1

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 November 1, 2016.

We are working to ensure that this document is compliant with Section 508 of the 

Rehabilitation Act of 1973, as amended (29 U.S.C. § 794 (d)). If you need assistance accessing 

this document, please contact Barbara Hoblitzell at 202-453-7583 or by e-mail at 

Barbara.Hoblitzell@ed.gov.

4000-01-U

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: Final regulations.

SUMMARY: The Secretary establishes new regulations 

governing the William D. Ford Federal Direct Loan (Direct 

Loan) Program to establish a new Federal standard and a 

process for determining whether a borrower has a defense to 

repayment on a loan based on an act or omission of a 

school. We also amend the Direct Loan Program regulations 

to prohibit participating schools from using certain 

contractual provisions regarding dispute resolution 
2

processes, such as predispute arbitration agreements or 

class action waivers, and to require certain notifications 

and disclosures by schools regarding their use of 

arbitration. We amend the Direct Loan Program regulations 

to codify our current policy regarding the impact that 

discharges have on the 150 percent Direct Subsidized Loan 

Limit. We amend the Student Assistance General Provisions 

regulations to revise the financial responsibility 

standards and add disclosure requirements for schools. 

Finally, we amend the discharge provisions in the Federal 

Perkins Loan (Perkins Loan), Direct Loan, Federal Family 

Education Loan (FFEL), and Teacher Education Assistance for 

College and Higher Education (TEACH) Grant programs. The 

changes will provide transparency, clarity, and ease of 

administration to current and new regulations and protect 

students, the Federal government, and taxpayers against 

potential school liabilities resulting from borrower 

defenses.

DATES: These regulations are effective July 1, 2017. 

Implementation date: For the implementation dates of the 

included regulatory provisions, see the Implementation Date 

of These Regulations section of this document.

FOR FURTHER INFORMATION CONTACT: For further information 

related to borrower defenses, Barbara Hoblitzell at (202) 
3

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 regulations is to protect student loan 

borrowers from misleading, deceitful, 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 
4

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 final regulations 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 in 

advertising and promotional materials, using plain language 

issued by the Department, about proprietary schools at 

which the typical student experiences poor loan repayment 

outcomes--defined in these final regulations as a 

proprietary school at which the median borrower has not 

repaid in full, or made loan payments sufficient to reduce 

by at least one dollar the outstanding balance of, the 

borrower’s loans received at the institution--so that 

students can make more informed enrollment and financing 

decisions.

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

amended (HEA), 20 U.S.C. 1087e(h), authorizes the Secretary 

to specify in regulation which acts or omissions of an 
5

institution of higher education a borrower may assert as a 

defense to repayment of a Direct Loan. Section 685.206(c), 

governing defenses to repayment, has been in place since 

1995 but, until recently, has rarely been used. Those 

final 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 

hold schools accountable for actions and omissions that 

result in loan discharges. 

These final regulations 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.” The current standard allows borrowers to assert 

a borrower defense if a cause of action would have arisen 

under applicable State law. In contrast, these final 
6

regulations establish a new Federal standard that will 

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 

will apply to loans made after the effective date of the 

proposed regulations. The final regulations establish a 

process for borrowers to assert a borrower defense that 

will 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 final regulations 

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 students, the Federal government, 

and taxpayers against potential institutional liabilities.

These final regulations also prohibit a school 

participating in the Direct Loan Program from obtaining, 

through the use of contractual provisions or other 

agreements, a predispute agreement for arbitration to 

resolve claims brought by a borrower against the school 

that could also form the basis of a borrower defense under 
7

the Department’s regulations. The final regulations also 

prohibit a school participating in the Direct Loan Program 

from obtaining an 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 dispute processes before contacting 

accrediting or government agencies with authority over the 

school regarding such claims. In addition, the final 

regulations impose certain notification and disclosure 

requirements on a school regarding claims that are the 

subject of a lawsuit filed in court or 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, the final 

regulations--

 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;
8

 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 

 Add provisions to schools’ Direct Loan Program 

participation agreements (PPAs) 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 predispute arbitration 

agreements by schools;

 Prohibit the use of class action lawsuit waivers; 

 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; and
9

 Require schools to disclose to and notify the 

Secretary of certain judicial filings and dispositions. 

The final regulations 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, 

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 at which the median 

borrower has not repaid in full, or paid down by at least 
10

one dollar the outstanding balance of, the borrower’s loans 

to provide a Department-issued plain language warning in 

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 final regulations also--

 Expand the types of documentation that may be 

used for the granting of a discharge based on the death of 

the borrower (“death discharge”) in the Perkins, FFEL, 

Direct Loan, and TEACH Grant programs;

 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
11

 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. 

Costs and Benefits: As noted in the NPRM, the primary 

potential benefits of these 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 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 informed 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 associated with the regulations will fall 

on a number of affected entities including institutions, 

guaranty agencies, the Federal government, and taxpayers. 

These costs include changes to business practices, review 
12

of marketing materials, additional employee training, and 

unreimbursed claims covered by taxpayers. The largest 

quantified impact of the regulations is the transfer of 

funds from the Federal government to borrowers who succeed 

in a borrower defense claim, a significant share of which 

will be offset by the recovery of funds from institutions 

whose conduct gave rise to the claims. 

On June 16, 2016, the Secretary published a notice of 

proposed rulemaking (NPRM) for these parts in the Federal 

Register (81 FR 39329). The final regulations contain 

changes from the NPRM, which are fully explained in the 

Analysis of Comments and Changes section of this document. 

Implementation Date of These Regulations: Section 482(c) 

of the HEA requires that regulations affecting programs 

under title IV of the HEA be published in final form by 

November 1, prior to the start of the award year (July 1) 

to which they apply. However, that section also permits 

the Secretary to designate any regulation as one that an 

entity subject to the regulations may choose to implement 

earlier and the conditions for early implementation.

The Secretary is exercising his authority under 

section 482(c) to designate the following new regulations 

included in this document for early implementation 

beginning on [INSERT DATE OF PUBLICATION IN FEDERAL 
13

REGISTER], at the discretion of each lender or guaranty 

agency:

(1) Section 682.211(i)(7).

(2) Section 682.410(b)(6)(viii).

 Additionally, the Secretary intends to exercise his 

authority under section 482(c) of the HEA to permit the 

Secretary and guaranty agencies to implement the new and 

amended regulations specific to automatic closed school 

discharges in §§ 674.33(g)(3)(ii), 682.402(d)(8)(ii) and 

685.214(c)(2)(ii) as soon as operationally possible after 

the publication date of these final regulations. We will 

publish a separate Federal Register notice to announce this 

implementation date. 

The Secretary has not designated any of the remaining 

provisions in these final regulations for early 

implementation. Therefore, the remaining final regulations 

included in this document are effective July 1, 2017.

Public Comment: In response to our invitation in the June 

16, 2016, NPRM, more than 50,000 parties submitted comments 

on the proposed regulations. 

We discuss substantive issues under the sections of 

the proposed regulations to which they pertain. Generally, 

we do not address technical or other minor changes or 

recommendations that are out of the scope of this 
14

regulatory action or that would require statutory changes 

in this preamble.

Analysis of Comments and Changes: 

An analysis of the comments and of any changes in the 

regulations since publication of the NPRM follows.

General

Comments: Many commenters supported the Department’s 

proposals to improve the borrower defense regulations by 

establishing a Federal standard for permissible defenses to 

borrower repayment, standardizing the defense to repayment 

claim processes for both borrowers and institutions, and 

strengthening the financial responsibility standards for 

institutions. The commenters also supported granting 

automatic closed school discharges in certain instances and 

ending the use of mandatory, predispute arbitration 

agreements at schools that receive Federal financial aid.

Other commenters expressed support for the proposed 

regulations, but felt that the Department should further 

strengthen them. For example, these commenters believed 

that the final regulations should provide full loan relief 

to all defrauded students, eliminate the six-year time 

limit to recover amounts that borrowers have already paid 

on loans for which they have a borrower defense based on a 

breach of contract or substantial misrepresentation, and 
15

allow automatic group discharges without an application in 

cases where there is sufficient evidence of a school’s 

wrongdoing.

Many commenters agreed with the Department’s proposed 

objectives, but believed that the proposed regulations 

would have the unintended consequences of creating a 

“cottage industry” of opportunistic attorneys and agents 

attempting to capitalize on students who have been, or 

believe they have been, victims of wrongdoing by schools 

and unleashing a torrent of frivolous and costly lawsuits, 

which would tarnish the reputation of many institutions. 

The commenters also believed that the proposed Federal 

standard is so broad that borrowers will have nothing to 

lose by claiming a borrower defense even if they are 

employed and happy with their college experience. 

Many commenters did not support the proposed 

regulations and stated that the Department should 

completely revise them and issue another NPRM and 30-day 

comment period, or that the proposed regulations should be 

withdrawn completely. The commenters were concerned that 

the projected net budget impact provided in the NPRM would 

undermine the integrity of the Direct Loan Program and that 

neither American taxpayers, nor schools that have 

successfully educated students, could cover these costs if 
16

thousands of students or graduates start requesting 

discharges of their loans. Other commenters stated that 

the proposed regulations would create unneeded 

administrative and financial burdens for institutions that 

work hard to comply with the Department’s regulations and 

establish new substantive standards of liability, new 

procedural issues, new burdens of proof, widespread and 

unwarranted “triggering” of the financial responsibility 

requirements, and the abolition of a “Congressionally 

favored” arbitration remedy, that are unnecessary or 

counterproductive. 

Discussion: We appreciate the commenters’ support. In 

response to the commenters requesting that the proposed 

regulations be strengthened, completely revised, or 

withdrawn, we believe these final regulations strike the 

right balance between our goals of providing transparency, 

clarity, and ease of administration to the current and new 

regulations while at the same time protecting students, the 

Federal government, and taxpayers against potential 

liabilities resulting from borrower defenses. In response 

to commenters’ concerns that the proposed regulations will 

create a “cottage industry” of opportunistic attorneys 

attempting to capitalize on victimized students and unleash 

a torrent of frivolous lawsuits, the individual borrower 
17

defense process described in § 685.222(e) is intended to be 

a simple process that a borrower may access without the aid 

of counsel. Similarly, by providing that only a designated 

Department official may present group borrower claims in 

the group processes described in § 685.222(f) to (h), the 

Department believes that the potential for frivolous suits 

in the borrower defense process will be limited. To date, 

Department staff have generally not received borrower 

defense claims submitted by attorneys, opportunistic or 

otherwise, and we have not observed the filing of frivolous 

lawsuits against schools. We will monitor both situations 

going forward. We note that we address commenters’ 

arguments with respect to specific provisions of the 

regulations in the sections of this preamble specific to 

those provisions. 

Changes: None. 

Comments: One commenter contended that the proposed 

regulations run contrary to Article III (separation of 

powers) and the Seventh Amendment (right to jury trial) of 

the Constitution, in that it would vest the Department with 

exclusive judicial powers to determine private causes of 

action in the absence of a jury.

The commenter contended that the proposed regulations 

do not ensure Constitutional due process because they do 
18

not ensure that schools would have the right to receive 

notice of all the evidence presented by a borrower in the 

new borrower defense proceedings. The commenter stated 

that the lack of due process also affects the process for 

deciding claims, under which the Department is effectively 

the prosecutor, the judge, the only source of appeal, and 

the entity tasked with executing judgment. 

The commenter also contended that a breach of contract 

or a misrepresentation determination are determinations 

that normally arise in common law claims and defenses and 

are subject to the expertise of the courts, rather than a 

particular government agency. The commenter believes that 

these determinations are not matters of public right, but 

are instead matters of “private right, that is, of the 

liability of one individual to another under the law as 

defined,” which cannot be delegated outside the judiciary. 

Stern v. Marshall, 564 U.S. 462, 489 (2011) (quoting 

Crowell v. Benson, 285 U.S. 22, 50 (1932).

Discussion: The rights adjudicated in borrower defense 

proceedings are rights of the Direct Loan borrower against 

the government regarding the borrower’s obligation to repay 

a loan made by the government, and rights of the government 

to recover from the school for losses incurred as a result 

of the act or omission of the school in participating in 
19

the Federal loan program. The terms of these rights are 

governed (for loans disbursed prior to July 1, 2017) by 

common law or State law, but in each instance the rights 

are asserted against or by a Federal agency, with respect 

to obligations incurred by the borrower and the school in 

the course of their voluntary participation in the Federal 

loan program. Those facts give the rights adjudicated in 

these proceedings, both the individual borrower 

adjudications and the adjudications of group claims against 

the school, the character of public rights, even if the 

resolution of those rights turns on application of common 

law and State law (for current loans), and thus giving them 

some of the characteristics of private rights as well. 

Even if these common law rights of the borrower and 

the school were to be considered simply private rights, 

Congress could properly consign their adjudication to the 

Department, as it did in committing purely private rights 

of the investor and broker asserted in its reparations 

program to the Commodity Futures Trading Commission for 

adjudication. Commodity Futures Trading Comm'n v. Schor, 

478 U.S. 833 (1986). In Schor, the competing claims 

asserted were not creations of Federal law, nor were the 

rights asserted by or against a Federal agency.

