1 and ending on the following September 30 that 

is identified by the calendar year in which it ends;

(ii) “Original outstanding balance” (OOB) means the 

amount of the outstanding balance, including accrued 

interest, on the Direct Loans owed by a student for 

enrollment at the institution on the date the loans first 

entered repayment. The OOB does not include PLUS loans 

made to parent borrowers or TEACH Grant-related loans. For 

consolidation loans, the OOB includes only those loans 

attributable to the borrower’s enrollment at the 

institution; 

(iii) “Current outstanding balance” (COB) means the 

amount of the outstanding balance, including capitalized 

and uncapitalized interest, on the Direct Loans owed by the 

student at the end of the most recently completed fiscal 

year; and 

(iv) “Measurement period” is the period of time 

between the date that a borrower’s loan enters repayment 

and the end of the fiscal year for which the COB of that 

loan is determined.

(3) Methodology. For each fiscal year, the Secretary 

calculates an institution’s loan repayment rate for the 

cohort of borrowers whose Direct Loans entered repayment at 
443

any time during the fifth fiscal year prior to the most 

recently completed fiscal year by--

(i) Determining the OOB of the loans for each of 

those borrowers;

(ii) Determining the COB of the loans for each of 

those borrowers; 

(iii) Calculating the difference between the OOB and 

the COB of the loans for each of those borrowers and 

expressing that difference as a percentage reduction of, or 

an increase in, the OOB; 

(iv) Using zero as the value for any loan on which 

the borrower defaulted for which there is a percentage 

reduction of the OOB; and 

(v) On a scale where percentage reductions in 

principal are positive values and percentage increases in 

principal are negative values, determining the median 

value. The median value is the loan repayment rate for 

that fiscal year. 

(4) Exclusions. The Secretary excludes a borrower 

from the calculation of the loan repayment rate if--

(i) One or more of the borrower’s loans were in a 

military-related deferment status during the last fiscal 

year of the measurement period;
444

(ii) One or more of the borrower's loans are either 

under consideration by the Secretary, or have been 

approved, for a discharge on the basis of the borrower's 

total and permanent disability, under §685.213;

(iii) The borrower was enrolled in an eligible 

institution during the last fiscal year of the measurement 

period; or

(iv) The borrower died.

(5) Issuing and correcting loan repayment rates. In 

accordance with procedures established by the Secretary--

(i) Before issuing a final loan repayment rate for a 

fiscal year, the Secretary--

(A) Provides to the institution a list of the 

students in the cohort described in paragraph (h)(3) of 

this section, the draft repayment rate for that cohort, and 

the information used to calculate the draft rate; and

(B) Allows 45 days for the institution to challenge 

the accuracy of the information that the Secretary used to 

calculate the draft rate; and

(ii) After considering any challenges to the draft 

loan repayment rate, the Secretary notifies the institution 

of its final repayment rate.

(iii) If an institution’s final loan repayment rate 

is equal to or less than zero--
445

(A) Using the calculation described in paragraph 

(h)(6)(ii) of this section, the institution may submit an 

appeal to the Secretary within 15 days of receiving 

notification of its final repayment rate; and

(B) The Secretary will notify the institution if the 

appeal is accepted and the institution qualifies for an 

exemption from the warning requirement under paragraph 

(h)(7) of this section.

(6) Privacy and low borrowing considerations. An

institution is not required to deliver a warning under 

paragraph (h)(7) of this section based on a final repayment 

rate for that fiscal year if the institution demonstrates 

to the Secretary’s satisfaction that--

(i) That rate is based on fewer than 10 borrowers in 

the cohort described in paragraph (h)(3) of this section; 

or

(ii) The institution’s participation rate index is 

less than or equal to 0.0625. An institution calculates 

its participation rate index as if its cohort default rate 

were 30 percent, using the formula described in

§668.214(b)(1). 

(7) Student warnings — (i) General. An institution 

must deliver the warning required under this section to 

enrolled and prospective students in a form and manner 
446

prescribed by the Secretary in a notice published in the 

Federal Register. Before publishing that notice, the 

Secretary will conduct consumer testing to help ensure that 

the warning is meaningful and helpful to students. 

(ii) Delivery to enrolled students. An institution 

must deliver the warning required under this section by 

notifying each enrolled student in writing no later than 30 

days after the Secretary informs the institution of its 

final loan repayment rate by--

(A)(1) Hand-delivering the warning as a separate 

document to the student individually or as part of a group 

presentation; or 

(2) Sending the warning to the student’s primary 

email address or delivering the warning through the 

electronic method used by the institution for communicating 

with the student about institutional matters; and

(B) Ensuring that the warning is the only substantive 

content in the message sent to the student under this 

paragraph unless the Secretary specifies additional, 

contextual language to be included in the message. 

(iii) Delivery to prospective students. An 

institution must provide the warning required under this 

paragraph (h) to a prospective student before that student 
447

enrolls, registers, or enters into a financial obligation

with the institution by--

(A)(1) Hand-delivering the warning as a separate 

document to the student individually, or as part of a group 

presentation; or

(2) Sending the warning to the student’s primary 

email address or delivering the warning through the 

electronic method used by the institution for communicating 

with prospective students about institutional matters; and

(B) Ensuring that the warning is the only substantive 

content in the message sent to the student under this 

paragraph unless the Secretary specifies additional, 

contextual language to be included in the message.

(8) Promotional materials. (i) If an institution is 

required to deliver a warning under paragraph (h)(1) of 

this section, it must, in all promotional materials that 

are made available to prospective or enrolled students by 

or on behalf of the institution, include the warning under 

paragraph (h)(7) of this section, in a prominent manner.

(ii) Promotional materials include, but are not 

limited to, an institution's Web site, catalogs, 

invitations, flyers, billboards, and advertising on or 

through radio, television, print media, social media, or 

the Internet.
448

(iii) The institution must ensure that all 

promotional materials, including printed materials, about 

the institution are accurate and current at the time they 

are published, approved by a State agency, or broadcast.

(9) Institutional Web site. (i) An institution must 

prominently provide the warning required in this section in 

a simple and meaningful manner on the home page of the 

institution’s Web site.

(ii) The warning must be posted to the institution’s 

Web site no later than 30 days after the date the Secretary 

informs the institution of its final loan repayment rate, 

and remain posted to that Web site for the 12-month period 

following the date on which the Secretary informs the 

institution of its final loan repayment rate.

(i) Financial protection disclosures. If an 

institution is required to provide financial protection to 

the Secretary, such as an irrevocable letter of credit or 

cash under §668.175(d) or (f), or to establish a set-aside 

under §668.175(h), the institution must--

(1) Disclose information about that financial 

protection to enrolled and prospective students in the 

manner described in paragraph (h)(7) of this section; 

(2) Post the disclosure on the home page of the 

institution’s Web site in the manner described in paragraph 
449

(h)(9) of this section no later than 30 days after the date 

the Secretary informs the institution of the need for the 

institution to provide financial protection, until such 

time as the Secretary releases the institution from the 

requirement that it provide financial protection; and 

(3) Identify and explain clearly in that disclosure 

the reason or reasons that the institution was required to 

provide that financial protection.

(Authority: 20 U.S.C. 1092, 1094, 1099c)

§668.71 [Amended]

6. Section 668.71 is amended by:

A. In the second sentence of the definition of 

“Misrepresentation” in paragraph (c), removing the word 

“deceive” and adding in its place the words “mislead under 

the circumstances”.

B. In the definition of “Misrepresentation” in 

paragraph (c), adding a new fourth sentence, 

“Misrepresentation includes any statement that omits 

information in such a way as to make the statement false, 

erroneous, or misleading.”

7. Section 668.90 is amended by revising paragraph 

(a)(3) to read as follows:

§668.90 Initial and final decisions.

(a) * * *
450

(3) Notwithstanding the provisions of paragraph 

(a)(2) of this section--

(i) If, in a termination action against an 

institution, the hearing official finds that the 

institution has violated the provisions of §668.14(b)(18), 

the hearing official also finds that termination of the 

institution's participation is warranted;

(ii) If, in a termination action against a thirdparty servicer, the hearing official finds that the 

servicer has violated the provisions of §668.82(d)(1), the 

hearing official also finds that termination of the 

institution's participation or servicer's eligibility, as 

applicable, is warranted;

(iii) In an action brought against an institution or 

third-party servicer that involves its failure to provide a 

letter of credit or other financial protection in the 

amount specified by the Secretary under §668.15 or subpart L 

of part 668, the hearing official finds that the amount of 

the letter of credit or other financial protection 

established by the Secretary is appropriate, unless the 

institution can demonstrate that the amount was not 

warranted because--

(A) The events or conditions identified by the

Secretary as the grounds on which the protection is 
451

required no longer exist or have been resolved in a

manner that eliminates the risk they posed to the 

institution’s ability to meet its financial obligations;

or

(B) The institution has proffered alternative 

financial protection that provides students and the 

Department adequate protection against losses resulting from

the risks identified by the Secretary. Adequate protection

consists of one or both of the following--

(1) A deposit with the Secretary of cash in the amount

of financial protection demanded by the Secretary to be held

by the Secretary in escrow; or

(2) An agreement with the Secretary that a portion of

the funds earned by the institution under a reimbursement 

funding arrangement will be temporarily withheld in such

amounts as will meet, by the end of a nine-month period, the 

amount of the required financial protection demanded; 

(iv) In a termination action taken against an

institution or third-party servicer based on the grounds 

that the institution or servicer failed to comply with the

requirements of §668.23(c)(3), if the hearing official finds 

that the institution or servicer failed to meet those

requirements, the hearing official finds that the 

termination is warranted;
452

(v)(A) In a termination action against an institution

based on the grounds that the institution is not financially

responsible under §668.15(c)(1), the hearing official finds

that the termination is warranted unless the institution

demonstrates that all applicable conditions described in

§668.15(d)(4) have been met; and

(B) In a termination or limitation action against an 

institution based on the grounds that the institution is 

not financially responsible--

(1) Upon proof of the conditions in §668.174(a), the 

hearing official finds that the limitation or termination 

is warranted unless the institution demonstrates that all 

the conditions in §668.175(f) have been met; and

(2) Upon proof of the conditions in §668.174(b)(1), 

the hearing official finds that the limitation or 

termination is warranted unless the institution 

demonstrates that all applicable conditions described in 

§668.174(b)(2) or §668.175(g) have been met.

* * * * *

8. Section 668.93 is amended by redesignating

paragraphs (h) and (i) as paragraphs (i) and (j), 

respectively, and adding a new paragraph (h), to read as 

follows:

§668.93 Limitation.
453

* * * * *

(h) A change in the participation status of the 

institution from fully certified to participate to 

provisionally certified to participate under §668.13(c).

* * * * * 

9. Section 668.171 is revised to read as follows:

§668.171 General.