Nevertheless, the Court ruled that Congress properly 
20

assigned adjudication of those private rights to the 

agency. Like the claimants in Schor, both parties--the 

Direct Loan borrower, by filing the claim for relief, and 

the Direct Loan-participant school, by entering into the 

Direct Loan Participation Agreement--have consented to 

adjudications of their respective rights by the Federal 

agency--the Department. Moreover, these rights are 

adjudicated in this context precisely because Congress 

directed the Department to establish by regulation which 

acts or omissions of a school would be recognized by the 

Department as defenses to repayment of the Direct Loan; by 

so doing, and by further requiring the Department to 

conduct a predeprivation hearing before credit bureau 

reporting, Federal offset, wage garnishment, of Federal 

salary offset, Congress necessarily committed adjudication 

of these claims to the Department. 20 U.S.C. 1080a(c)(4), 

31 U.S.C. 3711(e) (credit bureau reporting); 5 U.S.C. 5514 

(Federal salary offset); 20 U.S.C. 1095, 31 U.S.C. 3720D 

(wage garnishment); 31 U.S.C. 3716, 3720B (Federal payment 

offset). Similarly, by recognizing that acts or omissions 

of the school in participating in the title IV, HEA 

programs would give rise to a claim by the Department 

against the school that arises not by virtue of any 

statutory requirement, but under common law as discussed 
21

elsewhere and by requiring the Department to provide a 

hearing for a school that disputes that common law claim 

for damages, Congress necessarily committed adjudication of 

that common law claim to the Department. 20 U.S.C. 

1094(b)(administrative hearing on appeal of audit or 

program review liability claim). In each of these 

instances, judicial review of these agency adjudications by 

an Article III court is available under the APA. 5 U.S.C. 

706. The fact that the borrower, the school, and the 

Department might have pursued their claims solely in a 

judicial forum instead of an administrative forum does not 

preclude assignment of their adjudication to the 

Department: “(T)he Congress, in exercising the powers 

confided to it may establish ‘legislative’ courts . . . to 

serve as special tribunals ‘to examine and determine 

various matters, arising between the government and others, 

which from their nature do not require judicial 

determination and yet are susceptible of it.’” Atlas 

Roofing Co. v. Occupational Safety & Health Review Comm'n, 

430 U.S. 442, 452 (1977)(quoting Crowell v. Benson, 285 

U.S. 22, 50 (1932)).

As to the assertion that committing adjudication of 

these claims to the Department deprives a party of the 

right to trial by jury, the Court has long rejected that 
22

argument, as it stated in Atlas Roofing, on which the 

commenter relies: 

. . . the Seventh Amendment is generally inapplicable 

in administrative proceedings, where jury trials would 

be incompatible with the whole concept of 

administrative adjudication. . . . . . This is the 

case even if the Seventh Amendment would have required 

a jury where the adjudication of those rights is 

assigned instead to a federal court of law instead of 

an administrative agency. 

Atlas Roofing Co, 430 U.S. at 454–55 (quoting Pernell v. 

Southall Realty, 416 U.S. 363, 383 (1974)).

We address the comment with respect to ensuring due 

process in the sections of this preamble specific to the 

framework for the borrower defense claims process.

Changes: None.

Comments: Some commenters asserted that the Department 

lacks authority to recover from the institution losses 

incurred by reason of borrower defenses to repayment. A 

commenter asserted that nothing in section 455(h) of the 

HEA (20 U.S.C. 1087e(h)) permits the Department to seek 

recoupment from any institution related to defenses to 

repayment. In contrast, the commenter asserted, section 

437(c)(1) of the HEA (20 U.S.C. 1087) explicitly provides 
23

that, in the case of closed school discharges, the 

Secretary shall pursue any claim “available to the 

borrower” against the institution to recover the amounts 

discharged. The commenter contended that this clear grant 

of authority to pursue claims to recoup funds associated 

with closed school discharges and false certification 

discharges indicates that Congress intended no grant of 

authority to recover for borrower defense losses. The 

commenter noted that the Department conditions discharge on 

the borrower transferring any claim she has against the 

institution to the Department. The commenter asserted that 

this assignment does not empower the Department to enforce 

the borrower’s claim, because the Secretary does not have 

the ability to acquire a claim from the borrower on which 

it may seek recoupment from a school. The commenter based 

this position on section 437(c) of the HEA, which provides 

that a borrower who obtains a closed school or false 

certification discharge is “deemed to have assigned to the 

United States the right to a loan refund,” and the absence 

of any comparable provision in section 455 of the HEA, 

which authorizes the Secretary to determine which acts or 

omissions of the institution may constitute defenses to 

repayment of a Direct Loan. Given that Congress indicated 

clear intent that the Secretary pursue claims related to 
24

closed school and false certification discharges, and 

explicitly provided for an assignment of claims, the 

commenter considered the failure of Congress to give any 

indication it wanted the Department to pursue claims of 

recoupment against institutions for section 455(h) loan 

discharges, or to acquire any claims from borrowers related 

to section 455(h) discharges, to show congressional intent 

to preclude a recoupment remedy against institutions. 

Another commenter questioned whether the Department 

would have a valid right to enforce a collection against an 

institution in the absence of what the commenter called a 

“third-party adjudication” of the loan discharge.

A commenter stated that the Department could not 

recover from the institution losses incurred from borrower 

defense claims because the commenter considered those 

losses to be incurred voluntarily by the Department. The 

commenter based this view on common law, under which a 

person who voluntarily pays another with full knowledge of 

the facts will not be entitled to restitution. The 

commenter asserted that the Department is further barred 

from recovery from the institution under a theory of 

indemnity or equitable subrogation because, under either 

theory, a party that voluntarily makes a payment or 

discharges a debt may not seek reimbursement. 
25

Discussion: We address under “Group Process for Borrower 

Defenses--Statutory Authority” comments regarding whether 

the Department has authority to assert against the school 

claims that borrowers may have, and discuss here only the 

comments that dispute whether the Department has a legal 

right to recover from a school the amount of loss incurred 

by the Department upon the recognition of a borrower 

defense and corresponding discharge of some or all of a 

Direct Loan obtained to attend the school. 

Applicable law gives the Department the right to 

recover from the school losses incurred on Direct Loans for 

several reasons. First, section 437(c) of the HEA gives 

the Department explicit authority to recover certain losses 

on Direct and FFEL loans. Section 437(c) provides that, 

upon discharge of a FFEL Loan for a closed school 

discharge, false certification discharge, or unpaid refund, 

the Secretary is authorized to pursue any claim of the 

borrower against the school, its principals, or other 

source, and the borrower is deemed to have assigned his or 

her claim against the school to the Secretary. 20 U.S.C. 

1087(c). Section 487(c)(3)(ii) authorizes the Secretary to 

deduct the amount of any civil penalty, or fine, imposed 

under that section from any amounts owed to the 

institution, but any claim for recovery is not based on 
26

authority to fine under that section. Section 432(a)(6) 

authorizes the Secretary to enforce any claim, however 

acquired, but does not describe what those claims may be. 

20 U.S.C. 1082(a)(6)( applicable to Direct Loan claims by 

virtue of section 455(a)(1), 20 U.S.C. 1078e(a)(1)). In 

addition, section 498(c)(1)(C) of the HEA, 20 U.S.C. 

1099c(c)(1)(C), implies that the Secretary has claims that 

the Secretary is expected to enforce and recover against 

the institution for “liabilities and debts”--the 

“liabilities of such institution to the Secretary for funds 

under this title, including loan obligations discharged 

pursuant to section 437.” 20 U.S.C. 1099c(c)(3)(A) 

(emphasis added).1 These provisions are meaningless if the 

Secretary can enforce claims against institutions only if 

the HEA or another statute explicitly authorizes such 

recoveries. 

There are two distinct, and overlapping, lines of 

authority that empower the Secretary to recover from the 

school the amount of losses incurred due to borrower 

defense claims. The first relies on the Secretary’s 

 

1 The Secretary can require the institution to submit “third-party financial guarantees” which thirdparty financial guarantees shall equal not less than one-half of the annual potential liabilities of such 

institution to the Secretary for funds under this title, including loan obligations discharged pursuant 

to section 437 [20 U.S.C. 1087], and to students for refunds of institutional charges, including funds 

under this title.” 20 U.S.C. 1099c(c)(3)(A). 
27

longstanding interpretation of the HEA as authorizing such 

recovery. The second relies on the government’s rights 

under common law. 

In both the Direct Loan and FFEL programs, the 

institution plays a central role in determining which 

individuals receive loans, the amount of loan an individual 

receives, and the Federal interest subsidy, if any, that an 

individual qualifies to receive on the loan, a 

determination based on assessment of financial need. In 

the Direct Loan Program, the institution determines whether 

and to whom the Department makes a loan; in the FFEL 

Program, the institution determines whether and to whom a 

private lender may make a loan that will be federally 

reinsured. 

In Chauffeur’s Training School v. Spellings, 478 F.3d 

117 (2d Cir. 2007), the court addressed a challenge by an 

institution to the Department’s asserted right to hold the 

school liable through an administrative procedure for 

losses incurred and to be incurred on FFEL Loans that were 

made by private lenders and federally reinsured and 

subsidized, after the school had wrongly determined that 

the borrowers had proven eligibility for these loans. The 

court noted that no provision of the HEA expressly 

authorized the Department to determine and recover these 
28

losses on student loans (as opposed to recovery of losses 

of grant funds, expressly authorized by 20 U.S.C. 1234a)). 

However, the court looked to whether the Department’s 

interpretation of the HEA as authorizing the Department to 

assess a liability for loan program violations was 

reasonable. 478 F.3d at 129. The court concluded that the 

Department had reasonably interpreted the HEA’s grant of 

authority to administer the FFEL program to empower the 

Department to “assess liability to recover its guarantee 

payments” on loans made as a result of the school’s 

“improper documentation.” Id. 

Similarly, the Department is authorized under the HEA 

to administer the Direct Loan Program. The HEA directs 

that, generally, Direct Loans are made under the same 

“terms, conditions, and benefits” as FFEL Loans. 20 U.S.C. 

1087a(b)(2), 1087e(a)(1). In 1994 and 1995, the Department 

interpreted that Direct Loan authority as giving the 

Department authority to hold schools liable for borrower 

defenses under both the FFEL and Direct Loan programs, and 

stated that, for this reason, it was not pursuing more 

explicit regulatory authority to govern the borrower 

defense process. 

Thus, in Dear Colleague Letter Gen 95-8 (Jan. 1995), 

the Department stated (emphasis in original):
29

Finally, some parties warn that Direct Loan schools 

will face potential liability from claims raised by 

borrowers that FFEL schools will not face. . . .The 

liability of any school--whether a Direct Loan or FFEL 

participant--for conduct that breaches a duty owed to 

its students is already established under law other 

than the HEA--usually state law. In fact, borrowers 

will have no legal claims against Direct Loan schools 

that FFEL borrowers do not already have against FFEL 

schools. The potential legal liability of schools 

under both programs for those claims is the same, and 

the Department proposes to develop procedures and 

standards to ensure that in the future schools in both 

programs will face identical actual responsibility for 

borrower claims based on grievances against schools.

The Direct Loan statute creates NO NEW 

LIABILITIES for schools; the statute permits the 

Department to recognize particular claims students 

have against schools as defenses to the repayment of 

Direct Loans held by the Department. Current Direct 

Loan regulations allow a borrower to assert as a 

defense any claim that would stand as a valid claim 

against the school under State law.
30

. . . Congress intended that schools 

participating in either FFEL or Direct Loan programs 

should receive parallel treatment on important issues, 

and the Department has already committed during 

negotiated rulemaking to apply the same borrower 

defense provisions to BOTH the Direct Loan and FFEL 

programs. Therefore, schools that cause injury to 

student borrowers that give rise to legitimate claims 

should and, under these proposals, will bear the risk 

of loss, regardless of whether the loans are from the 

Direct Loan or FFEL Program.

The Department reiterated this position in a notice 

published in the Federal Register on July 21, 1995 (60 FR 

37768, 37769-37770): 

Some members of the FFEL industry have asserted that 

there will be greater liabilities for institutions 

participating in the Direct Loan Program than for 

institutions participating in the FFEL Program as a 

consequence of differences in borrower defenses 

between the Direct Loan and FFEL Programs. These 

assertions are inaccurate.

The Department has consistently stated that the 

potential legal liability resulting from borrower 

defenses for institutions participating in the Direct 
31

Loan Program will not be significantly different from 

the potential liability for institutions participating 

in the FFEL Program. (59 FR 61671, December 1, 1994, 

and Dear Colleague Letter GEN 95–8 January 1995) That 

potential liability usually results from causes of 

action allowed to borrowers under various State laws, 

not from the HEA or any of its implementing 

regulations. Institutions have expressed some concern 

that there is a potential for greater liability for 

institutions in the Direct Loan Program than in the 

FFEL Program under 34 CFR 685.206. The Secretary 

believes that this concern is based on a 

misunderstanding of current law and the intention of 

the Direct Loan regulations. The Direct Loan 

regulations are intended to ensure that institutions 

participating in the FFEL and Direct Loan programs 

have a similar potential liability. Since 1992, the 

FFEL Program regulations have provided that an 

institution may be liable if a FFEL Program loan is 

legally unenforceable. (34 CFR 682.609) The 

Secretary intended to establish a similar standard in 

the Direct Loan Program by issuing 34 CFR 685.206(c). 

Consistent with that intent, the Secretary does not 

plan to initiate any proceedings against schools in 
32

the Direct Loan Program unless an institution 

participating in the FFEL Program would also face 

potential liability. . . . 

Thus, the Secretary will initiate proceedings to 

establish school liability for borrower defenses in 

the same manner and based on the same reasons for a 

school that participates in the Direct Loan Program or 

the FFEL Program. . . .

Thus, applying the Chauffeur’s Training analysis, this 

history and formal interpretation shows that the Department 

has, from the inception of the Direct Loan Program, 

considered its administrative authority under the HEA for 

the Direct Loan Program to authorize the Department to hold 

schools liable for losses incurred through borrower 

defenses, and to adopt administrative procedures to 

determine and liquidate those claims. 

Alternatively, common law provides the Department a 

legal right to recover from the school the losses it incurs 

due to recognition of borrower defenses on Direct Loans. 

Courts have long recognized that the government has the 

same rights under common law as any other party. U.S. v. 

Kearns, 595 F.2d 729 (D.C. Cir. 1978). Even when Congress 

expressly provides a remedy by statute, the government has 

the remedies that “normally arise out of the relationships 
33

authorized by the statutory scheme.” U.S. v. Bellard, 674 

F.2d 330 (5th Cir. 1982) (finding the Department had a 

common law right to recover as would any other guarantor 

regardless of an HEA provision describing the Department as 

assignee/subrogor to rights of the private lender whom it 

insured).2 In fact, as noted by the Bellard court, statutes 

must be read to preserve common law rights unless the 

intent to limit those rights is “clearly and plainly 

expressed by the legislature.” Id. The Bellard court 

found no such limiting language in the HEA, nor does any 

exist that is relevant to the Direct Loan issue presented 

here. 

The school enters into a PPA with the Department in 

order to participate in the Direct Loan Program. 20 U.S.C. 

1087(a). The PPA is a contract. San Juan City College 

Inc. v. U.S., 74 Fed. Cl. 448 (2006); Chauffeurs Training 

School v. Riley, 967 F.Supp. 719, 727 (N.D. N.Y. 1997). In 

executing the contract, the school “assume[s] a fiduciary 

relationship with the title IV, HEA Programs.” Chauffeurs 

Training School v. Paige, C.A. No. 01-CV-02-08 (N.D. N.Y. 

Sept. 30, 2003), at 7; 34 CFR 682.82(a). An institution 

 

2 See: U.S. v. Texas, 507 U.S. 529, 534 (1993)(courts may take it as a given that Congress has 

legislated with an expectation that the [common law] principle will apply except ‘when a statutory 

purpose to the contrary is evident.’ ”).
34

must “act with the competency and integrity necessary to 

qualify as a fiduciary” on behalf of taxpayers, “in 

accordance with the highest standard of care and diligence 

in administering the program and in accounting to the 

Secretary for the funds received under [title IV HEA] 

programs.” Id.; see 34 CFR 668.82. 

Specifically, under the Direct Loan Program, the HEA 

describes the institution pursuant to its agreement with 

the Department as “originating” Direct Loans, 20 U.S.C. 

1087c(a), 1087d(b), and accepting “responsibility and 

financial liability stemming from its failure to perform 

its functions pursuant to the agreement.” 20 U.S.C. 

1087d(a)(3), 34 CFR 685.300(b)(8). The regulations 

describe the role of the institution as “originating” 

Direct Loans. 34 CFR 685.300(c), 685.301. 

As a loan “originator” for the Department, the school 

is the authorized agent of the Department: the school acts 

pursuant to Department direction, the school manifests its 

intent to act as agent by entering into the PPA, and most 

importantly, the school has power to alter the legal 

relationships between the principal (the Department) and 

third parties (the students). But for the school’s act in 

originating the loan, there would be no lender-borrower 

relationship. 
35

The interests of the Department as lender and 

principal in this Direct Loan Program relationship with the 

institution are simple: to enable students and parents to 

obtain Federal loans to pay for postsecondary education. 

20 U.S.C. 1087a. Congress selected the vehicle--a loan, 

not a grant--under which the borrower repays the loan, made 

with public funds, which in turn enables the making of new 

loans to future borrowers. Acts or omissions by an agent 

of the Department that frustrate repayment by the borrower 

of the amount the Department lends are contrary to the 

Department’s benefit and interest. Acts or omissions by 

the institution, as the Department’s loan-making agent, 

that harm the Department’s interests in achieving the 

objectives of the loan program violate the duty of loyalty 

owed by the institution as the Department’s loan 

originator, or agent. The Department made clear at the 

inception of the Direct Loan relationship with the 

institution that the institution would be liable for losses 

caused by its acts and omissions, in 1994 and 1995, when 

the Department publicly and unequivocally adopted the 

“borrower defense to repayment” regulation, 34 CFR 685.206, 

and, in the Federal Register and other statements described 

earlier, stated the consequences for the institution that 

caused such losses. 
36

The government has the same protections against breach 

of fiduciary duty that extend under common law to any 

principal against its agent. U.S. v. Kearns, at 348; see 

also U.S. v. York, 890 F.Supp. 1117 (D.D.C. 1995) (breach 

of fiduciary duty to government by contractor, loan 

servicing dealings constituting conflict of interest). The 

remedies available for breach of fiduciary duty are damages 

resulting from the breach of that duty. “One standing in a 

fiduciary relation with another is subject to liability to 

the other for harm resulting from a breach of duty imposed 

by the relation.” Restatement Second, Torts § 874. 

Applying this common law analysis to the relationship 

between the Department and the Direct Loan participating 

institution as it bears on the Department’s right to 

recover, we note, first, that the Department has the rights 

available under common law to any other party, without 

regard to whether any statute explicitly confers such 

rights. Second, the institution enters into a contract 

with the Department pursuant to which the institution acts 

as the Department’s agent in the making of Direct Loans. 

The school is the loan “originator” for the Department. 

Third, under common law, an agent has a fiduciary duty to 

act loyally for the principal's benefit in all matters 

connected with the agency. Fourth, under common law, an 
37

agent’s breach of its fiduciary duty makes the agent liable 

to the principal for the loss that the breach of duty 

causes the principal. And last, a school that commits an 

act or omission that gives a Direct Loan borrower a defense 

to repayment that causes the Department loss thereby 

violates its common law fiduciary duty to act loyally for 

the interests of the Department, and is liable to the 

Department for losses caused by that breach of duty.

The commenter who argued that the Secretary incurs the 

loss by honoring the borrower defense “voluntarily,” and is 

barred by that fact from recovery against the institution, 

misconceives the nature of the claim. As early as Bellard, 

the courts have consistently recognized that in its 

capacity as a loan guarantor under the FFEL Program, the 

Department pays the lender under its contractual obligation 

as loan guarantor, and not as a volunteer. The Department 

guarantees FFELP loans at the request of the borrower who 

applied for the guaranteed loan, as well as the lender. By 

virtue of payment of the guarantee, the Department acquired 

an implied-in-law right against the borrower for 

reimbursement of the losses it incurred in honoring the 

guarantee--a claim distinct from its claim as assignee from

the lender of the defaulted loan. Similarly, where the 

Department incurs a loss under a statutory obligation to 
38

discharge by reason of closure of the school or false 

certification, the Department does not incur that loss 

voluntarily, but rather under legal obligation imposed by 

the statute, as well as the terms of the federally 

prescribed promissory note. Regardless of whether the HEA 

explicitly authorized the Secretary to recover for that 

loss, or deemed the borrower’s claim against the school to 

be assigned to the Secretary, common law gives the 

Secretary the right to recover from the school for the loss 

incurred as a result of the act or omission of the school. 

Section 455(h) of the HEA, by directing that the Secretary 

determine by regulation which acts or omissions of the 

school constitute defenses to repayment, requires the 

Department to discharge the borrower’s obligation to repay 

when the borrower establishes such a defense. 20 U.S.C. 

1087e(h). To the extent that the borrower proves that the 

act or omission of the school gave the borrower a defense, 

the amount not recoverable from the borrower was a loss 

incurred because of the Department’s legal obligation to 

honor that defense. That loss, like the loss on payment of 

a loan guarantee on a FFEL Loan, is not one incurred 

voluntarily, but rather is incurred, like the loss on the 

loan guarantee, by legal obligation. By honoring the 

proven defense of the Direct Loan borrower, like honoring 
39

the claim of the lender on the government guarantee, the 

Secretary acquires by subrogation the claim of the Direct 

Loan borrower or FFEL lender, as well as a claim for 

reimbursement from the party that caused the loss--the 

borrower, on the defaulted FFEL Loan, or the school, on the 

Direct Loan defense. 

Changes: None.

Comments: Several commenters stated that the HEA does not 

authorize, or even contemplate, the sweeping regulatory 

framework set forth in the Department’s borrower defense 

proposals. The commenters questioned the three HEA 

provisions cited by the Department as the source of its 

statutory authority: Section 455(h), which allows the 

Secretary to identify “acts or omissions . . . a borrower 

may assert as a defense to repayment of a loan;” Section 

487, which outlines certain consequences for an 

institution’s “substantial misrepresentation of the nature 

of its educational program, its financial charges, or the 

employability of its graduates;” and Section 454(a)(6), 

which permits the Department to “include such . . . 

provisions as the Secretary determines are necessary to 

protect the interests of the United States and to promote 

the purposes of” the Direct Loan Program in each 

institution’s PPA. The commenters believed that section 
40

455(h) of the HEA only empowers the Department to define 

those “acts or omissions” that an individual borrower may 

assert as a defense in a loan collection proceeding and

noted that none of the provisions allows the Department to 

create a novel cause of action for a borrower to levy 

against her school, which the Department would both 

prosecute and adjudicate in its own “court.” Accordingly, 

the commenters believed that the Department should 

substantially revise the rule to be consistent with the 

regulatory authority granted to the Department by Congress. 

Other commenters stated that the Department should withdraw 

the proposed regulations and instead work jointly with 

Congress to address the issues in the proposed regulations 

as part of the reauthorization of the HEA. The commenters 

believed that borrower defense policy proposals are so 

substantive and commit such an enormous amount of taxpayer 

dollars that careful consideration by Congress is required 

so that all of the available options are weighed in the 

overall context of comprehensive program changes. 

Discussion: We disagree with the commenters who contended 

that the HEA does not authorize the regulatory framework 

proposed in the Department’s borrower defense proposals. 

As explained above, common law and the HEA as interpreted 

by the Department in adopting the Direct Loan regulations, 
41

give the Department the right to recover losses incurred 

due to borrower defense claims. The commenters rightly 

identify sections 455(h), 487, and 454(a)(6) of the HEA as 

some of the sources of the Department’s statutory authority 

for these regulations as they relate to identification of 

causes of action that are recognized as defenses to 

repayment, as well as procedures for receipt and 

adjudication of these claims. In addition, the HEA 

authorizes the Secretary to include in Direct Loan PPAs 

with institutions any provisions that are necessary to 

protect the interests of the United States and to promote 

the purposes of the Direct Loan Program. In becoming a 

party to a Direct Loan PPA, the institution accepts 

responsibility and financial liability stemming from its 

failure to perform its functions pursuant to the agreement. 

And, as a result, students and parents are able to obtain 

Federal loans to pay for postsecondary education. Far from 

exceeding its statutory authority in developing procedures 

for adjudicating these claims, section 455(h) presumes that 

the Department must recognize in its existing 

administrative collection and enforcement proceedings the 

very defenses that section directs the Department to 

establish, or create new procedures to better address these 

claims, as we do here.
42

In addition, section 410 of the General Education 

Provisions Act (GEPA) provides the Secretary with authority 

to make, promulgate, issue, rescind, and amend rules and 

regulations governing the manner of operations of, and 

governing the applicable programs administered by, the 

Department. 20 U.S.C. 1221e-3. Further, under section 414 

of the Department of Education Organization Act, the 

Secretary is authorized to prescribe such rules and 

regulations as the Secretary determines necessary or 

appropriate to administer and manage the functions of the 

Secretary or the Department. 20 U.S.C. 3474. These 

general provisions, together with the provisions in the HEA 

and common law explained earlier, noted above, authorize 

the Department to promulgate regulations that govern 

defense to repayment standards, process, and institutional 

liability.

With regard to the commenters who believe that the 

Department’s proposals are so substantive and commit such 

an enormous amount of taxpayer dollars that the Department 

should work with Congress, or defer to Congress, in terms 

of the development of such comprehensive program changes, 

we do not agree that the Department should not take, or 

should defer, regulatory action on this basis until 

Congress acts. Since the collapse of Corinthian, the 
43

Department has received a flood of borrower defense claims 

stemming from the school’s misconduct. In order to 

streamline and strengthen this process, we believe it is 

critical that the Department proceed now in accordance with 

its statutory authority, as delegated by Congress, to 

finalize regulations that protect student loan borrowers 

while also protecting the Federal and taxpayer interests.

Changes: None.

Comments: Several commenters stated that the proposed 

regulations were arbitrary and capricious and therefore 

violate the APA. Commenters raised this concern both 

generally and with respect to specific elements of the 

proposed regulations. For example, several commenters 

argued that the Department withheld substantive detail 

regarding its expansion of the loan repayment defenses into 

offensive causes of action and on the process by which 

borrower defense claims and Department proceedings to 

collect claim liabilities from institutions will be 

adjudicated, thereby depriving institutions and affected 

parties the opportunity to offer meaningful comment on 

critical parts of the rule.

Discussion: We address commenters’ arguments with respect 

to specific provisions of the regulations in the sections

of this preamble specific to those provisions. However, as 
44

a general matter, in taking this regulatory action, we have 

considered relevant data and factors, considered and 

responded to comments and articulated a reasoned basis for 

our actions. Marsh v. Oregon Natural Res. Council, 490 

U.S. 360, 378 (1989); Motor Vehicle Mfrs. Ass’n v. State 

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see also

Pub. Citizen, Inc. v. Fed. Aviation Admin., 988 F.2d 186, 

197 (D.C. Cir. 1993); PPL Wallingford Energy LLC v. FERC, 

419 F.3d 1194, 1198 (D.C. Cir. 2005).

Changes: None.

Comments: Several commenters stated that the negotiated 

rulemaking process, by which the proposed rules were 

developed, was flawed. 