(a) Purpose. To begin and to continue to participate 

in any title IV, HEA program, an institution must 

demonstrate to the Secretary that it is financially 

responsible under the standards established in this 

subpart. As provided under section 498(c)(1) of the HEA, 

the Secretary determines whether an institution is 

financially responsible based on the institution’s ability 

to--

(1) Provide the services described in its official 

publications and statements;

(2) Meet all of its financial obligations; and

(3) Provide the administrative resources necessary to 

comply with title IV, HEA program requirements.

(b) General standards of financial responsibility. 

Except as provided under paragraphs (c) and (d) of this 

section, the Secretary considers an institution to be 

financially responsible if the Secretary determines that--
454

(1) The institution's Equity, Primary Reserve, and 

Net Income ratios yield a composite score of at least 1.5, 

as provided under §668.172 and appendices A and B to this 

subpart;

(2) The institution has sufficient cash reserves to 

make required returns of unearned title IV, HEA program 

funds, as provided under §668.173; 

(3) The institution is able to meet all of its 

financial obligations and otherwise provide the 

administrative resources necessary to comply with title IV, 

HEA program requirements; and

(4) The institution or persons affiliated with the 

institution are not subject to a condition of past 

performance under §668.174(a) or (b).

(c) Actions and triggering events. An institution is 

not able to meet its financial or administrative 

obligations under paragraph (b)(3) of this section if it is 

subject to one or more of the following actions or 

triggering events.

(1) Lawsuits and other actions. (i)(A) Currently or 

at any time during the three most recently completed award 

years, the institution is or was required to pay a debt or 

incurs a liability arising from an audit, investigation, or 

similar action initiated by a State, Federal, or other 
455

oversight entity, or settles or resolves a suit brought 

against it by that entity, that is based on claims related 

to the making of a Federal loan or the provision of 

educational services, for an amount that, for one or more 

of those years, exceeds the lesser of the threshold amount 

for which an audit is required under 2 CFR part 200 or 10 

percent of its current assets; or

(B) The institution is currently being sued by a 

State, Federal, or other oversight entity based on claims 

related to the making of a Federal loan or the provision of 

educational services for an amount that exceeds the lesser 

of the threshold amount for which an audit is required 

under 2 CFR part 200 or 10 percent of its current assets; 

(ii) The institution is currently being sued by one 

or more State, Federal, or other oversight entities based 

on claims of any kind that are not described in paragraph 

(c)(1)(i)(B) of this section, and the potential monetary 

sanctions or damages from that suit or suits are in an 

amount that exceeds 10 percent of its current assets;

(iii) The institution is currently being sued in a 

lawsuit filed under the False Claims Act, 31 U.S.C. 3729 et 

seq., or by one or more private parties for claims that 

relate to the making of loans to students for the purpose 
456

of enrollment or the institution’s provision of educational 

services, if that suit--

(A) Has survived a motion for summary judgment by the 

institution and has not been dismissed; and

(B) Seeks relief in an amount that exceeds 10 percent 

of the institution’s current assets; or

(iv) For a suit described in paragraph (c)(1)(ii) or 

(iii) of this section, during a fiscal year for which the 

institution has not submitted its audited financial 

statements to the Secretary, the institution entered into a 

settlement, had judgment entered against it, incurred a 

liability, or otherwise resolved that suit for an amount 

that exceeds 10 percent of its current assets. 

(v) In determining whether a suit or action under 

this paragraph exceeds the audit or percentage thresholds, 

the institution must--

(A) Except for private party suits under paragraph 

(c)(1)(iii) of this section, for a suit or action that does 

not demand a specific amount as relief, calculate that 

amount by totaling the tuition and fees the institution 

received from every student who was enrolled at the 

institution during the period for which the relief is 

sought, or if no period is stated, the three award years 
457

preceding the date the suit or action was filed or 

initiated; and

(B) Use the amount of current assets reported in its 

most recent audited financial statements submitted to the 

Secretary.

(2) Repayments to the Secretary. During the current

award year or any of the three most recently completed 

award years, the institution is or was required to repay 

the Secretary for losses from borrower defense claims in an 

amount that, for one or more of those years, exceeds the 

lesser of the threshold amount for which an audit is 

required under 2 CFR part 200 or 10 percent of its current 

assets, as reported in its most recent audited financial 

statements submitted to the Secretary.

(3) Accrediting agency actions. Currently or any 

time during the three most recently completed award years, 

the institution is or was--

(i) Required by its accrediting agency to submit a 

teach-out plan, for a reason described in §602.24(c)(1), 

that covers the institution or any of its branches or 

additional locations; or

(ii) Placed on probation or issued a show-cause 

order, or placed on an accreditation status that poses an 

equivalent or greater risk to its accreditation, by its 
458

accrediting agency for failing to meet one or more of the 

agency’s standards, and the accrediting agency does not 

notify the Secretary within six months of taking that 

action that it has withdrawn that action because the 

institution has come into compliance with the agency’s 

standards.

(4) Loan agreements and obligations. As disclosed in 

a note to its audited financial statements or audit 

opinion, or reported by the institution under paragraph (d) 

of this section--

(i) The institution violated a provision or 

requirement in a loan agreement with the creditor with the 

largest secured extension of credit to the institution; 

(ii) The institution failed to make a payment for 

more than 120 days in accordance with its debt obligations 

owed to the creditor with the largest secured extension of 

credit to the institution; or

(iii) As provided under the terms of a security or 

loan agreement between the institution and the creditor 

with the largest secured extension of credit to the 

institution, a monetary or nonmonetary default or 

delinquency event occurs, or other events occur that 

trigger, or enable the creditor to require or impose on the 

institution, an increase in collateral, a change in 
459

contractual obligations, an increase in interest rates or 

payments, or other sanctions, penalties, or fees.

(5) Non-title IV revenue. For its most recently 

completed fiscal year, a proprietary institution did not 

derive at least 10 percent of its revenue from sources 

other than title IV, HEA program funds, as provided under 

§668.28(c).

(6) Publicly traded institutions. As reported by the 

institution under paragraph (d) of this section, or 

identified by the Secretary--

(i) The Securities and Exchange Commission (SEC) 

warns the institution that it may suspend trading on the 

institution’s stock, or the institution’s stock is delisted 

involuntarily from the exchange on which the stock was

traded; 

(ii) The institution disclosed or was required to 

disclose in a report filed with the SEC a judicial or 

administrative proceeding stemming from a complaint filed 

by a person or entity that is not part of a State or 

Federal action under paragraph (c)(1) of this section; 

(iii) The institution failed to file timely a 

required annual or quarterly report with the SEC; or
460

(iv) The exchange on which the institution’s stock is 

traded notifies the institution that it is not in 

compliance with exchange requirements.

(7) Gainful employment. As determined annually by 

the Secretary, the number of students who receive title IV, 

HEA program funds enrolled in gainful employment programs 

that are failing or in the zone under the D/E rates measure 

in §668.403(c) is more than 50 percent of the total number 

of students who received title IV program funds who are 

enrolled in all the gainful employment programs at the 

institution. An institution is exempt from this provision

if less than 50 percent of all the students enrolled at the 

institution who receive title IV, HEA program funds are 

enrolled in gainful employment programs.

(8) Withdrawal of owner’s equity. For an institution 

whose composite score is less than 1.5, any withdrawal of 

owner’s equity from the institution by any means, including 

by declaring a dividend.

(9) Cohort default rates. The institution’s two most 

recent official cohort default rates are 30 percent or 

greater, as determined under subpart N of this part, 

unless--
461

(i) The institution files a challenge, request for 

adjustment, or appeal under that subpart with respect to 

its rates for one or both of those fiscal years; and

(ii) That challenge, request, or appeal remains 

pending, results in reducing below 30 percent the official 

cohort default rate for either or both years, or precludes 

the rates from either or both years from resulting in a 

loss of eligibility or provisional certification.

(10) Other events or conditions. The Secretary 

determines that there is an event or condition that is 

reasonably likely to have a material adverse effect on the 

financial condition, business, or results of operations of 

the institution, including but not limited to whether--

(i) There is a significant fluctuation between 

consecutive award years, or a period of award years, in the 

amount of Direct Loan or Pell Grant funds, or a combination 

of those funds, received by the institution that cannot be 

accounted for by changes in those programs;

(ii) The institution is cited by a State licensing or 

authorizing agency for failing State or agency 

requirements; 

(iii) The institution fails a financial stress test 

developed or adopted by the Secretary to evaluate whether 

the institution has sufficient capital to absorb losses 
462

that may be incurred as a result of adverse conditions and 

continue to meet its financial obligations to the Secretary 

and students; 

(iv) The institution or its corporate parent has a 

non-investment grade bond or credit rating; 

(v) As calculated by the Secretary, the institution 

has high annual dropout rates; or

(vii) Any adverse event reported by the institution 

on a Form 8-K filed with the SEC. 

(d) Reporting requirements. In accordance with 

procedures established by the Secretary, an institution 

must notify the Secretary of any action or event identified 

in paragraph (c) of this section no later than 10 days 

after that action or event occurs. The Secretary may take 

an administrative action under paragraph (g) of this 

section against the institution if it fails to provide 

timely notice under this paragraph. In its notice to the 

Secretary, the institution may demonstrate that--

(1) The reported disclosure of a judicial or 

administrative proceeding under paragraph (c)(6)(ii) of 

this section does not constitute a material event;

(2) The reported withdrawal of owner’s equity 

under paragraph (c)(8) of this section was used 

exclusively to meet tax liabilities of the institution 
463

or its owners for income derived from the institution, 

or, in the case where the composite score is 

calculated based on the consolidated financial 

statements of a group of institutions, the amount 

withdrawn from one institution in the group was 

transferred to another entity within that group; or

(3) The reported violation of a provision or 

requirement in a loan agreement under paragraph (c)(4) 

of this section was waived by the creditor. However, 

if the creditor imposes additional constraints or 

requirements as a condition of waiving the violation, 

or imposes penalties or requirements under paragraph 

(c)(4)(iii) of this section, the institution must 

identify and describe those penalties, constraints, or 

requirements and demonstrate that complying with those 

actions will not adversely affect the institution’s 

ability to meet its current and future financial 

obligations.

(e) Public institutions. (1) The Secretary

considers a domestic public institution to be

financially responsible if the institution--

(i)(A) Notifies the Secretary that it is designated

as a public institution by the State, local, or municipal 

government entity, tribal authority, or other government
464

entity that has the legal authority to make that 

designation; and

(B) Provides a letter from an official of that State

or other government entity confirming that the institution

is a public institution; and

(ii) Is not subject to a condition of past performance 

under §668.174.