One commenter stated that input from representatives 

of publicly held proprietary institutions was not included 

in the public comment process prior to the establishment of 

a negotiated rulemaking committee. This commenter also 

stated that only representatives from private, proprietary 

institutions were represented on the negotiated rulemaking 

committee and that those representatives had no expertise 

in the active management of an institution. The commenter 

also stated that the NPRM 45-day public comment process was 

too short.
45

Several commenters contended that the Department 

failed to provide adequate notice to the public of the 

scope of issues to be discussed at the negotiated 

rulemaking. The commenters stated that the issues of 

financial responsibility and arbitration clauses were not 

included in the Federal Register notices announcing the 

establishment of a negotiated rulemaking committee or the 

solicitation of negotiators and that, had the higher 

education community known these issues were within the 

scope of the rulemaking, negotiators more familiar with 

these issues would have been nominated. The commenters 

believed that the Department failed to carry out its 

statutory mandate under 20 U.S.C. 1098 to engage the public 

and receive input on the issues to be negotiated. One 

commenter also expressed dismay at the Department’s 

accelerated timetable and intent to publish final 

regulations one week before the general election. The 

commenter felt that the “rush to regulate” resulted in a 

public comment period that did not give the public enough 

time to fully consider the proposals and a timeline that 

did not afford the Department enough time to develop an 

effective, cost-effective rule. 

Discussion: The negotiated rulemaking process ensures that 

a broad range of interests is considered in the development 
46

of regulations. Specifically, negotiated rulemaking seeks 

to enhance the rulemaking process through the involvement 

of all parties who will be significantly affected by the 

topics for which the regulations will be developed. 

Accordingly, section 492(b)(1) of the HEA, 20 U.S.C. 

1098a(b)(1), requires the Department to choose negotiators 

from groups representing many different constituencies. 

The Department selects individuals with demonstrated 

expertise or experience in the relevant subjects under 

negotiation, reflecting the diversity of higher education 

interests and stakeholder groups, large and small, 

national, State, and local. In addition, the Department 

selects negotiators with the goal of providing adequate 

representation for the affected parties while keeping the 

size of the committee manageable. The statute does not 

require the Department to select specific entities or 

individuals to be on the committee. As there was both a 

primary and an alternate committee member representing 

proprietary institutions, we believe that this group was 

adequately represented on the committee. 

We note that the Department received several 

nominations to seat representatives from proprietary 

schools on the committee after publication of our October 

20, 2015, Federal Register notice. The Department 
47

considered each applicant to determine their qualifications 

to serve on the committee. 

This process did not result in proprietary sector 

nominees with the requisite qualifications, so we published 

a second Federal Register notice on December 21, 2015, 

seeking further nominations for the negotiated rulemaking 

committee, including representation from the proprietary 

sector. Dennis Cariello, Shareholder, Hogan Marren Babbo & 

Rose, Ltd., and Chris DeLuca, Founder, DeLuca Law, were 

selected following this second notice. Given the topics 

under discussion, we believe Mr. Cariello and Mr. DeLuca 

adequately represented the proprietary sector. 

We disagree with the commenters who contended that the 

Department failed to provide adequate public notice and 

failed to engage and receive input from the public on the 

scope of issues to be discussed at the negotiated 

rulemaking, in particular the issues of financial 

responsibility and arbitration clauses. On August 20, 

2015, the Department published a notice in the Federal 

Register announcing our intention to establish a negotiated 

rulemaking committee. We also announced our intention to 

accept written comments from and hold two public hearings 

(September 10, 2015 and September 16, 2015, in Washington, 

D.C. and San Francisco, respectively) at which interested 
48

parties could comment on the topics suggested by the 

Department and suggest additional topics that should be 

considered for action by the committee. Lastly, we 

announced our intent to develop proposed regulations for 

determining which acts or omissions of an institution of 

higher education a borrower may assert as a defense to 

repayment of a loan made under the Direct Loan Program and 

the consequences of such borrower defenses for borrowers, 

institutions, and the Secretary. We specifically stated 

that we would address the issues of defense to repayment 

procedures; the criteria that constitute a defense to 

repayment; the standards and procedures that the Department 

would use to determine institutional liability for amounts 

based on borrower defenses; and, the effect of borrower 

defenses on institutional capability assessments. No 

representatives of the proprietary sector testified at the 

hearings. One proprietary association representing 1,100 

cosmetology schools submitted written testimony stating 

that the association was interested in working with the 

Department to determine the institutional liability and 

capability assessments associated with borrower defense 

claims. In addition, we presented issue papers prior to 

the first day of the first of the three negotiating 

sessions in which we outlined the particular questions to 
49

be addressed. 3 These included Issue Paper No. 5, which 

explicitly addresses financial responsibility and letters 

of credit.4 Negotiators who had any question about the 

scope of issues we intended to cover were thus given very 

explicit notice before the first day of negotiations, and 

were free to obtain then, or at any other time during the 

nine days of hearings over three months, any expert 

advisors they wished to engage to inform their 

deliberations. 

We received written testimony from other parties that 

supported both holding institutions financially accountable 

for the costs associated with borrower defenses and 

limiting a school’s use of certain dispute resolution 

procedures.

 

3 http://www2.ed.gov/policy/highered/reg/hearulemaking/2016/index.html. 

4 The paper states--

Questions to be considered by the negotiating committee include:

1. Should the Department take additional steps to protect students and taxpayers from a) 

potential borrower defense to repayment (DTR) claims, b) liabilities stemming from 

closed school discharges, and c) other conditions that may be detrimental to students? 

 If so, what conditions, triggering events, metric-based standards, or other 

risk factors should the Department consider indicative of failing financial 

responsibility, administrative capability, or other standards? 

 What should the consequences be for a violation? Letter of credit or other 

financial guarantee? Disclosure requirements and student warnings? 

Other consequences? 

 If a letter of credit or other financial guarantee is required, how should the amount 

be determined?
50

We disagree with the commenter who contended that the 

Department’s timetable for developing borrower defense 

regulations was rushed and that the comment period did not 

give the public enough time to fully consider the 

proposals. We believe that the 45-day public comment 

period provided sufficient time for interested parties to 

submit comments, particularly given that prior to issuing 

the proposed regulations, the Department conducted two 

public hearings and three negotiated rulemaking sessions, 

where stakeholders and members of the public had an 

opportunity to weigh in on the development of much of the 

language reflected in the proposed regulations. In 

addition, the Department also posted the NPRM on its Web 

site several days before publication in the Federal 

Register, providing stakeholders additional time to view 

the proposed regulations and consider their viewpoints on 

the NPRM. 

Changes: None.

Comments: Although the regulations will affect all

schools, many commenters expressed frustration at their 

perception that the regulations target proprietary schools 

in particular. The commenters noted several provisions of 

the regulations–-for example, financial protection triggers 

related to publicly traded institutions, distributions of 
51

equity, the 90/10 regulations, and the Gainful Employment 

regulations, and disclosure provisions regarding loan 

repayment rates–-as unfairly targeting only proprietary 

schools with no justification or rationale. The commenters 

noted that that there are many private sector career 

schools and colleges that play a vital role in the 

country’s higher education system by providing distinctive, 

career-focused programs and that the Department should 

develop rules that are applied uniformly across all 

educational institutions that offer title IV, HEA funding. 

Another commenter appreciated the distinction made in the 

NPRM between nonprofit/public institutions and proprietary 

schools as the basis for restricting the loan repayment

rate disclosure to proprietary schools. The commenter 

suggested that the fundamental differences in the 

governance structures and missions of the public and nonprofit sectors versus the for-profit sector provide a 

substantive basis for differentiating this regulation among 

the sectors. 

Several commenters urged the Department to reconsider 

the changes to 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 
52

claims and other liabilities, given their sweeping scope 

and potentially damaging financial impact on historically 

black colleges and universities (HBCUs). The commenters 

contended that these provisions could lead to the closure 

of HBCUs that are not financially robust but provide 

quality educational opportunities to students and noted 

that HBCUs have not been the focus of Federal and State 

investigations nor have they defrauded students or had 

false claims lawsuits filed against them. These commenters 

expressed concern about a number of the specific financial 

protection triggers, including, but not limited to, the 

triggers relating to lawsuits, actions by accrediting 

agencies, and cohort default rate.

Discussion: We agree that there are many proprietary 

career schools and colleges that play a vital role in the 

country’s higher education system. We do not agree, 

however, that either the financial protection triggers or 

the loan repayment rate disclosure unfairly target 

proprietary institutions. We apply the financial 

protection triggers related to publicly traded 

institutions, the distribution of equity, and the 90/10 

regulations only to proprietary institutions because, as 

another commenter noted, of the fundamental differences in 

the governance structures and missions of the public and 
53

non-profit sectors and the unique nature of the business 

model under which these institutions operate. These 

triggers identify events or conditions that signal 

impending financial problems at proprietary institutions 

that warrant action by the Department. We apply the loan 

repayment rate disclosure only to the for-profit sector 

primarily because the frequency of poor repayment outcomes 

is greatest in this sector. We appreciate the support of 

the commenter who agreed with this approach.

We note that we address commenters’ arguments with 

respect to specific provisions of the regulations in the 

sections of this preamble specific to those provisions. 

 We also note that HBCUs play a vital role in the 

Nation’s higher education system. We recognize the 

concerns commenters raised regarding the financial 

protection provisions of the proposed regulations, which 

they argue would have a damaging financial impact on HBCUs. 

We note that the triggers are designed to identify signs, 

and to augment the Department's tools for detection, of 

impending financial difficulties. If an institution is 

subject to material actions or events that are likely to 

have an adverse impact on the financial condition or 

operations of an institution, we believe that the Federal 

government and taxpayers should be protected from any 
54

resulting losses incurred by requiring a letter or credit, 

regardless of the institution’s sector. As commenters

mentioned, our recent experience suggests that HBCUs have 

not been the subject of government agency suits or other 

litigation by students or others, or of administrative 

enforcement actions. Institutions that do not experience 

these kinds of claims, including HBCUs, will not experience 

adverse impacts under these triggers. In addition, 

institutions, including HBCUs, will retain their existing 

rights of due process and continue to have the ability to 

present to the Secretary if there is any factual objection 

to the grounds for the required financial protection. 

Accordingly, the Secretary can consider additional 

information provided by an institution before requiring a 

letter of credit. Even in instances where the Department 

still requires a letter of credit over a school’s 

objection, the school could raise such issues to the 

Department’s Office of Hearing and Appeals. 

Finally, we have made a number of changes to the 

proposed triggers that address the commenters’ specific 

objections to particular triggers, to more sharply focus 

the automatic triggers on actions and events that are 

likely to affect a school’s financial stability. For 

instance, as we stated in other sections of this preamble, 
55

in light of the significant comments received regarding the 

potential for serious unintended consequences if the

accreditation action triggers were automatic, we are 

revising the accreditation trigger so that accreditation 

actions such as show cause and probation or equivalent 

actions are discretionary. We note that we address 

commenters’ arguments with respect to additional specific 

financial protection triggers, and any changes we have made 

in the final regulations, in the sections of this preamble 

specific to those provisions. 

Changes: None.

Comments: One commenter suggested that the Department 

ensure that its contractors are aware of the basis for 

borrower defense discharge claims and the accompanying 

process. The commenter noted that inconsistent servicing 

and debt collection standards impede borrowers’ access to 

the benefit and other forms of relief. The commenters also 

suggested that the Department update its borrower-facing 

materials to reflect the availability and scope of the 

borrower defense discharge. 

Discussion: We are committed to ensuring that our 

contractors and any borrower-facing material published by 

the Department provide accurate and timely information on 

the discharge standards and processes associated with a 
56

borrower defense to repayment. We have begun the process 

of updating applicable materials to reflect these final 

regulations and will continue working closely with our 

contractors to help ensure that they have the information 

they need to assist borrowers expeditiously and accurately.

Changes: None.

Comments: Several commenters requested that the Department 

make information available to the public on the number of 

borrowers who submitted borrower defense applications, the 

number of borrowers who received a discharge, the amount of 

loans discharged, the basis or standard applied by the 

Department in a successful discharge claim, discharged 

amounts collected from schools, a list of institutions 

against which successful borrower defense claims are made, 

and any reports relevant to the process. The commenters 

believed that this information would provide transparency 

and facilitate a better understanding of how the process is 

working as well.

Discussion: We are committed to transparency, clarity and 

ease of administration and will give careful consideration 

to this request as we refine our borrower defense process.

Changes: None.

Comments: Several commenters noted that they, as student 

loan borrowers, are taxpayers like every American citizen 
57

and that paying student loans that were fraudulently made 

on top of paying taxes is a double penalty. The commenters 

also requested that the Department permit a borrower to 

include all types of student loans--private student loans, 

FFEL, Perkins, Parent Plus--they received to finance the 

cost of higher education in a borrower defense claim. 

Discussion: The Department is committed to protecting 

student loan borrowers from misleading, deceitful, and 

predatory practices of, and failure to fulfill contractual 

promises by, institutions participating in the Federal 

student aid programs. These final regulations permit a 

borrower to consolidate loans listed in § 685.220(b), 

including nursing loans made under part E of title VIII of 

the Public Health Service Act, to pursue borrower defense 

relief by consolidating those loans, as provided in 

proposed § 685.212(k). The Department does not have the 

authority to include private student loans in a Direct Loan 

consolidation. 

Changes: None.

Comments: Several commenters stated that, in order to 

avoid another failure as serious as that of Corinthian, the 

Department should implement strong compliance and 

enforcement policies to proactively prevent institutions 

that engage in fraudulent activity from continuing to 
58

receive title IV, HEA funding. The commenters believe that 

institutions that do not meet statutory, regulatory or 

accreditor standards and that burden students with debt 

without providing a quality education should be identified 

early and subjected to greater scrutiny and sanctions so 

that a borrower defense is a last resort. 

Discussion: The Department is committed to strong 

compliance and enforcement policies to proactively prevent 

institutions that engage in fraudulent activity from 

continuing to receive title IV, HEA funding. These final 

regulations establish the definitive conditions or events 

upon which an institution is or may be required to provide 

to the Department with financial protection, such as a 

letter of credit, to help protect students, the Federal 

government, and taxpayers against potential institutional 

liabilities. 