(2) The Secretary considers a foreign public 

institution to be financially responsible if the

institution--

(i)(A) Notifies the Secretary that it is designated

as a public institution by the country or other government

entity that has the legal authority to make that

designation; and

(B) Provides documentation from an official of that

country or other government entity confirming that the

institution is a public institution and is backed by the

full faith and credit of the country or other government

entity; and

(ii) Is not subject to a condition of past performance 

under §668.174.

(f) Audit opinions. Even if an institution 

satisfies all of the general standards of financial 

responsibility under paragraph (b) of this section, the
465

Secretary does not consider the institution to be

financially responsible if, in the institution's audited

financial statements, the opinion expressed by the auditor 

was an adverse, qualified, or disclaimed opinion, or the

auditor expressed doubt about the continued existence of 

the institution as a going concern, unless the Secretary

determines that a qualified or disclaimed opinion does not

significantly bear on the institution's financial

condition.

(g) Administrative actions. If the Secretary

determines that an institution is not financially

responsible under the standards and provisions of this

section or under an alternative standard in §668.175, or 

the institution does not submit its financial and

compliance audits by the date and in the manner required

under §668.23, the Secretary may--

(1) Initiate an action under subpart G of this part

to fine the institution, or limit, suspend, or terminate 

the institution's participation in the title IV, HEA 

programs; or

(2) For an institution that is provisionally

certified, take an action against the institution under

the procedures established in §668.13(d).
466

(Authority: 20 U.S.C. 1094 and 1099c and section 4 of Pub. 

L. 95-452, 92 Stat. 1101-1109)

10. Section 668.175 is amended by:

A. Revising paragraphs (d) and (f).

B. Removing and reserving paragraph (e).

C. Adding paragraph (h).

D. Revising the authority citation.

The revisions and addition read as follows:

§668.175 Alternative standards and requirements.

* * * * *

(d) Zone alternative. (1) A participating

institution that is not financially responsible solely

because the Secretary determines that its composite score

is less than 1.5 may participate in the title IV, HEA 

programs as a financially responsible institution for no

more than three consecutive years, beginning with the

year in which the Secretary determines that the

institution qualifies under this alternative.

(i)(A) An institution qualifies initially under this 

alternative if, based on the institution's audited

financial statement for its most recently completed fiscal

year, the Secretary determines that its composite score is 

in the range from 1.0 to 1.4; and

(B) An institution continues to qualify under 
467

this alternative if, based on the institution's 

audited financial statement for each of its subsequent

two fiscal years, the Secretary determines that the 

institution's composite score is in the range from 1.0

to 1.4.

(ii) An institution that qualified under this 

alternative for three consecutive years, or for one of

those years, may not seek to qualify again under this

alternative until the year after the institution achieves

a composite score of at least 1.5, as determined by the

Secretary.

(2) Under the zone alternative, the Secretary--

(i) Requires the institution to make disbursements 

to eligible students and parents, and to otherwise comply 

with the provisions, under either the heightened cash 

monitoring or reimbursement payment method described in

§668.162;

(ii) Requires the institution to provide timely

information regarding any of the following oversight and

financial events--

(A) Any event that causes the institution, or related 

entity as defined in Accounting Standards Codification 

(ASC) 850, to realize any liability that was noted as a 
468

contingent liability in the institution's or related 

entity's most recent audited financial statement; or

(B) Any losses that are unusual in nature or 

infrequently occur or both, as defined in accordance with 

Accounting Standards Update (ASU) No. 2015-01 and ASC 225;

(iii) May require the institution to submit its 

financial statement and compliance audits earlier than the 

time specified under §668.23(a)(4); and

(iv) May require the institution to provide

information about its current operations and future plans.

(3) Under the zone alternative, the institution must--

(i) For any oversight or financial event described in

paragraph (d)(2)(ii) of this section for which the 

institution is required to provide information, in 

accordance with procedures established by the Secretary, 

notify the Secretary no later than 10 days after that event

occurs; and

(ii) As part of its compliance audit, require its

auditor to express an opinion on the institution's 

compliance with the requirements under the zone

alternative, including the institution's administration of 

the payment method under which the institution received and

disbursed title IV, HEA program funds.

(4) If an institution fails to comply with the
469

requirements under paragraphs (d)(2) or (3) of this 

section, the Secretary may determine that the institution

no longer qualifies under this alternative.

(e) [Reserved]

(f) Provisional certification alternative. (1) The

Secretary may permit an institution that is not financially 

responsible to participate in the title IV, HEA programs 

under a provisional certification for no more than three

consecutive years if--

(i) The institution is not financially responsible

because it does not satisfy the general standards under 

§668.171(b)(1), is subject to an action or triggering event 

under §668.171(c), or because of an audit opinion described

in §668.171(f); or

(ii) The institution is not financially responsible

because of a condition of past performance, as provided 

under §668.174(a), and the institution demonstrates to the

Secretary that it has satisfied or resolved that

condition.

(2) Under this alternative, the institution must--

(i) Provide to the Secretary an irrevocable letter of 

credit that is acceptable and payable to the Secretary, 

provide cash, or agree to a set-aside under paragraph (h) 

of this section, for an amount determined by the Secretary
470

under paragraph (f)(4) of this section, except that this 

requirement does not apply to a public institution; and

(ii) Comply with the provisions under the zone

alternative, as provided under paragraph (d)(2) and (3) of 

this section.

(3) If at the end of the period for which the

Secretary provisionally certified the institution, the 

institution is still not financially responsible, the

Secretary may again permit the institution to participate 

under a provisional certification, but the Secretary--

(i) May require the institution, or one or more

persons or entities that exercise substantial control over 

the institution, as determined under §668.174(b)(1) and

(c), or both, to provide to the Secretary financial 

protection for an amount determined by the Secretary to be

sufficient to satisfy any potential liabilities that may

arise from the institution's participation in the title IV, 

HEA programs; and

(ii) May require one or more of the persons or

entities that exercise substantial control over the 

institution, as determined under §668.174(b)(1) and (c), 

to be jointly or severally liable for any liabilities that

may arise from the institution's participation in the

title IV, HEA programs.
471

(4) The institution must provide to the Secretary an 

irrevocable letter of credit for an amount that is--

(i) For a State or Federal action under 

§668.171(c)(1)(i)(A) or (B), 10 percent or more, as 

determined by the Secretary, of the amount of Direct Loan 

Program funds received by the institution during its most 

recently completed fiscal year; 

(ii) For repayments to the Secretary for losses from 

borrower defense claims under §668.171(c)(2), equal to the 

greatest annual loss incurred by the Secretary during the 

three most recently completed award years to resolve those 

claims or the amount of losses incurred by the Secretary 

during the current award year, whichever is greater, plus a 

portion of the amount of any outstanding or pending claims 

based on the ratio of the total value of claims resolved in 

favor of borrowers during the three most recently completed 

award years to the total value of claims resolved during 

the three most recently completed award years; and 

(iii) For any other action or triggering event 

described in §668.171(c), or if the institution’s composite 

score is less than 1.0 or the institution no longer 

qualifies under the zone alternative, 10 percent or more, 

as determined by the Secretary, of the total amount of 
472

title IV, HEA program funds received by the institution 

during its most recently completed fiscal year.

* * * * *

(h) Set-aside. If an institution does not provide 

cash or the letter of credit for the amount required under 

paragraph (d) or (f) of this section within 30 days of the 

Secretary’s request, the Secretary offsets the amount of 

title IV, HEA program funds that an institution has earned 

in a manner that ensures that, by the end of a nine-month 

period, the total amount offset equals the amount of cash 

or the letter of credit the institution would otherwise 

provide. The Secretary maintains the amount of funds 

offset in a temporary escrow account, uses the funds to 

satisfy the debt and liabilities owed to the Secretary not 

otherwise paid directly by the institution, and provides to 

the institution any funds not used for this purpose during 

the period for which the cash or letter of credit was 

required.

(Authority: 20 U.S.C. 1094 and 1099c)

11. Section 668.176 is added to subpart L to read as 

follows:

§668.176 Severability.

If any provision of this subpart or its application to 

any person, act, or practice is held invalid, the remainder 
473

of the subpart or the application of its provisions to any 

person, act, or practice shall not be affected thereby.

(Authority: 20 U.S.C. 1094, 1099c)

PART 674--FEDERAL PERKINS LOAN PROGRAM

12. The authority citation for part 674 continues to

read as follows:

AUTHORITY: 20 U.S.C. 1070g, 1087aa—1087hh, unless 

otherwise noted.

13. Section 674.33 is amended by:

A. In paragraph (g)(3) introductory text, removing 

the words “may discharge” and adding, in their place, the 

word “discharges”.

B. In paragraph (g)(3)(i), removing the word “or”.

C. In paragraph (g)(3)(ii), removing the period and 

adding, in its place, the punctuation and word “; or”.

D. Adding paragraph (g)(3)(iii).

E. Redesignating paragraphs (g)(8)(vi), (vii),

(viii), and (ix) as paragraphs (g)(8)(vii), (viii), (ix), 

and (x), respectively.

F. Adding a new paragraph (g)(8)(vi).

The additions read as follows:

§674.33 Repayment.

* * * * * 

(g) * * *
474

(3) * * *

(iii) Based on information in the Secretary’s 

possession, the borrower did not subsequently re-enroll in 

any title IV-eligible institution within a period of three 

years from the date the school closed.

* * * * * 

(8) * * *

(vi) Upon resuming collection on any affected loan, 

the Secretary provides the borrower another discharge 

application and an explanation of the requirements and 

procedures for obtaining a discharge.

* * * * *

14. Section 674.61 is amended by revising paragraph 

(a) to read as follows:

§674.61 Discharge for death or disability.

(a) Death. (1) An institution must discharge the 

unpaid balance of a borrower's Defense, NDSL, or Federal 

Perkins loan, including interest, if the borrower dies. 

The institution must discharge the loan on the basis of--

(i) An original or certified copy of the death 

certificate;

(ii) An accurate and complete photocopy of the 

original or certified copy of the death certificate;
475

(iii) An accurate and complete original or certified 

copy of the death certificate that is scanned and submitted 

electronically or sent by facsimile transmission; or

(iv) Verification of the borrower's death through an 

authoritative Federal or State electronic database approved 

for use by the Secretary.

(2) Under exceptional circumstances and on a case-bycase basis, the chief financial officer of the institution 

may approve a discharge based upon other reliable 

documentation of the borrower's death.

* * * * *

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

15. The authority citation for part 682 continues to 

read as follows: 

AUTHORITY: 20 U.S.C. 1071-1087-4, unless otherwise 

noted. 

§682.202 [Amended]

16. Section 682.202 is amended in paragraph (b)(1) by

removing the words “A lender” and adding, in their place, 

“Except as provided in §682.405(b)(4), a lender”.

17. Section 682.211 is amended by adding paragraph 

(i)(7) to read as follows:

§682.211 Forbearance.