Changes: None.

Comments: One commenter requested that the Department and 

the Internal Revenue Service develop a determination on the 

tax treatment of discharges of indebtedness for students 

with successful defense to repayment claims. While 

acknowledging that the Department does not administer tax 

law, the commenter stated that the Department should 

question, or at least weigh in on the matter, of the 
59

Internal Revenue Service's “decline to assert” policy on 

successful defense to repayment claims that currently 

applies to loans for students who attend schools owned by 

Corinthian, but not to loans for students who attend other 

schools.

Discussion: As noted by the commenter, the tax treatment 

of discharges that result from a successful borrower 

defense is outside of the Department’s jurisdiction. 

However, the Department recognizes the commenter’s concern 

and will pursue the issue in the near future.

Changes: None.

Borrower Defenses (Sections 668.71, 685.205, 685.206, and 

685.222)

Federal Standard

Support for Standard

Comments: A group of commenters fully supported the 

Department’s intent to produce clear and fair regulations 

that protect student borrowers and taxpayers and hold 

schools accountable for acts and omissions that deceive or 

defraud students. However, these commenters suggested that 

the Department has not fully availed ourselves of existing 

consumer protection remedies and have, instead, engaged in 

overreach to expand our enforcement options.
60

Another group of commenters noted that the proposed 

Federal standard is a positive complement to consumer 

protections already provided by State law. Another group 

of commenters offered support for the Federal standard 

specifically because it addresses complexities and 

inequities between borrowers in different States. 

One commenter explicitly endorsed our position that 

general HEA eligibility or compliance violations by schools 

could not be used a basis for a borrower defense.

Another group of commenters noted that the proposed 

Federal standard provides an efficient, transparent, and 

fair process for borrowers to pursue relief. According to 

these commenters, the Federal standard eliminates the 

potential for disparate application of this borrower 

benefit inherent with the current rule’s State-based 

standard, and enables those who are providing training and 

support to multiple institutions to develop standardized 

guidance. 

A different group of commenters expressed support for 

the Federal standard, noting that it would be challenging 

for us to adjudicate claims based on 50 States’ laws.

Yet another group of commenters requested that the new 

Federal standard be applied retroactively when a borrower 

makes a successful borrower defense claim and has loans 
61

that were disbursed both before and after July 1, 2017. 

Discussion: We appreciate the support of these commenters. 

However, we do not agree with the commenters’ 

contention that we are engaging in overreach to expand our 

enforcement options, nor have we disregarded existing 

consumer protection remedies. The HEA provides specific

authority to the Secretary to conduct institutional 

oversight and enforcement of the title IV regulations. The 

borrower defense regulations do not supplant consumer 

protections available to borrowers. Rather, the borrower 

defense regulations describe the circumstances under which 

the Secretary exercises his or her long-standing authority 

to relieve a borrower of the obligation to repay a loan on 

the basis of an act or omission of the borrower’s school. 

The Department’s borrower defense process is distinct from 

borrowers’ rights under State law. State consumer 

protection laws establish causes of action an individual 

may bring in a State’s courts; nothing in the Department’s 

regulation prevents borrowers from seeking relief through 

State law in State courts. As noted in the NPRM, 81 FR 

39338, the limitations of the borrower defense process 

should not be taken to represent any view regarding other 

issues and causes of action under other laws and 

regulations that are not within the Department’s authority. 
62

As to the request to make the new Federal standard 

available to all Direct Loan borrowers, we cannot apply the 

new Federal standard retroactively when a borrower makes a 

successful borrower defense claim and has loans that were 

disbursed both before and after July 1, 2017. Loans made 

before July 1, 2017 are governed by the contractual rights 

expressed in the existing Direct Loan promissory notes. 

These promissory notes incorporate the current borrower 

defense standard, 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. Promissory notes for loans made after July 1, 2017 

will include a discussion of the new Federal standard for 

borrower defense claims.

Changes: None. 

Evidentiary Standard 

Comments: A number of commenters and an individual 

commenter remarked that the proposed Federal standard 

increases the risk to institutions by granting loan 

discharges when the borrower’s case is substantiated by a 

preponderance of the evidence. 

Another commenter expanded on this position, asserting 

that the evidentiary standard in most States for fraudulent 

misrepresentation is clear and convincing evidence. A few 
63

commenters echoed these viewpoints and suggested that the 

perceived minimal burden of proof may encourage bad actors 

to entice borrowers into filing false claims. 

A couple of other commenters wrote that the standard 

is not clear enough to preclude students from asserting 

claims of misrepresentation without supporting evidence. 

These commenters suggested that the proposed regulations 

presume that all proprietary schools engage in deliberate 

misrepresentation.

Discussion: We do not agree that the “preponderance of the 

evidence” standard will result in greater risk to 

institutions. 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 proceedings 

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 overly burdensome 

evidentiary standard and protecting the Federal government, 

taxpayers, and institutions from unsubstantiated claims. 

Under the standard, the designated Department official may 

determine whether the elements of the borrower’s cause of 
64

action under the Federal standard for borrower defenses 

have been sufficiently alleged and shown. If the official 

determines that the elements have not been alleged or have 

not met the preponderance of evidence standard, the claim 

will be denied.

The Department is aware of unscrupulous businesses 

that prey upon distressed borrowers, charging exorbitant 

fees to enroll them in Federal loan repayment plans that 

are freely available. On January 28, 2016, the Department 

sent cease and desist letters to two third-party “debt 

relief” companies that were using the Department’s official 

seal without authorization. The misuse of the Department's 

Seal is part of a worrying trend. Some of these companies 

are charging large up-front or monthly fees for Federal 

student aid services offered by the Department of Education 

and its student loan servicers for free. In April of 2016, 

the Department launched several informational efforts to 

direct borrowers to the Department’s free support 

resources, as well as to share information regarding State 

and Federal entities that have the authority to act against 

companies that engage in deceptive or unfair practices. 

Although these or similar opportunists may seek to profit 

from filing false claims, the Department will be aggressive

in curtailing this activity, and will remain vigilant to 
65

help ensure that bad actors do not profit from this 

process. 

We do not agree that the Federal standard will incent 

borrowers to assert claims of misrepresentation without 

sufficient evidence to substantiate their claims. As 

explained in more detail under “Process for Individual 

Borrowers,” under § 685.222(a)(2), a borrower in the 

individual process in § 685.222(e) bears the burden of 

proof in establishing that the elements of his or her claim 

have been met. In a group process under § 685.222(f) to 

(h), this burden falls on the designated Department 

official. Borrower defense claims that do not meet the 

evidentiary standard will be denied. We also disagree with 

the commenters’ interpretation of the borrower defense 

regulations as based on a presumption that all proprietary 

institutions engage in deliberate misrepresentation. These 

borrower defense regulations are applicable to and designed 

to address all institutions of postsecondary education 

participating in the Direct Loan Program; further, they 

contain no presumption regarding the activities of any 

institution, but instead provide a fair process for 

determining whether acts or omissions by any particular 

institution give rise to a borrower defense. We also 
66

discuss this issue in more detail under “Substantial 

Misrepresentation.”

Changes: None. 

Educational Malpractice

Comments: A group of commenters asked that we clarify the 

difference between educational malpractice and a school’s 

failure to provide the necessary aspects of an education 

(such as qualified instructors, appropriately equipped 

laboratories, etc.).

Discussion: We do not believe that the regulations should 

differentiate between educational malpractice and a 

school’s failure to provide the necessary aspects of an 

education, such as might be asserted in a claim of 

substantial misrepresentation or breach of contract. State 

law does not recognize claims characterized as educational 

malpractice, and we do not intend to create a different 

legal standard for such claims in these regulations. 

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. We recognize 

that there may be instances where a school has made 

specific misrepresentations about its facilities, financial 

charges, programs, or the employability of its graduates, 
67

and these misrepresentations may function as the basis of a 

borrower defense, as opposed to a claim regarding 

educational quality. Similarly, a borrower defense claim 

based on a breach of contract may be raised where a school 

has failed to deliver specific obligations, such as 

programs and services, it has committed to by contract.

Changes: None. 

Intent 

Comments: A number of commenters expressed concern that 

the proposed Federal standard does not require intent on 

the part of the institution. These commenters were 

concerned that inadvertent errors by an institution or its 

employees could serve as the basis for a borrower defense 

claim. Some commenters cited an example of an employee 

misstating or omitting information that is available to the 

borrower in a complete and correct form in publications or 

electronic media. One of these commenters noted that the 

six-year statute of limitations may exacerbate this issue, 

by permitting borrowers to present claims relying on 

distant memories of oral conversations that may have been 

misunderstood. 

Discussion: Gathering evidence of intent would likely be 

nearly impossible for borrowers. Information asymmetry 

between borrowers and institutions, which are likely in 
68

control of the best evidence of intentionality of 

misrepresentations, would render borrower defense claims 

implausible for most borrowers.

As explained in more detail under “Substantial 

Misrepresentation,” we do not believe it is necessary to 

incorporate an element of intent or knowledge into the 

substantial misrepresentation standard. This reflects the 

Department’s longstanding position that a misrepresentation 

does not require knowledge or intent on the part of the 

institution. The Department will continue to operate 

within a rule of reasonableness and will evaluate available 

evidence of extenuating, mitigating, and aggravating 

factors prior to issuing any sanctions pursuant to 34 CFR 

part 668, subpart F. We will also consider the totality of 

the circumstances surrounding any misrepresentation for 

borrower defense determinations. However, an institution 

will generally be responsible for harm to borrowers caused 

by its misrepresentations, even if they are not 

intentional. We continue to believe that this is more 

reasonable and fair than having the borrower (or taxpayers) 

bear the cost of such injuries. It also reflects the 

consumer protection laws of many States.

Similarly, we do not believe it is necessary or 

appropriate to adopt an intent element for the breach of 
69

contract standard. Generally, intent is not a required 

element for breach of contract, and we do not see a need to 

depart from that general legal principle here.

Regardless of the point in time within the statute of 

limitations at which a borrower defense claim is made, the 

borrower will be required to present a case that meets or 

exceeds the preponderance of the evidence standard. 

Changes: None.

State Law Bases for the Federal Standard

Comments: A number of commenters advocated the 

continuation of State-based standards for future borrower 

defense claims. These commenters put forward several 

arguments in support of their position. 

Several commenters suggested that the proposed Federal 

standard effectively reduces, preempts, or repeals 

borrowers’ current rights under the current, State lawbased standard.

According to another commenter, the proposed 

acceptance of favorable, nondefault, contested judgments 

based on State law suggests that allegations of State law 

violations should provide sufficient basis for a borrower 

defense claim. Another group of commenters contended that, 

when a Federal law or regulation intends to provide broad 

consumer protections, it generally does not supplant all 
70

State laws, but rather, replaces only those that provide 

less protection to consumers.

 A group of commenters noted that the HEA’s State 

authorization regulations require States to regulate 

institutions and protect students from abusive conduct. 

According to these commenters, the laws States enact under 

this authority would not be covered by the Federal standard 

unless the borrower obtained a favorable, nondefault, 

contested judgment. 

 Additionally, one commenter believed that providing a 

path to borrower defense based on act or omission of the 

school attended by the student that would give rise to a 

cause of action under applicable State law would preserve 

the relationship between borrower defense, defense to 

repayment, and the “Holder in Due Course” rule of the 

Federal Trade Commission (FTC).5

 These commenters stated that the Department has not 

provided sufficient evidence to support its assertions that 

borrower defense determinations based on a cause of action 

under applicable State law results or would result in 

 

5 The FTC’s “Holder Rule” or “Holder in Due Course Rule” is also formally known as the “Trade 

Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses,” 16 CFR part 433. The 

Holder Rule requires certain credit contracts to include a contractual provision that establishes that 

the holder of such a contract is subject to all claims and defenses which the debtor could assert 

against the seller of the goods or services obtained with the proceeds of the contract, with recovery 

by the debtor being limited to the amounts paid by the debtor under the contract. 
71

inequitable treatment for borrowers, or that the complexity 

of adjudicating State-based claims has increased due to the 

expansion of distance education. Further, these commenters 

also stated that the Department has not provided any 

examples of cases that would meet the standard required to 

base a borrower defense claim on a nondefault, contested 

judgement based on State law.

A group of commenters contended that State law 

provides the most comprehensive consumer protections to 

borrowers. Other commenters contended that State law 

provides clarity to borrowers and schools, as precedents 

have been established that elucidate what these laws mean 

with respect to the rights and responsibilities of the 

parties.

Another commenter suggested that providing borrowers 

comprehensive options to claim a borrower defense, 

including claims based on violation of State law, should be 

an essential precept of borrower relief.

One commenter contended that the elimination of the 

State standard is at odds with the proposed ban on 

mandatory arbitration, as this ban will clear the way for 

borrowers to pursue claims against their schools in State 

court. 
72

Several commenters noted that the Department will 

continue to apply State law standards to borrower defense 

claims for loans disbursed prior to July 2017, 

necessitating the continued understanding and application 

of State laws regardless of whether or not they remain a 

basis for borrower defense claims for loans disbursed after 

July 2017. 

A group of commenters expressed concern that borrowers 

with loans disbursed before July 2017 can access the 

Federal standard by consolidating their loans; however, 

borrowers with loans disbursed after July 2017 can only 

avail themselves of the State standard by obtaining a 

nondefault, contested judgment. They contended that 

Department should not introduce this inequity into the 

Federal student loan programs.

Another group of commenters asserted that defining 

bases for future borrower defense claims based on past 

institutional misconduct may limit the prosecution of 

future forms of misconduct that are unforeseeable.

Several commenters noted that many borrowers lack the 

resources necessary to obtain a nondefault, contested 

judgment based on State law. Moreover, these borrowers 

would not have access to the breadth of data and evidence 

available to the Department.
73

Several commenters contended that borrowers whose 

schools have violated State law should not have to rely 

upon their State’s Attorney General (AG) to access Federal 

loan relief.

One commenter wrote that creating multiple paths a 

borrower may use to pursue a borrower defense claim is 

unnecessarily complex.

A group of commenters remarked that the proposed 

Federal standard is both too complex and the evidentiary 

standard too low, suggesting that the prior State standard 

was more appropriate for borrower defense claims. 

Discussion: We disagree that the Federal standard 

effectively reduces, preempts, or repeals borrowers’ 

current rights under the State standard. Borrowers may 

still submit a claim based on violation of any State or 

Federal law, whether obtained in a court or an 

administrative tribunal of competent jurisdiction. As also 

explained in the “Claims Based on Non-Default, Contested 

Judgments” section of this document, the Department’s 

borrower defense process is distinct from borrowers’ rights 

to pursue judicial remedies in other State or Federal 

contexts and nothing in the Department’s regulation 

prevents borrowers from seeking relief through State law in 

State courts. 
74

We agree, as proposed in the NPRM and reflected in 

these final regulations, that the acceptance of favorable, 

nondefault, contested judgments based on State or Federal 

law violations may serve as a sufficient basis for a 

borrower defense claim. We believe it is important to 

enable borrowers to bring borrower defense claims based on 

those judgments, but we do not think this means that we 

should maintain the State-based standard. 

We acknowledge that the HEA’s State authorization 

regulations require States to regulate institutions and 

protect students from abusive conduct and that the laws 

States have enacted in this role would only be covered by 

the Federal standard where the borrower obtained a 

favorable, nondefault, contested judgment. However, we do 

not view this as a compelling reason to maintain an 

exclusively State-based standard, or a standard that also 

incorporates State law in addition to the Federal standard, 

for borrower defense.

We disagree that the Federal standard for borrower 

defense should incorporate the FTC’s Holder Rule. We 

acknowledge that the current borrower defense regulation’s 

basis in applicable State law has its roots in the 
75

Department’s history with borrower defense.6 However, we 

have decided that it is appropriate that the Department 

exercise its authority under section 455(h) of the HEA to 

specify “which acts or omissions” may serve as the basis of 

a borrower defense and establish a Federal standard that is 

not based in State law, for loans made after the effective 

date of these final regulations. 

We have acknowledged that potential disparities may 

exist as students in one State may receive different relief 

than students in another State, despite having common facts 

and claims. This concern is substantiated, in part, by 

comments made by non-Federal negotiators and members of the 

public in response to the NPRM, asserting that consumer 

protections laws vary greatly from State to State. 

We have also described how the complexity of 

adjudicating State-based claims for borrower defense has 

increased due to the expansion of distance education. As 

noted in the NPRM (81 FR 39335 to 39336), while a 

 

6 As explained in the “Expansion of Borrower Rights” section, before the Department enacted the 

borrower defense regulations in 1994 as part of its Direct Loan Program regulations, 59 FR 61664, 

the Department had preserved borrowers’ rights under the FFEL Program to bring any claims a 

borrower may have against a school as defenses against the holder of the loan if the school had a 

referral or affiliation relationship with the lender. This was done by adopting a version of the FTC’s 

Holder Rule language in the FFEL Master Promissory Note in 1994, and was later formalized in 

regulation at 34 CFR 682.209(g) in 2008. As further explained under “General,” in 1995, the 

Department clarified that the borrower defense Direct Loan Program regulation was meant to create 

rights for borrowers, and as to liabilities for schools corresponding to those that would arise under 

the FFEL Program. 
76

determination might be made as to which State’s laws would 

provide protection from school misconduct for 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. 

Additionally, we have discussed the administrative 

burden to the Department and difficulties Department has 

experienced in determining which States’ laws apply to any 

borrower defense claim and the inherent uncertainties in 

interpreting another authorities’ laws. 81 FR 39339. 

We agree that borrower relief should include 

comprehensive options, including claims based on violations 

of State law. 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 these 

situations, the final regulations provide that nondefault, 

contested judgments obtained against a school based on any 

State or Federal law, may be a basis for a borrower defense 

claim, whether obtained in a court or an administrative 

tribunal of competent jurisdiction. Under these 
77

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. To support a 

borrower defense claim, the judgment would be required to 

pertain to the making of a Direct Loan or the provision of 

educational services to the borrower. 

While State law may provide clarity to borrowers and 

schools regarding the rights and responsibilities of the 

parties under established precedents, we believe that the 

Federal standard for borrower defenses more clearly and 

efficiently captures the full scope of acts and omissions 

that may result in a borrower defense claim. 

We disagree that the elimination of the State standard 

is at odds with the ban on predispute arbitration clauses. 

Rather, we assert that prohibiting predispute arbitration 

clauses will enable more borrowers to seek redress in court 

and, as appropriate, to submit a nondefault, contested 

judgment in support of their borrower defense claim, 

including a claim based on State law.

We concur that the Department’s continued application 

of State law standards to borrower defense claims for loans 

disbursed prior to July 2017, will require the continued 
78

interpretation of State law. However, the number of loans 

subject to the State standard will diminish over time, 

enabling the Department to transition to a more effective 

and efficient borrower defense standard and process.

We understand the commenters’ concern that borrowers 

may be treated inequitably based on when their loans were 

disbursed. However, while it is true that borrowers with 

loans disbursed prior to July 2017 may consolidate those 

loans, as discussed in the NPRM (81 FR 39357), the standard 

that would apply would depend upon the date on which the 

first Direct Loan to which a claim is asserted was made. 

Therefore, the standard applied to these loans does not 

change by virtue of their consolidation. 

We do not agree that the Federal standard supplants 

all State consumer protection laws, as borrowers may still 

pursue relief based on these laws by obtaining a 

nondefault, contested judgment by a court or administrative 

tribunal of competent jurisdiction. 

We do not agree that the three bases for borrower 

defenses under the Federal standard limit the prosecution 

of future unforeseeable forms of misconduct. We expect 

that many of the borrower defense claims that the 

Department anticipates receiving will be addressed through 

the categories of substantial misrepresentation, breach of 
79

contract, or violations of State or Federal law that are 

confirmed through a nondefault, contested judgment by a 

court or administrative tribunal of competent jurisdiction. 

Additionally, the Department’s borrower defense process is 

distinct from borrowers’ rights or other Federal, State, or 

oversight agencies’ authorities to prosecute or initiate 

claims against schools for wrongful conduct in State or 

other Federal tribunals. We recognize that, while the 

attainment of a favorable judgment can be an effective and 

efficient means of adjudicating a borrower’s claim of 

wrongdoing by an institution, it can also be prohibitively 

time-consuming or expensive for some borrowers. The 

regulation includes a provision that enables a borrower to 

show that a judgment obtained by a governmental agency, 

such as a State AG or a Federal agency, that 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. We do not agree that borrowers whose schools 

have violated State law will have to rely upon their 

State’s AG to access Federal loan relief. These borrowers 

are still able to file borrower defense claims under the 

substantial misrepresentation or breach of contract 
80

standards, even if a nondefault, contested judgment is not 

obtained by the government entity. Moreover, the 

prohibition against predispute arbitration clauses and 

class action waivers will enable more borrowers to pursue a 

determination of wrongdoing on the part of an institution 

individually or as part of a class. 

We do not agree that the State standard is less 

complex than the new Federal standard. As discussed, the 

current State law-based standard necessarily involves 

complicated questions relating to which State’s laws apply 

to a specific case and to the proper and accurate 

interpretation of those laws. We believe the elements of 

the Federal standard and the bases for borrower defense 

claims provide sufficient clarity as to what may or may not 

constitute an actionable act or omission on the part of an 

institution. As discussed earlier, we also disagree that 

the State standard provides a higher evidentiary standard. 

Preponderance of the evidence 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. 

Changes: None. 

Federal Standard as a Minimum Requirement 
81

Comments: Several groups of commenters recommended that we 

establish a Federal standard that serves as a floor, or 

minimum requirement, to provide additional consumer 

safeguards to borrowers in States that have less robust 

consumer protection laws. One group of commenters 

suggested that this could assure consistency with the FTC 

Holder Rule. These commenters opined that expansion of the 

Federal standard to include Unfair, Deceptive or Abusive 

Acts and Practices (UDAP)7 violations and breaches of 

contract would benefit borrowers and simplify borrower 

defense claim adjudication, as very few States would 

provide more robust consumer protections. 

Another commenter opined that a strong Federal 

standard as a more robust minimum requirement, i.e., one 

that requires only reasonable reliance to prove substantial 

misrepresentation and includes UDAP violations, would 

eliminate the need to maintain a State law standard. 

Discussion: We disagree that the Federal standard requires 

expansion to include UDAP violations in order to ensure 

borrowers are protected or that the Federal standard should 

be established as a minimum requirement for borrower 

 

7 Each State has consumer protection laws that prohibit certain unfair and deceptive conduct, which 

are commonly known as “unfair and deceptive trade acts and practices” or “UDAP” laws. The FTC 

also enforces prohibitions against unfair and deceptive conduct in certain contexts under section 5 of 

the FTC Act, 15 U.S.C. 45, which may also be described as Federal “UDAP” law. 
82

defense. As noted in the NPRM, reliance upon State law not 

only presents a significant burden for Department officials 

who must apply and interpret various State laws, but also 

for borrowers who must make the threshold determination as 

to whether they may have a claim. We believe that many of 

the claims the Department will receive will be covered by 

the standards proposed by the Department and that those 

standards will streamline the administration of the 

borrower defense regulations. 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 borrower defense context. Under the borrower 

defense regulations, 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.” 

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 
83

of guidance, it is unclear how such principles would apply 

in the borrower defense context.

Moreover, many of the borrower defense claims the 

Department has addressed or is considering have involved 

misrepresentations by schools. We believe that the 

standard established in these regulations will address much 

of the behavior arising in the borrower defense context, 

and that this standard appropriately addresses the 

Department’s goals of accurately identifying and providing 

relief to borrowers for misconduct by schools; providing 

clear standards for borrowers, schools, and the Department 

to use in resolving claims; and avoiding for all parties 

the burden of interpreting other Federal agencies’ and 

States’ authorities in the borrower defense context. As a 

result, we decline to adopt standards for relief based on 

UDAP. 

As discussed earlier, we also disagree that the 

Federal standard for borrower defense should incorporate 

the FTC’s Holder Rule, 16 CFR part 433, and believe that it 

is appropriate for the reasons discussed that the 

Department exercise its authority to establish a Federal 

standard that is not based in State law.

Notwithstanding the foregoing discussion, we 

appreciate that State law provides important protections
84

for students and borrowers. Nothing in the borrower 

defense regulations prevents a borrower from seeking relief 

under State law in State court. Moreover, § 685.222(b) 

provides that if a borrower has obtained a nondefault, 

favorable contested judgment against the school under State 

or other Federal law, the judgment may serve as a basis for 

borrower defense. As explained further under “Claims Based 

on Non-Default, Contested Judgments,” we believe this 

strikes the appropriate balance between providing relief to 

borrowers and the Department’s administrative burden in 

accurately evaluating the merits of such claims.

Changes: None. 

Additional Grounds 

State AGs 

Comments: A number of commenters requested that the final 

regulations include a process for State AGs to petition the 

Secretary to grant relief based on State law violations. 

One group of commenters expanded on this request, 

suggesting that other law enforcement agencies and entities 

also be permitted to bring forward evidence in support of 

group claims, and to receive from the Department a formal 

response regarding its determination of the claim. Another 

group of commenters contended that State AGs uncover 

institutional wrongdoing before others do, and, 
85

accordingly, their direct participation in the borrower 

defense process would provide affected borrowers more 

timely access to relief.

Discussion: The group process for borrower defenses in 

§ 685.222(f) provides for a process by which evidence for 

determinations of substantial misrepresentation, breach of 

contract, or judgments, 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 recognize that these entities may 

uncover institutional wrongdoing early and may have 

relevant evidence in support of group claims.

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 requiring 

formal written responses from the Secretary, but plan to 

create a point of contact for State AGs to allow for active 

communication channels. We also reiterate that we welcome 

a continuation of cooperation and communication with other 

interested groups and parties. As indicated above, the 

Department is fully prepared to receive and make use of 
86

evidence and input from other stakeholders, including 

advocates and State and Federal agencies. We also discuss 

this issue in more detail under “Group Process for Borrower 

Defense.” 

Changes: None.

Unfair or Deceptive Acts or Practices (UDAP) 

Comments: Several groups of commenters advocated the 

inclusion of State UDAP laws as a stand-alone basis for 

borrower defense claims. 

One group of commenters opined that UDAP laws, which 

include prohibitions against misrepresentation, along with 

unfair, fraudulent, and unlawful business acts, have been 

refined by decades of judicial decisions, while the 

proposed substantial misrepresentation basis for borrower 

defense claims remains untested.

Another group of commenters argued that State UDAP 

laws incorporate the prohibitions and deterrents that the 

Department seeks to achieve and offer the flexibility 

needed to deter and rectify institutional acts or omissions 

that would be presented as borrower defenses under the 

Department’s substantial misrepresentation and breach of 

contract standards. Another group of commenters noted that 

some acts that may violate State laws intended to protect 
87

borrowers may not constitute a breach of contract or 

misrepresentation.

Another commenter noted that multiple State AGs have 

investigated schools and provided the Department with their 

findings of wrongdoing based on their States’ UDAP laws.