* * * * *
476

(i) * * *

(7) The lender must grant a mandatory administrative 

forbearance to a borrower upon being notified by the 

Secretary that the borrower has made a borrower defense 

claim related to a loan that the borrower intends to 

consolidate into the Direct Loan Program for the purpose of 

seeking relief in accordance with §685.212(k). The 

mandatory administrative forbearance shall remain in effect

until the lender is notified by the Secretary that the 

Secretary has made a determination as to the borrower’s 

eligibility for a borrower defense discharge.

* * * * *

18. Section 682.402 is amended by:

A. Revising paragraphs (b)(2), (d)(6)(ii)(F)

introductory text and (d)(6)(ii)(H).

B. Redesignating paragraph (d)(6)(ii)(I) as paragraph 

(d)(6)(ii)(J).

C. Adding new paragraphs (d)(6)(ii)(I) and 

(d)(6)(ii)(K).

D. In paragraph (d)(8) introductory text, removing 

the words “may be” and adding in their place the word “is”.

E. In paragraph (d)(8)(i), removing the word “or”.

F. In paragraph (d)(8)(ii), removing the period and 

adding in its place the punctuation and word “; or”.
477

G. Adding paragraph (d)(8)(iii).

H. In paragraph (e)(6)(iii), removing the last 

sentence.

The revisions and additions read as follows:

§682.402 Death, disability, closed school, false 

certification, unpaid refunds, and bankruptcy payments.

* * * * *

(b) * * *

(2)(i) A discharge of a loan based on the death of 

the borrower (or student in the case of a PLUS loan) must 

be based on--

(A) An original or certified copy of the death 

certificate;

(B) An accurate and complete photocopy of the 

original or certified copy of the death certificate;

(C) An accurate and complete original or certified 

copy of the death certificate that is scanned and submitted 

electronically or sent by facsimile transmission; or

(D) Verification of the borrower's or student’s death 

through an authoritative Federal or State electronic 

database approved for use by the Secretary.

(ii) Under exceptional circumstances and on a caseby-case basis, the chief executive officer of the guaranty 
478

agency may approve a discharge based upon other reliable 

documentation of the borrower's or student's death. 

* * * * *

(d) * * *

(6) * * *

(ii) * * *

(F) If the guaranty agency determines that a borrower 

identified in paragraph (d)(6)(ii)(C) or (D) of this 

section does not qualify for a discharge, the agency shall 

notify the borrower in writing of that determination, the 

opportunity for review by the Secretary, and an explanation 

of the manner in which to request such a review within 30 

days after the date the agency--

* * * * *

(H) If a borrower described in paragraph 

(d)(6)(ii)(E) or (F) fails to submit the completed 

application within 60 days of being notified of that 

option, the lender or guaranty agency shall resume 

collection and shall be deemed to have exercised 

forbearance of payment of principal and interest from the 

date it suspended collection activity. The lender may 

capitalize, in accordance with §682.202(b), any interest 

accrued and not paid during that period. 
479

(I) Upon resuming collection on any affected loan, 

the lender or guaranty agency provides the borrower another 

discharge application and an explanation of the 

requirements and procedures for obtaining a discharge.

* * * * *

(K)(1) Within 30 days after receiving the borrower’s 

request for review under paragraph (d)(6)(ii)(F) of this 

section, the agency shall forward the borrower’s discharge 

request and all relevant documentation to the Secretary for 

review.

(2) The Secretary notifies the agency and the 

borrower of the determination upon review. If the 

Secretary determines that the borrower is not eligible for 

a discharge under paragraph (d) of this section, within 30 

days after being so informed, the agency shall take the 

actions described in paragraph (d)(6)(ii)(H) or 

(d)(6)(ii)(I) of this section, as applicable.

(3) If the Secretary determines that the borrower 

meets the requirements for a discharge under paragraph (d) 

of this section, the agency shall, within 30 days after 

being so informed, take actions required under paragraph 

(d)(6) and (d)(7) of this section, as applicable.

* * * * *

(8) * * *
480

(iii) The Secretary or guaranty agency determines, 

based on information in their possession, that the borrower 

did not subsequently re-enroll in any title IV-eligible 

institution within a period of three years after the school 

closed.

* * * * *

19. Section 682.405 is amended by:

A. Redesignating paragraph (b)(4) as paragraph 

(b)(4)(i).

B. Adding a new paragraph (b)(4)(ii).

The addition reads as follows:

§682.405 Loan rehabilitation agreement.

* * * * * 

(b) * * * 

(4) * * *

(ii) The lender must not consider the purchase of a 

rehabilitated loan as entry into repayment or resumption of 

repayment for the purposes of interest capitalization under 

§682.202(b).

* * * * *

§682.410 [Amended]

20. Section 682.410 is amended in paragraph (b)(4) by 

adding, after the words “to the lender”, the words and 
481

punctuation “, but shall not capitalize any unpaid interest 

thereafter”.

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

21. The authority citation for part 685 continues to 

read as follows:

AUTHORITY: 20 U.S.C. 1070g, 1087a, et seq., unless 

otherwise noted. 

22. Section 685.200 is amended by: 

A. Adding paragraph (f)(3)(v). 

B. Adding paragraph (f)(4)(iii). 

The additions read as follows: 

§685.200 Borrower eligibility. 

* * * * * 

(f) * * *

(3) * * *

(v) A borrower who receives a closed school, false 

certification, unpaid refund, or defense to repayment 

discharge that results in a remaining eligibility period 

greater than zero is no longer responsible for the interest 

that accrues on a Direct Subsidized Loan or on the portion 

of a Direct Consolidation Loan that repaid a Direct 

Subsidized Loan unless the borrower once again becomes 

responsible for the interest that accrues on a previously 

received Direct Subsidized Loan or on the portion of a 
482

Direct Consolidation Loan that repaid a Direct Subsidized 

Loan, for the life of the loan, as described in paragraph 

(f)(3)(i) of this section.

(4) * * *

(iii) For a first-time borrower who receives a closed 

school, false certification, unpaid refund, or defense to 

repayment discharge on a Direct Subsidized Loan or a 

portion of a Direct Consolidation Loan that is attributable 

to a Direct Subsidized Loan, the Subsidized Usage Period is 

reduced. If the Direct Subsidized Loan or a portion of a 

Direct Consolidation Loan that is attributable to a Direct 

Subsidized Loan is discharged in full, the Subsidized Usage 

Period is zero years. If the Direct Subsidized Loan or a 

portion of a Direct Consolidation Loan that is attributable

to a Direct Subsidized Loan is discharged in part, the

Subsidized Usage Period may be reduced if the discharge 

results in the inapplicability of paragraph (f)(4)(i) of 

this section.

* * * * *

23. Section 685.205 is amended by revising paragraph 

(b)(6) to read as follows:

§685.205 Forbearance.

* * * * * 

(b) * * *
483

(6) Periods necessary for the Secretary to determine 

the borrower's eligibility for discharge--

(i) Under §685.206(c);

(ii) Under §685.214;

(iii) Under §685.215;

(iv) Under §685.216;

(v) Under §685.217; 

(vi) Under §685.222; or

(vii) Due to the borrower's or endorser's (if 

applicable) bankruptcy;

* * * * *

24. Section 685.206 is amended by revising paragraph 

(c) to read as follows:

§685.206 Borrower responsibilities and defenses.

* * * * * 

(c) Borrower defenses. (1) For loans first disbursed 

prior to July 1, 2017, the borrower may assert a borrower 

defense under this paragraph (c). A “borrower defense” 

refers to any act or omission of the school attended by the 

student that relates to the making of the loan or the 

provision of educational services for which the loan was 

provided that would give rise to a cause of action against 

the school under applicable State law, and includes one or 

both of the following: 
484

(i) A defense to repayment of amounts owed to the 

Secretary on a Direct Loan, in whole or in part.

(ii) A claim to recover amounts previously collected 

by the Secretary on the Direct Loan, in whole or in part. 

(2) The order of objections for defaulted Direct 

Loans are as described in §685.222(a)(1) to (6). A 

borrower defense claim under this section must be asserted, 

and will be resolved, under the procedures in §685.222(e) 

to (k). 

(3) For an approved borrower defense under this 

section, the Secretary may initiate an appropriate 

proceeding to collect from the school whose act or omission 

resulted in the borrower defense the amount of relief 

arising from the borrower defense.

* * * * *

§685.209 [Amended]

25. Section 685.209 is amended by:

A. In paragraph (a)(1)(ii), adding the punctuation 

and words “, for purposes of determining whether a borrower 

has a partial financial hardship in accordance with 

paragraph (a)(1)(v) of this section or adjusting a 

borrower's monthly payment amount in accordance with 

paragraph (a)(2)(ii) of this section,” immediately after 

the words “Eligible loan”.
485

B. In paragraph (c)(1)(ii), adding the punctuation 

and words “, for purposes of adjusting a borrower's monthly 

payment amount in accordance with paragraph (c)(2)(ii) of 

this section,” immediately after the words “Eligible loan”.

C. In paragraph (c)(2)(ii)(B) introductory text, 

removing the word “Both” and adding, in its place, the 

words “Except in the case of a married borrower filing 

separately whose spouse's income is excluded in accordance 

with paragraph (c)(1)(i)(A) or (B) of this section, both”.

D. In paragraph (c)(2)(v), removing the words “or the 

Secretary determines the borrower does not have a partial 

financial hardship”. 

E. In paragraph (c)(4)(iii)(B), removing the 

citations “(c)(2)(iv), (c)(4)(v), and (c)(4)(vi)” and 

adding, in their place, the citations “(c)(2)(iv) and 

(c)(4)(v)”.

26. Section 685.212 is amended by:

A. Revising paragraphs (a)(1) and (a)(2).

B. Adding paragraph (k). 

The revision and addition read as follows:

§685.212 Discharge of a loan obligation.

(a) Death. (1) If a borrower (or a student on whose 

behalf a parent borrowed a Direct PLUS Loan) dies, the 

Secretary discharges the obligation of the borrower and any 
486

endorser to make any further payments on the loan based on-

-

(i) An original or certified copy of the death 

certificate;

(ii) An accurate and complete photocopy of the 

original or certified copy of the death certificate;

(iii) An accurate and complete original or certified 

copy of the death certificate that is scanned and submitted 

electronically or sent by facsimile transmission; or

(iv) Verification of the borrower’s or student’s 

death through an authoritative Federal or State electronic 

database approved for use by the Secretary.

(2) Under exceptional circumstances and on a case-bycase basis, the Secretary discharges a loan based upon 

other reliable documentation of the borrower’s or student’s 

death that is acceptable to the Secretary.

* * * * *

(k) Borrower defenses. (1) If a borrower defense is 

approved under §685.206(c) or §685.222--

(i) The Secretary discharges the obligation of the 

borrower in whole or in part in accordance with the 

procedures in §§685.206(c) and 685.222, respectively; and

(ii) The Secretary returns to the borrower payments 

made by the borrower or otherwise recovered on the loan 
487

that exceed the amount owed on that portion of the loan not 

discharged, if the borrower asserted the claim not later 

than--

(A) For a claim subject to §685.206(c), the 

limitation period under applicable law to the claim on 

which relief was granted; or

(B) For a claim subject to §685.222, the limitation 

period in §685.222(b), (c), or (d), as applicable. 

(2) In the case of a Direct Consolidation Loan, a 

borrower may assert a borrower defense under §685.206(c) or 

§685.222 with respect to a Direct Loan, a FFEL Program 

Loan, a Federal Perkins Loan, Health Professions Student 

Loan, Loan for Disadvantaged Students under subpart II of 

part A of title VII of the Public Health Service Act, 

Health Education Assistance Loan, or Nursing Loan made 

under subpart II of part B of the Public Health Service Act 

that was repaid by the Direct Consolidation Loan. 

(i) The Secretary considers a borrower defense claim 

asserted on a Direct Consolidation Loan by determining --

(A) Whether the act or omission of the school with 

regard to the loan described in paragraph (k)(2) of this 

section other than a Direct Subsidized, Unsubsidized, or 

PLUS Loan, constitutes a borrower defense under 

§685.206(c), for a Direct Consolidation Loan made before 
488

July 1, 2017, or under §685.222, for a Direct Consolidation 

Loan made on or after July 1, 2017; or 

(B) Whether the act or omission of the school with 

regard to a Direct Subsidized, Unsubsidized, or PLUS Loan 

made on after July 1, 2017 that was paid off by the Direct 

Consolidation Loan, constitutes a borrower defense under 

§685.222. 

(ii) If the borrower defense is approved, the 

Secretary discharges the appropriate portion of the Direct 

Consolidation Loan.

(iii) The Secretary returns to the borrower payments 

made by the borrower or otherwise recovered on the Direct 

Consolidation Loan that exceed the amount owed on that 

portion of the Direct Consolidation Loan not discharged, if 

the borrower asserted the claim not later than--

(A) For a claim asserted under §685.206(c), the 

limitation period under applicable law to the claim on 

which relief was granted; or

(B) For a claim asserted under §685.222, the 

limitation period in §685.222(b), (c), or (d), as 

applicable. 

(iv) The Secretary returns to the borrower a payment 

made by the borrower or otherwise recovered on the loan 

described in paragraph (k)(2) of this section only if--
489

(A) The payment was made directly to the Secretary on 

the loan; and 

 (B) The borrower proves that the loan to which the 

payment was credited was not legally enforceable under 

applicable law in the amount for which that payment was 

applied. 

* * * * * 

27. Section 685.214 is amended by: 

A. Revising paragraph (c)(2).

B. Revising paragraph (f)(4).

C. Redesignating paragraphs (f)(5) and (6) as 

paragraphs (f)(6) and (7), respectively.

D. Adding a new paragraph (f)(5).

The revisions and addition read as follows:

§685.214 Closed school discharge.

* * * * * 

(c) * * *

(2) The Secretary discharges a loan under this 

section without an application from the borrower if the 

Secretary determines, based on information in the 

Secretary’s possession, that--

(i) The borrower qualifies for the discharge; and 
490

(ii) The borrower did not subsequently re-enroll in 

any title IV-eligible institution within a period of three 

years from the date the school closed.

* * * * * 

(f) * * *

(4) If a borrower fails to submit the application 

described in paragraph (c) of this section within 60 days 

of the Secretary’s providing the discharge application, the 

Secretary resumes collection and grants forbearance of 

principal and interest for the period in which collection 

activity was suspended. The Secretary may capitalize any 

interest accrued and not paid during that period.

(5) Upon resuming collection on any affected loan, 

the Secretary provides the borrower another discharge 

application and an explanation of the requirements and 

procedures for obtaining a discharge.

* * * * *

28. Section 685.215 is amended by: 

A. Revising paragraph (a)(1).

B. Revising paragraph (c) introductory text.

C. Revising paragraph (c)(1).

D. Redesignating paragraphs (c)(2) through (7) as 

paragraphs (c)(3) through (8), respectively.

E. Adding a new paragraph (c)(2).
491

F. Revising redesignated paragraph (c)(8).

G. Revising paragraph (d).

The revisions and addition read as follows:

§685.215 Discharge for false certification of student 

eligibility or unauthorized payment.

(a) Basis for discharge — (1) False certification.

The Secretary discharges a borrower's (and any endorser's) 

obligation to repay a Direct Loan in accordance with the 

provisions of this section if a school falsely certifies 

the eligibility of the borrower (or the student on whose 

behalf a parent borrowed) to receive the proceeds of a 

Direct Loan. The Secretary considers a student's 

eligibility to borrow to have been falsely certified by the

school if the school--

(i) Certified the eligibility of a student who 

(A) Reported not having a high school diploma or its 

equivalent; and

(B) Did not satisfy the alternative to graduation 

from high school requirements under section 484(d) of the 

Act that were in effect at the time of certification;

(ii) Certified the eligibility of a student who is 

not a high school graduate based on--

(A) A high school graduation status falsified by the 

school; or 
492

(B) A high school diploma falsified by the school or 

a third party to which the school referred the borrower; 

(iii) Signed the borrower's name on the loan 

application or promissory note without the borrower's 

authorization; 

(iv) Certified the eligibility of a student who, 

because of a physical or mental condition, age, criminal 

record, or other reason accepted by the Secretary, would 

not meet State requirements for employment (in the 

student's State of residence when the loan was originated) 

in the occupation for which the training program supported 

by the loan was intended; or 

(v) Certified the eligibility of a student for a 

Direct Loan as a result of the crime of identity theft 

committed against the individual, as that crime is defined 

in paragraph (c)(5)(ii) of this section. 

* * * * *

(c) Borrower qualification for discharge. To qualify 

for discharge under this section, the borrower must submit 

to the Secretary an application for discharge on a form 

approved by the Secretary. The application need not be 

notarized but must be made by the borrower under penalty of 

perjury; and in the application, the borrower’s responses 

must demonstrate to the satisfaction of the Secretary that 
493

the requirements in paragraph (c)(1) through (7) of this 

section have been met. If the Secretary determines the 

application does not meet the requirements, the Secretary 

notifies the applicant and explains why the application 

does not meet the requirements.

(1) High school diploma or equivalent. In the case 

of a borrower requesting a discharge based on not having 

had a high school diploma and not having met the 

alternative to graduation from high school eligibility 

requirements under section 484(d) of the Act applicable at 

the time the loan was originated, and the school or a third 

party to which the school referred the borrower falsified 

the student’s high school diploma, the borrower must state 

in the application that that the borrower (or the student 

on whose behalf a parent received a PLUS loan)--

(i) Did not have a valid high school diploma at the 

time the loan was certified; and

(ii) Did not satisfy the alternative to graduation 

from high school statutory or regulatory eligibility 

requirements identified on the application form and 

applicable at the time the institution certified the loan.

(2) Disqualifying condition. In the case of a 

borrower requesting a discharge based on a condition that 

would disqualify the borrower from employment in the 
494

occupation that the training program for which the borrower 

received the loan was intended, the borrower must state in 

the application that the borrower (or student for whom a 

parent received a PLUS loan) did not meet State 

requirements for employment (in the student’s State of 

residence) in the occupation that the training program for 

which the borrower received the loan was intended because 

of a physical or mental condition, age, criminal record, or 

other reason accepted by the Secretary.

* * * * *

(8) Discharge without an application. The Secretary 

discharges all or part of a loan as appropriate under this 

section without an application from the borrower if the 

Secretary determines, based on information in the 

Secretary's possession, that the borrower qualifies for a 

discharge. Such information includes, but is not limited 

to, evidence that the school has falsified the Satisfactory 

Academic Progress of its students, as described in §668.34. 

(d) Discharge procedures. (1) If the Secretary 

determines that a borrower's Direct Loan may be eligible 

for a discharge under this section, the Secretary provides 

the borrower an application and an explanation of the 

qualifications and procedures for obtaining a discharge. 

The Secretary also promptly suspends any efforts to collect 
495

from the borrower on any affected loan. The Secretary may 

continue to receive borrower payments. 

(2) If the borrower fails to submit the application 

described in paragraph (c) of this section within 60 days 

of the Secretary's providing the application, the Secretary

resumes collection and grants forbearance of principal and 

interest for the period in which collection activity was 

suspended. The Secretary may capitalize any interest 

accrued and not paid during that period. 

(3) If the borrower submits the application described 

in paragraph (c) of this section, the Secretary determines 

whether the available evidence supports the claim for 

discharge. Available evidence includes evidence provided 

by the borrower and any other relevant information from the 

Secretary’s records and gathered by the Secretary from 

other sources, including guaranty agencies, State 

authorities, test publishers, independent test

administrators, school records, and cognizant accrediting 

associations. The Secretary issues a decision that 

explains the reasons for any adverse determination on the 

application, describes the evidence on which the decision 

was made, and provides the borrower, upon request, copies 

of the evidence, and considers any response from the 

borrower and any additional information from the borrower, 
496

and notifies the borrower whether the determination is 

changed. 

(4) If the Secretary determines that the borrower 

meets the applicable requirements for a discharge under 

paragraph (c) of this section, the Secretary notifies the 

borrower in writing of that determination. 

(5) If the Secretary determines that the borrower 

does not qualify for a discharge, the Secretary notifies 

the borrower in writing of that determination and the 

reasons for the determination. 

* * * * * 

§685.220 [Amended]

29. Section 685.220 is amended by: 

A. Removing the words “subpart II of part B” from 

paragraph (b)(21) and adding, in their place, the words 

“part E”.

 B. Removing paragraph (d)(1)(i). 

 C. Redesignating paragraph (d)(1)(ii) as (d)(1)(i), 

and paragraph (d)(1)(iii) as (d)(1)(ii).

30. Section 685.222 is added to subpart B to read as 

follows:

§685.222 Borrower defenses.

(a) General. (1) For loans first disbursed prior to 

July 1, 2017, a borrower asserts and the Secretary 
497

considers a borrower defense in accordance with the 

provisions of §685.206(c), unless otherwise noted in 

§685.206(c). 

(2) For loans first disbursed on or after July 1, 

2017, a borrower asserts and the Secretary considers a 

borrower defense in accordance with this section. To 

establish a borrower defense under this section, a 

preponderance of the evidence must show that the borrower 

has a borrower defense that meets the requirements of this 

section.

(3) A violation by the school of an eligibility or 

compliance requirement in the Act or its implementing 

regulations is not a basis for a borrower defense under 

either this section or §685.206(c) unless the violation 

would otherwise constitute a basis for a borrower defense 

under this section.