One group of commenters suggested that, if the 

Department did not opt to restore the State standard, the 

inclusion of a similar UDAP law provision would become even 

more important. These commenters assert that the 

additional factors that would favor a finding of a 

substantial misrepresentation would not close the gap 

between the Federal standard and States’ UDAP laws. They 

recommend using State UDAP laws as the additional factors 

that would elevate a misrepresentation to substantial 

misrepresentation. 

Discussion: As discussed above, we disagree that the 

inclusion of UDAP violations as a basis for a borrower 

defense claims is required to assure borrowers are 

protected by the Federal standard. 

We believe that the Federal standard 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 
88

claims; and avoiding for all parties the burden of 

interpreting other Federal agencies’ and States’ 

authorities in the borrower defense context. While UDAP 

laws may play an important role in State consumer 

protection and in State AGs’ enforcement actions, we 

believe the Federal standard addresses much of the same 

conduct, while being more appropriately tailored and 

readily administrable in the borrower defense context. As 

a result, we decline to include UDAP violations as a basis 

for borrower defense claims.

Changes: None.

Comments: One commenter stated that by foreclosing HEA 

violations from serving as a basis for borrower defense 

claims, the proposed regulations would effectively preempt 

State UDAP laws, which the commenter argued often use 

violations of other laws as a basis for determining that a 

practice is unfair or deceptive. 

Discussion: The Department’s borrower defense process is 

distinct from borrowers’ rights under State law. State 

UDAP laws establish causes of action an individual may 

bring in a State’s courts; nothing in the Department’s 

regulations prevents borrowers from seeking relief through 

State law in State courts. As noted in the NPRM, the 

specifics of the borrower defense process should not be 
89

taken to represent any view regarding other issues and 

causes of action under other laws and regulations that are 

not within the Department’s authority. 

Changes: None.

HEA Violations

Comments: One commenter requested that the regulations 

make clear that borrower defense claims do not include 

claims based on noncompliance with the HEA or sexual or 

racial harassment allegations, as described in the preamble 

to the NPRM. One commenter suggested that the explicit 

exclusion of sexual or racial harassment as the basis of a 

borrower defense claim is intended to protect public and 

non-profit schools. 

Another commenter believed the current regulations 

would allow borrowers to base a claim for a borrower 

defense on an institution’s violations of the HEA where 

those violations also constitute violations under State 

UDAP law. The commenter viewed the Department’s position 

in the NPRM that a violation of the HEA is not, in itself, 

a basis for a borrower defense as a retroactive change to 

the standard applicable to loans made before July 2017. 

The commenter rejected the Department’s assertion that this 

limitation is in fact based on a longstanding 

interpretation of the bases for borrower defense claims. 
90

Discussion: It is indeed the Department’s longstanding 

position that an act or omission 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. With limited 

exceptions not relevant here, the case law is unanimous 

that the HEA contains no implied private right of action 

for an individual to assert a claim for relief.8 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 § 685.222. 

 

8 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 13,337. See, e.g. Armstrong v. Accrediting Council for Continuing Educ. & Training,168 F.3d 

1362 (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); McCullough v. PNC Bank, 298 F.3d 1362, 1369 (11th Cir. 2002)(collecting cases).
91

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 cause of action under 

common law based on misrepresentation or constitute a 

substantial misrepresentation under the Federal standard 

and, therefore, constitute a basis for a borrower defense 

claim. However, this has always been the case, and is not 

a retroactive change to the current borrower defense 

standard under § 685.206(c).

As explained in more detail under “Federal Standard,” 

it has been the Department’s longstanding position that 

sexual and racial harassment claims do not directly relate 

to the making of a loan or provision of educational 

services and are not within the scope of borrower defense. 

60 FR 37769. We also note, moreover, that sexual and 

racial harassment are explicitly excluded as bases for 

borrower defense claims in recognition of other entities, 

both within and outside of the Department, with the 

authority to investigate and resolve these complaints, and 

not in an effort to protect public and non-profit schools. 

Changes: None. 

Claims Based on Non-Default, Contested Judgments 

Comments: A group of commenters requested that the 

Department explain how, if continuing to operate under the 
92

State standard results in potentially inequitable treatment 

for borrowers, it is still reasonable to rely upon State 

law when judgments have been obtained, thereby providing 

borrower protections that vary by State.

Several commenters suggested that a borrower should be 

required to obtain a favorable judgment under State law in 

order to obtain a loan discharge. One commenter suggested 

that borrowers pursuing State law judgments receive 

forbearance on their Direct Loans while their cases are 

proceeding.

Discussion: When the Department relies upon a nondefault, 

contested judgment to affirm a borrower defense, it is not 

required to interpret State law. Rather, it relies upon 

the findings of a court or administrative tribunal of 

competent jurisdiction.

Although we expect that the prohibition against 

certain mandatory arbitration clauses will enable more 

borrowers to pursue a determination of wrongdoing on the 

part of an institution, we do not agree that it is 

appropriate to require borrowers to obtain a favorable 

judgment in order to obtain a loan discharge. 

While the attainment of a favorable judgment can be an 

effective and efficient means of adjudicating a borrower’s 

claim of wrongdoing by an institution, it can also be 
93

prohibitively time-consuming or expensive for some 

borrowers. We have included a provision under which a 

judgment obtained by a governmental agency, such as a State 

AG or a Federal agency, that 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. 

We agree that borrowers should receive forbearance on 

their Direct Loans while their cases are proceeding. 

Borrowers may use the General Forbearance Request form to 

apply for forbearance in these circumstances; we would 

grant the borrower’s request, and the final regulations 

also will require FFEL Program loan holders to do the same 

upon notification by the Secretary. In addition, a 

borrower defense loan discharge based on a nondefault, 

contested judgment may provide relief for remaining 

payments due on the loan and recovery of payments already 

made. 

Changes: None.

Comments: Several commenters stated that the Department’s 

proposal to allow borrower defenses on the basis of 

“nondefault, favorable contested judgments” was 

unrealistic, and argued that such judgments are unlikely to 
94

occur. These commenters argued that both plaintiffs 

(either government agencies or students themselves) as well 

as institutions are under substantial pressure to settle 

lawsuits, and pointed to the lack of any current judgments 

against institutions that would meet this standard. One 

commenter argued that the lack of such nondefault favorable 

contested judgments effectively barred State causes of 

action and would force borrowers to rely on the 

Department’s Federal standard as the only basis for relief.

Discussion: The Department recognizes that nondefault, 

favorable contested judgments may not be common, relative 

to the number of lawsuits that are filed. The Department 

includes this basis for relief as a way for borrowers to 

avoid having to re-litigate claims actually decided on the 

merits. If no such determination against the institution 

has yet occurred, borrowers may bring claims to the 

Department for evaluation that satisfy the standards 

described for a substantial misrepresentation under § 

685.222(d) or breach of contract under § 685.222(c). The 

Department will thus continue to recognize State law causes 

of action under § 685.222(b), but will require a tribunal 

of competent jurisdiction to decide the legal and factual 

basis for the claim.

Changes: None.
95

Comments: Several commenters stated that the proposed 

standard for nondefault, favorable contested judgments 

effectively narrows State law causes of action by putting 

what the commenters argued was a significant and 

unrealistic burden on borrowers to litigate claims to 

judgment. These commenters argued that the Department 

should not effectively remove these bases for relief. One 

of the commenters asked that the Department recognize 

settlements with the institution as a basis for relief, 

while another proposed that the Department recognize class 

action settlements in which the settlement has been 

approved by a judge or in which the plaintiff(s) have 

survived a motion for summary judgment. Another asked that 

claim preclusive court judgments and findings of fact and 

admissions in settlements should likewise serve as a basis 

for relief. 

Discussion: As stated in the NPRM, 81 FR 39340, we decline 

to adopt a standard based on applicable State law due, in 

part, to the burden to borrowers and the Department in 

interpreting and applying States’ laws. However, we 

recognize that State law may provide important protections 

for borrowers and students. We believe that a standard 

recognizing nondefault, favorable, contested judgments 

strikes a balance between recognizing causes of action 
96

under State or other Federal law and minimizing the 

Department’s administrative burden in accurately evaluating 

the merits of such claims. For the reasons discussed here 

and in the NPRM, we decline to recognize settlements as a 

way to satisfy the standard in § 685.222(b). However, we 

welcome the submission of, and will consider, any orders, 

court filings, admissions, or other evidence from a 

borrower for consideration in the borrower defense process.

Changes: None.

Comments: One commenter stated that the Department’s 

proposed language leaves it unclear whether the judgment 

against the institution must include a specific 

determination regarding the act or omission forming the 

basis of the borrower defense, and urged the Department to 

explicitly require such a determination. Another commenter 

argued that the carve-outs of certain claims that the 

Department would not consider to be borrower defenses are 

not explicitly included for judgments obtained against an 

institution, and urged that the Department include such 

carve-outs.

Discussion: For a judgment to form the basis of a borrower 

defense, it must include a determination that an act or 

omission that would constitute a defense to repayment under 

State or Federal law occurred and that the borrower would 
97

be entitled to relief under such applicable law. That 

said, the overarching principles established in 

§ 685.222(a) apply to claims under all the standards 

established in § 685.222, including to judgments under 

§ 685.222(b). Thus, under § 685.222(a)(3), the Department 

will not recognize a violation by the school of an 

eligibility or compliance requirement in the HEA or its 

implementing regulations as a basis for borrower defense 

under § 685.222 or § 685.206(c) unless the violation would 

otherwise constitute a basis for borrower defense. 

Similarly, borrower defense claims must be based upon an 

act or omission of the school attended by the student that 

relates to the making of a Direct Loan or the provision of 

educational services for which the loan was provided, under 

§ 685.222(a)(5).

If a borrower, a class of consumers, or a government 

agency made a claim against a school regarding the 

provision of educational services and receives a favorable 

judgment that entitles the borrower to restitution or 

damages, but the borrower only obtained a partial recovery 

from the school on this judgment, under § 685.222(i)(8), we 

would recognize any unpaid amount of the judgment in 

calculating the total amount of relief that could be 

provided on the Direct Loan. If the borrower, a class of 
98

consumers, or a government agency obtained a judgment 

holding that the school engaged in wrongful acts or 

omissions regarding the provision of private loans, the 

borrower could demonstrate to the Department whether the 

findings of fact on which the judgment rested also 

established acts or omissions relating to the educational 

services provided to the borrower or the making of the 

borrower’s Direct Loan that could be the basis of a 

borrower defense claim under these regulations. This 

borrower defense claim would be a basis for relief 

independent of the judgment that related exclusively to the 

private loans, and such relief would be calculated without 

reference to any relief obtained through that private loan 

judgment. 

Changes: None.

Comments: Several commenters raised concerns about a 

student’s ability to bring a borrower defense claim based 

on judgments obtained by government agencies. One of the 

commenters stated that it is not always clear when an 

agency is acting on behalf of the students. 

Discussion: The final regulation recognizes that judgments 

obtained by governmental agencies may not be brought on the 

behalf of specific students, as opposed to having been 

brought, for example, on the behalf of a State or on the 
99

behalf of the United States. As described in the final 

regulation, a judgment under the standard brought by a 

governmental agency must be a favorable contested judgment 

obtained against the school. As discussed previously, such 

judgments must also meet the requirements of § 685.222(a).

Changes: None.

Comments: One commenter argued that the Department’s 

judgment standard should only apply with respect to loans 

disbursed, or judgments obtained, after July 1, 2017.

Discussion: We believe that the standard does not 

represent any change from current practice. If a borrower 

submitted a nondefault, contested judgment from a court or 

administrative tribunal of competent jurisdiction deciding 

a cause of action under applicable State law for a loan 

first disbursed before July 1, 2017, the Department would 

apply principles of collateral estoppel to determine if the 

judgment would bar a school from disputing the cause of 

action forming the basis of the borrower’s claim under 34 

CFR 685.206(c). 

Changes: None.

Comments: One commenter urged the Department to specify 

that the judgments referenced in § 685.222(b) must be 

obtained in court cases and not merely through 

administrative proceedings.
100

Discussion: As set forth in in § 685.222(b), the judgment 

must be obtained “in a court or administrative tribunal of 

competent jurisdiction.” The Department continues to 

believe that administrative adjudications serve an 

important role in determining the factual and legal basis 

for claims that could serve as borrower defenses. We do 

not believe further clarification is necessary on this 

point.

Changes: None.

Comments: One commenter stated that the Department should 

add language to the final regulations stating that it will 

also respect judgments in favor of the school as precluding 

a borrower defense claim.

Discussion: We will not incorporate an absolute bar on 

borrower defense claims where the borrower has already lost 

in a State proceeding because different underlying legal or 

factual bases may have been involved in the prior 

litigation. For example, a student might lose a breach of 

contract suit in State court premised on an institution’s 

failure to provide job placement services, but have a valid 

claim that the institution misrepresented whether credits 

would be transferrable. The Department will, however, 

follow established principles of collateral estoppel in its 

determination of borrower defense claims.
101

Changes: None.

Comments: One commenter stated that the Department’s 

proposed regulatory language would disrupt the adversarial 

process because institutions would be more likely to settle 

cases than risk a judgment that could lead to borrower 

defense liabilities, and also that institutions may be 

forced not to settle if the opposing party insists on 

admission of liability in the settlement that could form 

the basis of borrower defense liabilities. The commenter 

also argued that it would be unfair for the Department to 

consider past settlements retroactively. Another commenter 

argued that the Department should recognize default 

judgments against institutions obtained by a law 

enforcement agency such as the FTC, the Consumer Financial 

Protection Bureau (CFPB), or a State AG.