(4) For the purposes of this section or §685.206(c), 

“borrower” means--

(i) The borrower; and 

(ii) In the case of a Direct PLUS Loan, the student 

and any endorsers.

(5) For the purposes of this section or §685.206(c), 

a “borrower defense” refers to an act or omission of the 

school attended by the student that relates to the making 
498

of a Direct Loan for enrollment at the school or the 

provision of educational services for which the loan was 

provided and that meets the requirements under paragraphs 

(b), (c), or (d), and includes one or both of the 

following: 

(i) A defense to repayment of amounts owed to the 

Secretary on a Direct Loan, in whole or in part; and 

(ii) A right to recover amounts previously collected 

by the Secretary on the Direct Loan, in whole or in part. 

(6) If the borrower asserts both a borrower defense 

and any other objection to an action of the Secretary with 

regard to that Direct Loan, the Secretary notifies the 

borrower of the order in which the Secretary considers the 

borrower defense and any other objections. The order in 

which the Secretary will consider objections, including a 

borrower defense, will be determined by the Secretary as 

appropriate under the circumstances. 

(b) Judgment against the school. (1) The borrower 

has a borrower defense if the borrower, whether as an 

individual or as a member of a class, or a governmental 

agency, has obtained against the school a nondefault, 

favorable contested judgment based on State or Federal law 

in a court or administrative tribunal of competent 

jurisdiction.
499

(2) A borrower may assert a borrower defense under 

this paragraph at any time.

(c) Breach of contract by the school. The borrower 

has a borrower defense if the school the borrower received 

a Direct Loan to attend failed to perform its obligations 

under the terms of a contract with the student. A borrower 

may assert a defense to repayment of amounts owed to the 

Secretary under this paragraph at any time after the breach 

by the school of its contract with the student. A borrower 

may assert a right to recover amounts previously collected 

by the Secretary under this paragraph not later than six 

years after the breach by the school of its contract with 

the student. 

(d) Substantial misrepresentation by the school. (1) 

A borrower has a borrower defense if the school or any of 

its representatives, or any institution, organization, or 

person with whom the school has an agreement to provide 

educational programs, or to provide marketing, advertising, 

recruiting, or admissions services, made a substantial 

misrepresentation in accordance with 34 CFR part 668, 

subpart F, that the borrower reasonably relied on when the 

borrower decided to attend, or to continue attending, the 

school. A borrower may assert, at any time, a defense to 

repayment under this paragraph (d) of amounts owed to the 
500

Secretary. A borrower may assert a claim under this 

paragraph (d) to recover funds previously collected by the 

Secretary not later than six years after the borrower 

discovers, or reasonably could have discovered, the 

information constituting the substantial misrepresentation. 

(2) For the purposes of this section, a designated 

Department official pursuant to paragraph (e) of this 

section or a hearing official pursuant to paragraphs (f), 

(g), or (h) may consider, as evidence supporting the 

reasonableness of a borrower’s reliance on a 

misrepresentation, whether the school or any of the other 

parties described in paragraph (d)(1) engaged in conduct 

such as, but not limited to: 

(i) Demanding that the borrower make enrollment or 

loan-related decisions immediately;

(ii) Placing an unreasonable emphasis on unfavorable 

consequences of delay; 

(iii) Discouraging the borrower from consulting an 

adviser, a family member, or other resource; 

(iv) 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
501

(v) Otherwise unreasonably pressuring the borrower or 

taking advantage of the borrower’s distress or lack of 

knowledge or sophistication.

(e) Procedure for an individual borrower. (1) To 

assert a borrower defense under this section, an individual 

borrower must--

(i) Submit an application to the Secretary, on a form 

approved by the Secretary--

(A) Certifying that the borrower received the 

proceeds of a loan, in whole or in part, to attend a named 

school; 

(B) Providing evidence that supports the borrower 

defense; and 

(C) Indicating whether the borrower has made a claim 

with respect to the information underlying the borrower 

defense with any third party, such as the holder of a 

performance bond or a tuition recovery program, and, if so, 

the amount of any payment received by the borrower or 

credited to the borrower's loan obligation; and

(ii) Provide any other information or supporting 

documentation reasonably requested by the Secretary.

(2) Upon receipt of a borrower’s application, the 

Secretary--
502

(i) If the borrower is not in default on the loan for 

which a borrower defense has been asserted, grants 

forbearance and--

(A) Notifies the borrower of the option to decline 

the forbearance and to continue making payments on the 

loan; and

(B) Provides the borrower with information about the 

availability of the income-contingent repayment plans under 

§685.209 and the income-based repayment plan under 

§685.221; or

(ii) If the borrower is in default on the loan for 

which a borrower defense has been asserted--

(A) Suspends collection activity on the loan until 

the Secretary issues a decision on the borrower’s claim;

(B) Notifies the borrower of the suspension of 

collection activity and explains that collection activity 

will resume if the Secretary determines that the borrower 

does not qualify for a full discharge; and

(C) Notifies the borrower of the option to continue 

making payments under a rehabilitation agreement or other 

repayment agreement on the defaulted loan.

(3) The Secretary designates a Department official to 

review the borrower’s application to determine whether the 

application states a basis for a borrower defense, and 
503

resolves the claim through a fact-finding process conducted 

by the Department official. 

(i) As part of the fact-finding process, the 

Department official notifies the school of the borrower 

defense and considers any evidence or argument presented by 

the borrower and also any additional information, 

including--

(A) Department records;

(B) Any response or submissions from the school; and

(C) Any additional information or argument that may 

be obtained by the Department official.

(ii) The Department official identifies to the 

borrower and may identify to the school the records he or 

she considers relevant to the borrower defense. The 

Secretary provides to the borrower or the school any of the 

identified records upon reasonable request.

(4) At the conclusion of the fact-finding process, 

the Department official issues a written decision as 

follows: 

(i) If the Department official approves the borrower 

defense in full or in part, the Department official 

notifies the borrower in writing of that determination and 

of the relief provided as described in paragraph (i) of 

this section.
504

(ii) If the Department official denies the borrower 

defense in full or in part, the Department official 

notifies the borrower of the reasons for the denial, the 

evidence that was relied upon, any portion of the loan that 

is due and payable to the Secretary, and whether the 

Secretary will reimburse any amounts previously collected, 

and informs the borrower that if any balance remains on the 

loan, the loan will return to its status prior to the 

borrower’s submission of the application. The Department 

official also informs the borrower of the opportunity to 

request reconsideration of the claim based on new evidence 

pursuant to paragraph (e)(5)(i) of this section.

(5) The decision of the Department official is final 

as to the merits of the claim and any relief that may be 

granted on the claim. Notwithstanding the foregoing-–

(i) If the borrower defense is denied in full or in 

part, the borrower may request that the Secretary 

reconsider the borrower defense upon the identification of 

new evidence in support of the borrower’s claim. “New 

evidence” is relevant evidence that the borrower did not 

previously provide and that was not identified in the final 

decision as evidence that was relied upon for the final 

decision; and
505

(ii) The Secretary may reopen a borrower defense 

application at any time to consider evidence that was not 

considered in making the previous decision.

(6) The Secretary may consolidate applications filed 

under this paragraph (e) that have common facts and claims, 

and resolve the borrowers’ borrower defense claims as 

provided in paragraphs (f), (g), and (h) of this section.

(7) The Secretary may initiate a separate proceeding 

to collect from the school the amount of relief resulting 

from a borrower defense under this paragraph.

 (f) Group process for borrower defense, generally.

(1) Upon consideration of factors including, but not 

limited to, common facts and claims, fiscal impact, and the 

promotion of compliance by the school or other title IV, 

HEA program participants, the Secretary may initiate a 

process to determine whether a group of borrowers,

identified by the Secretary, has a borrower defense.

(i) The members of the group may be identified by the 

Secretary from individually filed applications pursuant to 

paragraph (e)(6) of this section or from any other source. 

(ii) If the Secretary determines that there are 

common facts and claims that apply to borrowers who have 

not filed an application under paragraph (e) of this 
506

section, the Secretary may identify such borrowers as 

members of a group.

(2) Upon the identification of a group of borrowers 

under paragraph (f)(1) of this section, the Secretary--

(i) Designates a Department official to present the 

group’s claim in the fact-finding process described in 

paragraph (g) or (h) of this section, as applicable; 

(ii) Provides each identified member of the group 

with notice that allows the borrower to opt out of the 

proceeding; and 

(iii) Notifies the school, as practicable, of the 

basis of the group’s borrower defense, the initiation of 

the fact-finding process described in paragraph (g) or (h) 

of this section, and of any procedure by which to request 

records and respond.

(3) For a group of borrowers identified by the 

Secretary, for which the Secretary determines that there

may be a borrower defense under paragraph (d) based upon a 

substantial misrepresentation that has been widely

disseminated, there is a rebuttable presumption that each 

member reasonably relied on the misrepresentation. 

(g) Procedures for group process for borrower 

defenses with respect to loans made to attend a closed 

school. For groups identified by the Secretary under 
507

paragraph (f) of this section, for which the borrower 

defense is asserted with respect to a Direct Loan to attend 

a school that has closed and has provided no financial 

protection currently available to the Secretary from which 

to recover any losses arising from borrower defenses, and 

for which there is no appropriate entity from which the 

Secretary can otherwise practicably recover such losses--

(1) A hearing official resolves the borrower defense

through a fact-finding process. As part of the factfinding process, the hearing official considers any 

evidence and argument presented by the Department official 

on behalf of the group and, as necessary to determine any 

claims at issue, on behalf of individual members of the 

group. The hearing official also considers any additional 

information the Department official considers necessary, 

including any Department records or response from the 

school or a person affiliated with the school as described

in §668.174(b), if practicable. The hearing official 

issues a written decision as follows: 

(i) If the hearing official approves the borrower 

defense in full or in part, the written decision notifies 

the members of the group in writing of that determination 

and of the relief provided on the basis of that claim as 

determined under paragraph (i) of this section.
508

(ii) If the hearing official denies the borrower 

defense in full or in part, the written decision states the 

reasons for the denial, the evidence that was relied upon, 

the portion of the loans that are due and payable to the 

Secretary, and whether reimbursement of amounts previously 

collected is granted, and informs the borrowers that if any 

balance remains on the loan, the loan will return to its 

status prior to the group claim process. 

(iii) The Secretary provides copies of the written 

decision to the members of the group and, as practicable, 

to the school.

(2) The decision of the hearing official is final as 

to the merits of the group borrower defense and any relief 

that may be granted on the group claim. 

(3) After a final decision has been issued, if relief 

for the group has been denied in full or in part pursuant 

to paragraph (g)(1)(ii) of this section, an individual 

borrower may file a claim for relief pursuant to paragraph 

(e)(5)(i) of this section. 

(4) The Secretary may reopen a borrower defense 

application at any time to consider evidence that was not 

considered in making the previous decision.

(h) Procedures for group process for borrower 

defenses with respect to loans made to attend an open 
509

school. For groups identified by the Secretary under 

paragraph (f) of this section, for which the borrower 

defense is asserted with respect to Direct Loans to attend 

an open school or a school that is not otherwise covered by 

paragraph (g) of this section, the claim is resolved in 

accordance with the procedures in this paragraph (h).

(1) A hearing official resolves the borrower defense 

and determines any liability of the school through a factfinding process. As part of the process, the hearing 

official considers any evidence and argument presented by 

the school and the Department official on behalf of the 

group and, as necessary to determine any claims at issue, 

on behalf of individual members of the group. The hearing 

official issues a written decision as follows: 

(i) If the hearing official approves the borrower 

defense in full or in part, the written decision 

establishes the basis for the determination, notifies the 

members of the group of the relief as described in

paragraph (i) of this section, and notifies the school of 

any liability to the Secretary for the amounts discharged 

and reimbursed.

(ii) If the hearing official denies the borrower 

defense for the group in full or in part, the written 

decision states the reasons for the denial, the evidence 
510

that was relied upon, the portion of the loans that are due 

and payable to the Secretary, and whether reimbursement of 

amounts previously collected is granted, and informs the 

borrowers that their loans will return to their statuses

prior to the group borrower defense process. The decision 

notifies the school of any liability to the Secretary for 

any amounts discharged or reimbursed.

(iii) The Secretary provides copies of the written 

decision to the members of the group, the Department 

official, and the school. 

(2) The decision of the hearing official becomes 

final as to the merits of the group borrower defense and 

any relief that may be granted on the group borrower 

defense within 30 days after the decision is issued and 

received by the Department official and the school unless, 

within that 30-day period, the school or the Department 

official appeals the decision to the Secretary. In the 

case of an appeal--

(i) The decision of the hearing official does not 

take effect pending the appeal; and

(ii) The Secretary renders a final decision. 

(3) After a final decision has been issued, if relief 

for the group has been denied in full or in part pursuant 

to paragraph (h)(1)(ii) of this section, an individual 
511

borrower may file a claim for relief pursuant to paragraph 

(e)(5)(i) of this section. 

(4) The Secretary may reopen a borrower defense 

application at any time to consider evidence that was not 

considered in making the previous decision.

(5) The Secretary collects from the school any 

liability to the Secretary for any amounts discharged or 

reimbursed to borrowers under this paragraph (h). 

(i) Relief. If a borrower defense is approved under 

the procedures in paragraphs (e), (g), or (h) of this 

section--

(1) The Department official or the hearing official, 

as applicable, determines the appropriate method for 

calculating, and the amount of, relief arising out of the 

facts underlying an individual or group borrower defense, 

based on information then available to the official or 

which the official may request; and determines the amount 

of relief to award the borrower, which may be a discharge 

of all amounts owed to the Secretary on the loan at issue 

and may include the recovery of amounts previously 

collected by the Secretary on the loan, or some lesser 

amount. In determining the appropriate method for 

calculating relief, the Department official or the hearing 

official, as applicable-- 
512

(i) Will consider the availability of information 

required for a method of calculation;

(ii) When calculating relief for a group of 

borrowers, may consider information derived from a sample 

of borrowers from the group; and 

(iii) May use one or more of the methods described in 

Appendix A to this subpart, or such other method determined 

by the official; 

(2) In the written decision described in paragraphs 

(e), (g), and (h) of this section, the designated 

Department official or hearing official, as applicable, 

notifies the borrower of the relief provided and--

(i) Specifies the relief determination; 

(ii) Advises that there may be tax implications; and 

(iii) Provides the borrower an opportunity to opt out 

of group relief, if applicable;

(3) Consistent with the determination of relief under 

paragraph (i)(1) of this section, the Secretary discharges 

the borrower’s obligation to repay all or part of the loan 

and associated costs and fees that the borrower would 

otherwise be obligated to pay and, if applicable, 

reimburses the borrower for amounts paid toward the loan 

voluntarily or through enforced collection; 
513

(4) The Secretary or the hearing official, as 

applicable, affords the borrower such further relief as the 

Secretary or the hearing official determines is appropriate 

under the circumstances. Such further relief includes, but 

is not limited to, one or both of the following:

(i) Determining that the borrower is not in default 

on the loan and is eligible to receive assistance under 

title IV of the Act.

(ii) Updating reports to consumer reporting agencies 

to which the Secretary previously made adverse credit 

reports with regard to the borrower's Direct Loan; and

(5) The total amount of relief granted with respect 

to a borrower defense cannot exceed the amount of the loan 

and any associated costs and fees and will be reduced by 

the amount of any refund, reimbursement, indemnification, 

restitution, compensatory damages, settlement, debt 

forgiveness, discharge, cancellation, compromise, or any 

other benefit received by, or on behalf of, the borrower 

that was related to the borrower defense. The relief to 

the borrower may not include non-pecuniary damages such as 

inconvenience, aggravation, emotional distress, or punitive 

damages.

(j) Cooperation by the borrower. To obtain relief 

under this section, a borrower must reasonably cooperate 
514

with the Secretary in any proceeding under paragraph (e), 

(g), or (h) of this section. The Secretary may revoke any 

relief granted to a borrower who fails to satisfy his or 

her obligations under this paragraph (j).

(k) Transfer to the Secretary of the borrower's right 

of recovery against third parties. (1) Upon the granting 

of any relief under this section, the borrower is deemed to 

have assigned to, and relinquished in favor of, the 

Secretary any right to a loan refund (up to the amount 

discharged) that the borrower may have by contract or 

applicable law with respect to the loan or the contract for 

educational services for which the loan was received, 

against the school, its principals, its affiliates, and 

their successors, its sureties, and any private fund. If 

the borrower asserts a claim to, and recovers from, a 

public fund, the Secretary may reinstate the borrower’s 

obligation to repay on the loan an amount based on the 

amount recovered from the public fund, if the Secretary 

determines that the borrower’s recovery from the public 

fund was based on the same borrower defense and for the 

same loan for which the discharge was granted under this 

section.

(2) The provisions of this paragraph (k) apply 

notwithstanding any provision of State law that would 
515

otherwise restrict transfer of those rights by the 

borrower, limit or prevent a transferee from exercising 

those rights, or establish procedures or a scheme of 

distribution that would prejudice the Secretary's ability 

to recover on those rights.

(3) Nothing in this paragraph (k) limits or 

forecloses the borrower’s right to pursue legal and 

equitable relief against a party described in this 

paragraph (k) for recovery of any portion of a claim 

exceeding that assigned to the Secretary or any other 

claims arising from matters unrelated to the claim on which 

the loan is discharged.

31. Section 685.223 is added to subpart B to read as 

follows:

§685.223 Severability.

If any provision of this subpart or its application to 

any person, act, or practice is held invalid, the remainder 

of the subpart or the application of its provisions to any 

person, act, or practice shall not be affected thereby.

(Authority: 20 U.S.C. 1087a et seq.)

32. Appendix A to subpart B of part 685 is added to 

read as follows:

Appendix A to Subpart B of Part 685–-Calculating 

Borrower Relief
516

The Department official or the hearing official, as 

applicable, determines the amount of relief to award the 

borrower, which may be a discharge of all amounts owed to 

the Secretary on the loan at issue and may include the 

recovery of amounts previously collected by the Secretary 

on the loan, or some lesser amount. A borrower’s relief 

may be calculated using one or more of the following 

methods or such other method as the Secretary may 

determine.

(A) The difference between what the borrower paid,

and what a reasonable borrower would have paid had the 

school made an accurate representation as to the issue that 

was the subject of the substantial misrepresentation 

underlying the borrower defense claim.

(B) The difference between the amount of financial 

charges the borrower could have reasonably believed the 

school was charging, and the actual amount of financial 

charges made by the school, for claims regarding the cost 

of a borrower’s program of study.

(C) The total amount of the borrower's economic loss, 

less the value of the benefit, if any, of the education 

obtained by the student. Economic loss, for the purposes 

of this section, may be no greater than the cost of 

attendance. The value of the benefit of the education may 
517

include transferable credits obtained and used by the 

borrower; and for gainful employment programs, qualifying 

placement in an occupation within the Standard Occupational 

Classification (SOC) code for which the training was 

provided, provided the borrower’s earnings meet the 

expected salary for the program’s designated occupations or 

field, as determined using an earnings benchmark for that 

occupation. The Department official or hearing official 

will consider any evidence indicating that no identifiable 

benefit of the education was received by the student.

33. Section 685.300 is amended by:

A. Redesignating paragraph (b)(11) as paragraph 

(b)(12). 

B. Adding a new paragraph (b)(11).

C. Adding new paragraphs (d) through (i).

The additions read as follows:

§685.300 Agreements between an eligible school and the 

Secretary for participation in the Direct Loan Program.

* * * * *

(b) * * *

(11) Comply with the provisions of paragraphs (d) 

through (i) regarding student claims and disputes. 

* * * * *
518

(d) Borrower defense claims in an internal dispute 

process. The school will not compel any student to pursue 

a complaint based on a borrower defense claim through an 

internal institutional process before the student presents 

the complaint to an accrediting agency or government agency 

authorized to hear the complaint.

(e) Class action bans. (1) The school shall not 

seek to rely in any way on a pre-dispute arbitration 

agreement, nor on any other pre-dispute agreement, with a 

student, with respect to any aspect of a class action that 

is related to a borrower defense claim including to seek a 

stay or dismissal of particular claims or the entire 

action, unless and until the presiding court has ruled that 

the case may not proceed as a class action and, if that 

ruling may be subject to appellate review on an 

interlocutory basis, the time to seek such review has 

elapsed or the review has been resolved. 

(2) Reliance on a pre-dispute arbitration agreement, 

or on any other pre-dispute agreement, with a student, with 

respect to any aspect of a class action includes, but is 

not limited to, any of the following:

(i) Seeking dismissal, deferral, or stay of any 

aspect of a class action;
519

(ii) Seeking to exclude a person or persons from a 

class in a class action;

(iii) Objecting to or seeking a protective order 

intended to avoid responding to discovery in a class 

action;

(iv) Filing a claim in arbitration against a student 

who has filed a claim on the same issue in a class action;

(v) Filing a claim in arbitration against a student 

who has filed a claim on the same issue in a class action 

after the trial court has denied a motion to certify the 

class but before an appellate court has ruled on an 

interlocutory appeal of that motion, if the time to seek 

such an appeal has not elapsed or the appeal has not been 

resolved; and

(vi) Filing a claim in arbitration against a student 

who has filed a claim on the same issue in a class action 

after the trial court in that class action has granted a 

motion to dismiss the claim and, in doing so, the court 

noted that the consumer has leave to refile the claim on a 

class basis, if the time to refile the claim has not 

elapsed. 

(3) Required provisions and notices. (i) The school 

must include the following provision in any agreements with 

a student recipient of a Direct Loan for attendance at the 
520

school, or, with respect to a Parent PLUS Loan, a student 

for whom the PLUS loan was obtained, that include any 

agreement regarding pre-dispute arbitration or any other 

pre-dispute agreement addressing class actions and that are 

entered into after effective date of this regulation:

“We agree that neither we nor anyone else will 

use this agreement to stop you from being part of a 

class action lawsuit in court. You may file a class 

action lawsuit in court or you may be a member of a 

class action lawsuit even if you do not file it. 

This provision applies only to class action claims 

concerning our acts or omissions regarding the making 

of the Direct Loan or the provision by us of 

educational services for which the Direct Loan was 

obtained.” 

(ii) When a pre-dispute arbitration agreement or any 

other pre-dispute agreement addressing class actions has 

been entered into before the effective date of this 

regulation that did not contain a provision described in 

paragraph (e)(3)(i) of this section, the school must either 

ensure the agreement is amended to contain the provision 

specified in paragraph (e)(3)(iii)(A) of this section or 

provide the student to whom the agreement applies with the 
521

written notice specified in paragraph (e)(3)(iii)(B) of 

this section. 

(iii) The school must ensure the agreement described 

in paragraph (e)(3)(ii) of this section is amended to 

contain the provision specified in paragraph (e)(3)(iii)(A) 

or must provide the notice specified in paragraph 

(e)(3)(iii)(B) to students no later than the exit 

counseling required under §685.304(b), or the date on which 

the school files its initial response to a demand for 

arbitration or service of a complaint from a student who 

has not already been sent a notice or amendment.

(A) Agreement provision. 

“We agree that neither we nor anyone else who 

later becomes a party to this agreement will use it 

to stop you from being part of a class action lawsuit 

in court. You may file a class action lawsuit in 

court or you may be a member of a class action 

lawsuit even if you do not file it. This provision 

applies only to class action claims concerning our 

acts or omissions regarding the making of the Direct 

Loan or the provision by us of educational services 

for which the Direct Loan was obtained.”

(B) Notice provision. 
522

“We agree not to use any pre-dispute agreement 

to stop you from being part of a class action lawsuit 

in court. You may file a class action lawsuit in 

court or you may be a member of a class action 

lawsuit even if you do not file it. This provision 

applies only to class action claims concerning our 

acts or omissions regarding the making of the Direct 

Loan or the provision by us of educational services 

for which the Direct Loan was obtained.”

(f) Pre-dispute arbitration agreements. (1) The 

school will not compel a student to enter into a predispute agreement to arbitrate a borrower defense claim, or 

rely in any way on a mandatory pre-dispute arbitration 

agreement with respect to any aspect of a borrower defense 

claim. 

(2) Reliance on a mandatory pre-dispute arbitration 

agreement with respect to any aspect of a borrower defense 

claim includes, but is not limited to, any of the 

following:

(i) Seeking dismissal, deferral, or stay of any 

aspect of a judicial action filed by the student;

(ii) Objecting to or seeking a protective order 

intended to avoid responding to discovery in a judicial 

action filed by the student; and
523

(iii) Filing a claim in arbitration against a student 

who has filed a suit on the same claim. 

(3) Required provisions and notices. (i) The school 

must include the following provision in any mandatory predispute arbitration agreements with a student recipient of 

a Direct Loan for attendance at the school, or, with 

respect to a Parent PLUS Loan, a student for whom the PLUS 

loan was obtained, that include any agreement regarding 

arbitration and that are entered into after effective date 

of this regulation:

“We agree that neither we nor anyone else will 

use this agreement to stop you from bringing a 

lawsuit regarding our acts or omissions regarding the 

making of the Direct Loan or the provision by us of 

educational services for which the Direct Loan was 

obtained. You may file a lawsuit for such a claim or 

you may be a member of a class action lawsuit for 

such a claim even if you do not file it. This 

provision does not apply to lawsuits concerning other

claims.”

(ii) When a mandatory pre-dispute arbitration 

agreement has been entered into before the effective date 

of this regulation that did not contain a provision 

described in paragraph (f)(3)(i), the school shall either 
524

ensure the agreement is amended to contain the provision 

specified in paragraph (f)(3)(iii)(A) of this section or 

provide the student to whom the agreement applies with the 

written notice specified in paragraph (f)(3)(iii)(B) of 

this section. 

(iii) The school shall ensure the agreement described 

in paragraph (f)(3)(ii) of this section is amended to 

contain the provision specified in paragraph (f)(3)(iii)(A) 

or shall provide the notice specified in paragraph 

(f)(3)(iii)(B) to students no later than the exit 

counseling required under §685.304(b), or the date on which 

the school files its initial response to a demand for 

arbitration or service of a complaint from a student who 

has not already been sent a notice or amendment.

(A) Agreement provision. 

“We agree that neither we nor anyone else who 

later becomes a party to this pre-dispute arbitration 

agreement will use it to stop you from bringing a 

lawsuit regarding our acts or omissions regarding the 

making of the Direct Loan or the provision by us of 

educational services for which the Direct Loan was 

obtained. You may file a lawsuit for such a claim or 

you may be a member of a class action lawsuit for 
525

such a claim even if you do not file it. This 

provision does not apply to other claims.”

(B) Notice provision. 

“We agree not to use any pre-dispute arbitration 

agreement to stop you from bringing a lawsuit

regarding our acts or omissions regarding the making 

of the Direct Loan or the provision by us of 

educational services for which the Direct Loan was 

obtained. You may file a lawsuit regarding such a 

claim or you may be a member of a class action 

lawsuit regarding such a claim even if you do not 

file it. This provision does not apply to any other 

claims.”

(g) Submission of arbitral records. (1) A school 

shall submit a copy of the following records to the 

Secretary, in the form and manner specified by the 

Secretary, in connection with any claim filed in 

arbitration by or against the school concerning a borrower 

defense claim:

(i) The initial claim and any counterclaim;

(ii) The pre-dispute arbitration agreement filed with 

the arbitrator or arbitration administrator;

(iii) The judgment or award, if any, issued by the 

arbitrator or arbitration administrator; 
526

(iv) If an arbitrator or arbitration administrator 

refuses to administer or dismisses a claim due to the 

school’s failure to pay required filing or administrative 

fees, any communication the school receives from the 

arbitrator or an arbitration administrator related to such 

a refusal; and

(v) Any communication the school receives from an 

arbitrator or an arbitration administrator related to a 

determination that a pre-dispute arbitration agreement 

regarding educational services provided by the school does 

not comply with the administrator’s fairness principles, 

rules, or similar requirements, if such a determination 

occurs.

(2) Deadline for submission. A school shall submit 

any record required pursuant to paragraph (g)(1) of this 

section within 60 days of filing by the school of any such 

record with the arbitrator or arbitration administrator and 

within 60 days of receipt by the school of any such record 

filed or sent by someone other than the school, such as the 

arbitration administrator or the student. 

(h) Submission of judicial records. (1) A school 

shall submit a copy of the following records to the 

Secretary, in the form and manner specified by the 

Secretary, in connection with any claim filed in a lawsuit 
527

by the school against the student, or by any party, 

including a government agency, against the school 

concerning a borrower defense claim:

(i) The complaint and any counterclaim;

(ii) Any dispositive motion filed by a party to the 

suit; and 

(iii) The ruling on any dispositive motion and the 

judgment issued by the court. 

(2) Deadline for submission. A school shall submit 

any record required pursuant to paragraph (h)(1) of this 

section within 30 days of filing or receipt, as applicable, 

of the complaint, answer, or dispositive motion, and within 

30 days of receipt of any ruling on a dispositive motion or 

a final judgment. 

(i) Definitions. For the purposes of paragraphs (d) 

through (h) of this section, the term--

(1) “Borrower defense claim” means a claim that is or 

could be asserted as a defense to repayment under

§685.206(c) or §685.222;

(2) “Class action” means a lawsuit in which one or 

more parties seek class treatment pursuant to Federal Rule 

of Civil Procedure 23 or any State process analogous to 

Federal Rule of Civil Procedure 23;
528

(3) “Dispositive motion” means a motion asking for a 

court order that entirely disposes of one or more claims in 

favor of the party who files the motion without need for 

further court proceedings; 

(4) “Pre-dispute arbitration agreement” means an 

agreement between a school and a student providing for 

arbitration of any future dispute between the parties; and

(5) “Mandatory pre-dispute arbitration agreement”

means a pre-dispute arbitration agreement included in an 

enrollment agreement or other document that must be 

executed by the student as a condition for enrollment at 

the school.

* * * * *

34. Section 685.308 is amended by revising paragraph 

(a) to read as follows:

§685.308 Remedial actions.

(a) The Secretary collects from the school the amount 

of the losses the Secretary incurs and determines that the 

institution is liable to repay under §§685.206, 685.214, 

685.215(a)(1)(i), (ii), or (iii), 685.216, or 685.222 or 

that were disbursed--

(1) To an individual, because of an act or omission 

of the school, in amounts that the individual was not 

eligible to receive; or 
529

(2) Because of the school's violation of a Federal 

statute or regulation.

* * * * *

35. Section 685.310 is added to subpart C to read as 

follows:

§685.310 Severability.

If any provision of this subpart or its application to any 

person, act, or practice is held invalid, the remainder of 

the subpart or the application of its provisions to any 

person, act, or practice shall not be affected thereby.

(Authority: 20 U.S.C. 1087a et seq.)

PART 686--TEACHER EDUCATION ASSISTANCE FOR COLLEGE AND 

HIGHER EDUCATION (TEACH) GRANT PROGRAM

36. The authority citation for part 686 continues to 

read as follows:

AUTHORITY: 20 U.S.C. 1070g, et seq., unless otherwise 

noted. 

37. Section 686.42 is amended by revising paragraph 

(a) to read as follows:

§686.42 Discharge of an agreement to serve.

(a) Death. (1) If a grant recipient dies, the 

Secretary discharges the obligation to complete the 

agreement to serve based on--
530

(i) An original or certified copy of the death 

certificate;

(ii) An accurate and complete photocopy of the 

original or certified copy of the death certificate;

(iii) An accurate and complete original or certified 

copy of the death certificate that is scanned and submitted 

electronically or sent by facsimile transmission; or 

(iv) Verification of the grant recipient's death 

through an authoritative Federal or State electronic 

database approved for use by the Secretary.

(2) Under exceptional circumstances and on a case-bycase basis, the Secretary discharges the obligation to 

complete the agreement to serve based on other reliable 

documentation of the grant recipient's death that is 

acceptable to the Secretary.

* * * * *