Discussion: We appreciate the concern that the new 

standard may cause disruptions to the strategy and risk 

calculus in other litigation by private parties as well as 

government agencies. The Department’s purpose in this 

rulemaking is to create a Federal standard that will more 

efficiently and fairly determine whether a borrower is 

entitled to relief, and we consider this purpose to 

outweigh the concern raised about altering litigation 

strategies. We do not intend either to dissuade or 
102

encourage settlements between borrowers and institutions, 

and will give settlements and admissions in previous 

litigation the weight to which they are entitled. That 

said, a default judgment does not involve any determination 

of the merits, and therefore will require the Department to 

make an independent assessment of the underlying factual 

and legal basis for the claim. Settlements prior to July 

1, 2017 will not be considered under this standard. 

Changes: None.

Claims Based on Breach of Contract

Comments: Several commenters questioned why the Department 

would permit a breach of contract claim, but not any other 

State law claims. One commenter noted that evaluation of a 

breach of contract claim would require substantial 

Department resources, including choice-of-law decisions 

that may be especially complicated in cases of distance 

education. One commenter said that other contract-related 

causes of action should be open to borrowers, such as lack 

of consideration, lack of formation due to lack of 

capacity, and contract contrary to public policy, among 

others. Another commenter said that borrowers should be 

able to assert contract-related claims under State UDAP 

laws for signing forms saying they received materials that 

they never received. 
103

Discussion: The comments suggest some confusion about the 

Department’s standard for evaluating breach of contract 

claims. For loans first disbursed prior to July 1, 2017, 

the Department will continue to recognize any applicable 

State-law causes of action, in accordance with the State of 

the law prior to these regulations. That standard requires 

the Department to evaluate State law questions, including 

choice-of-law questions. For loans first disbursed after 

July 1, 2017, however, the Department will move to a 

Federal standard for misrepresentation and breach of 

contract claims, and will cease to recognize State-law 

bases that may exist for those causes of action. Some 

commenters appeared to question why the Department drew the 

line at accepting breach of contract claims but rejecting 

other traditional State law contract-related causes of 

action. As we explained in the NPRM, 81 FR 39341, breach 

of contract is a common allegation against schools, and the 

underlying facts for a breach of contract claim may very 

well not fit into the Department’s substantial 

misrepresentation standard. Furthermore, breach of 

contract is a cause of action established in common law 

recognized across all States, and its basic elements are 

likewise uniform across the States. Developing a Federal 

standard in the particularized area of student-institution 
104

contracts will ultimately lead to better consistency and 

greater predictability in this area. That said, the 

Department will continue to recognize a borrower defense 

based on any applicable State law cause of action, provided 

that such a claim is litigated to a non-default, favorable 

contested judgment under § 685.222(b). Thus, we believe 

the final regulations strike an appropriate balance between 

the efficiency and predictability of a Federal standard, 

while still providing sufficient bases upon which a 

borrower entitled to debt relief may seek it. 

Changes: None.

Comments: Several commenters asked the Department to 

incorporate the covenant of good faith and fair dealing 

when evaluating breach of contract claims. One commenter 

argued that these doctrines could be used to prevent 

institutions from relying on fine print disclaimers, “job 

placement assistance” that does not provide any targeted 

advice for students but instead refers them to Internet 

job-posting sites, and other tactics the commenter believes 

are unfair to students. Another commenter attached 

examples of current institutional agreements that seek to 

disclaim any promises beyond what are made in the 

enrollment agreement, and urged the Department not to honor 

such disclaimers.
105

Discussion: The Department’s position on this issue is 

that it will rely on general, widely accepted principles of 

contract law in developing a Federal standard in this area. 

We decline to elaborate further on what specific types of 

contract claims might or might not be successful at this 

time. We believe that a Federal standard for breach of 

contract cases within the education context will ultimately 

be more helpful if developed on a case-by-case basis.

Changes: None.

Comments: Several commenters weighed in on the 

Department’s position that documents beyond the enrollment 

agreement might serve as part of the contract. Some of 

these commenters noted that this position may lead to 

inconsistent results, since different State laws and 

circumstances may or may not allow a student to rely on 

other documents beyond the enrollment agreement. Some of 

the commenters argued for more clarity from the Department 

on which materials we would consider to constitute the 

contract, and one of these commenters pointed to cases 

varying on the treatment of such materials. One commenter 

invited us to specify that a contract would include any 

promise the borrower reasonably believed would be the 

institution’s commitment to them. Other commenters argued 

that, by raising the possibility that a student might be 
106

able to point to course catalogues and similar documents as 

part of the “contract,” the Department’s rule would have 

the effect of limiting the information schools provide to 

students. These commenters said that the uncertainty could 

pose practical obstacles for large institutions in 

particular, and asked the Department to explicitly exclude 

such material from the definition of contract. One 

commenter said that the ultimate effect of the current 

uncertainty might be to reduce recruitment from underserved student populations.

Discussion: We understand the concerns from both the 

student advocates and the institutional advocates regarding 

the lack of certainty in the NPRM language. However, the 

Department is unable to draw a bright line on what 

materials would be included as part of a contract because 

that determination is necessarily a fact-intensive 

determination best made on a case-by-case basis. The 

Department intends to make these determinations consistent 

with generally recognized principles applied by courts in 

adjudicating breach of contract claims.9 To the extent that 

 

9 Section 455(h)of the HEA clearly gives the Secretary the power to create legal defenses, which until 

now has been done by adopting State law; this rulemaking adopts a Federal standard, the 

interpretation and application of which will require consideration of principles developed by Federal 

and State courts in deciding cases brought on claims for breach of contract or misrepresentation, as 

distilled, for example, in the restatements of the law. 
107

Federal and State case law has resolved these issues, we 

will be guided by that precedent. Application of the 

standard will thus be guided but not controlled by State 

law. Moreover, the Department will continue to evaluate 

claims as they are received and may issue further guidance 

on this topic as necessary. 

Changes: None.

Comments: A commenter argued that allowing breach of 

contract as a basis for borrower defense claims will not be 

effective. The commenter said that most contracts in the 

for-profit education sector are written to bind the student 

and not the institution. The commenter also argued that 

the NPRM preamble failed to cite any successful breach of 

contract suits students have made against schools, arguing 

that the Department’s citation to Vurimindi v. Fuqua Sch. 

Of Business, 435 F. App’x 129 (3d Cir. 2011) is inapposite. 

Discussion: The Department appreciates this concern, and 

intends to follow general fairness and contract principles 

in its analysis of whether other promises made to a student 

beyond the enrollment agreement should be considered. 

Changes: None.

Comments: A commenter argued that the Department should 

not refer to “specific obligations” in its preamble 

discussion of how a borrower could make out a breach of 
108

contract theory, saying it was unnecessarily confusing in 

light of well-developed State law on what kind of promises 

are sufficient to make out a breach of contract claim. 

Discussion: We believe the phrase “specific obligations” 

is consistent with general contract principles that a 

breach of contract cannot be based on promises that are so 

abstract as to be unenforceable, and believe that 

determinations regarding an institution’s obligations under 

a contract with a student will be highly fact-specific. 

Given that many borrowers may not be legally sophisticated 

regarding what constitutes an enforceable promise, we do 

not believe that any modification to the language is 

necessary.

Changes: None.

Comments: Several commenters were concerned that the 

proposed rule did not include a “materiality” element that 

a borrower would need to show in order to make out a breach 

of contract claim, which they worried might lead to 

numerous, frivolous claims as well as wide uncertainty as 

to potential future liabilities. One commenter further 

invited the Department to explain in the final rule what 

would constitute a “de minimis” claim that would lead a 

judge to dismiss a case. Other commenters asked that the 

Department focus on systemic problems and material 
109

breaches, and identify the standards it will use to make 

determinations. A group of commenters suggested the 

Department adopt the standards used for such cases in New 

York.

Discussion: We appreciate the concerns, first raised 

during the negotiated rulemaking, about the lack of a 

materiality element in the standard for a breach of 

contract borrower defense. As explained in the NPRM, 81 FR 

39341, we believe it is appropriate that the regulations 

allow borrowers to assert a borrower defense based on any 

breach of contract that would entitle them to any relief--

including relatively minor breaches--and thus do not 

include a materiality requirement. The Department will 

consider whether any alleged breach of contract by an 

institution is material in its assessment of whether the 

borrower would be entitled to relief, as well as whether 

such relief would be full or partial.

Changes: None.

Comments: Several commenters expressed concern that the 

proposed regulation contains an exception to the bar on 

using HEA violations for borrower defense claims if “the 

violation would otherwise constitute a basis for a borrower 

defense.” These commenters stated that this exception 

could swallow the rule to the extent a compliance violation 
110

could be restated as a borrower defense, and further noted 

that the HEA does not contain a private right of action. 

These commenters urged the Department to bar compliance 

violations asserted as breach of contract.

Discussion: We agree that the HEA does not itself contain 

a private right of action, but note that the underlying 

conduct constituting a violation of the HEA may also be a 

cognizable borrower defense. For example, the Department 

has the authority to prohibit and penalize substantial 

misrepresentations under the HEA, but such 

misrepresentations may also serve as the basis for a 

borrower defense which a borrower is undoubtedly entitled 

to pursue with the Department if the borrower can 

demonstrate proof of substantial misrepresentation under § 

685.222(d), which also requires that a borrower demonstrate 

actual, reasonable reliance to their detriment for relief. 

For that reason, the final regulations strike a balance 

between allowing borrowers to pursue defenses based on 

misconduct that might also constitute HEA violations, but 

only so long as the underlying misconduct also satisfies a 

standard under which borrower defense claims may be brought 

as noted at § 685.222(a)(3).

Changes: None.
111

Comments: A commenter argued that the lack of a reliance 

element on a contractual promise could lead to borrower 

relief that is unwarranted. Other commenters argued the 

same for lack of an injury element. 

Discussion: The Department will analyze breach of contract 

defenses under general and well established contract 

principles shared by State law. At this time, the 

Department has not set forth more fulsome details for what 

elements a borrower must show in the Federal standard to 

allow the standard to develop on a case-by-case basis. We 

believe that the Federal standard will ultimately be more 

useful if developed in light of actual student claims.

Changes: None.

Comments: Several commenters urged the Department to 

exclude any claims related to academic considerations, such 

as the quality of instructional materials, because such 

matters should be left to the institution or the 

institution’s accreditor or State licensing agency. 

Discussion: We do not see any present need for categorical 

exemptions. The Department will evaluate claims in 

accordance with well-established principles of contract 

law. Claims related to academic consideration may well be 

beyond the scope of a cognizable borrower defense or even 

the Department’s jurisdiction, but that is something the 
112

Department will consider on a case-by-case basis in 

evaluating the borrower defense applications. 

Changes: None.

Comments: One commenter argued that the Department should 

recognize defenses an institution could raise, such as 

compliance with contract terms, economic hardship, or that 

the borrower not be entitled to refund of monies already 

paid.

Discussion: The final regulations, like the proposed 

regulations, do not put limits on the defenses an 

institution can make in a proceeding before the Department.

Changes: None.

Comments: One commenter noted that the Department’s 

proposed language was ambiguous as to whether the act or 

omission must give rise to the breach of contract or itself 

constitute a breach of contract. 

Discussion: Consistent with the Department’s 

interpretation of its authorizing statute, the act or 

omission by the school must be the breach of contract 

itself. We believe, however, that this reading is clear 

from the language in the final rule.

Changes: None.
113

Comments: One commenter asked the Department to clarify 

what kinds of actions it would consider to be within the 

scope of a borrower defense based on a breach of contract.

Discussion: We do not believe further detail or 

elaboration is necessary of helpful at this time, given the 

wide variety of allegations the Department expects to 

receive. Under the regulations, the Department will 

recognize as a borrower defense any breach of contract 

claim that reasonably relates to the student loan.

Changes: None. 

Claims Based on Substantial Misrepresentation

Comments: A group of commenters expressed concern that the 

Department’s substantial misrepresentation standard is too 

narrow. These commenters believed that the standard would 

allow schools to engage in problematic behavior, so long as 

they did not make untrue statements. 

Discussion: We appreciate the concerns that the 

substantial misrepresentation standard does not capture all 

actions that may form causes of action under standards in 

State or other Federal law. However, as noted in the NPRM, 

81 FR 39340, we believe that the standard appropriately 

addresses the Department’s interests in accurately 

identifying and providing relief for borrowers and in 

providing clear standards for borrowers, schools, and the 
114

Department in resolving claims. We believe that § 

668.71(c), which is referenced in § 685.222(d), will 

address much of the behavior the Department anticipates 

arising in the borrower defense context. 

We disagree that the substantial misrepresentation 

standard would not necessarily capture institutional 

misconduct that did not involve untrue statements. As 

revised in these final regulations, § 668.71(c) defines a 

“misrepresentation” as including not only false or 

erroneous statements, but also misleading statements that 

have the likelihood or tendency to mislead under the 

circumstances. The definition also notes that omissions of 

information are also considered misrepresentations. Thus, 

a statement may still be misleading, even if it is true on 

its face. As explained in the NPRM, 81 FR 39342, we 

revised the definition of “misrepresentation” to add the 

words “under the circumstances” to clarify that the 

Department will consider the totality of the circumstances 

in which a statement occurred, to determine whether it 

constitutes a substantial misrepresentation. We believe 

the Department has the ability to properly evaluate whether 

a statement is misleading, but otherwise truthful, to a 

degree that it becomes an actionable borrower defense 

claim.
115

Changes: None.

Comments: Several commenters expressed concern that the 

substantial misrepresentation standard would apply only to 

proprietary institutions. One commenter stated that the 

standard should apply to all institutions of higher 

education, stating that many public colleges and 

universities also misrepresent the benefits and outcomes of 

the education provided. Another commenter stated that the 

proposed addition of misrepresentation through omissions 

would target only borrower defense claims that would be 

made by students attending proprietary institutions, and 

not students at traditional schools. 

Other commenters stated that by limiting the subject 

matter covered by the substantial misrepresentation 

standard to just those related to loans, in their view, the 

standard would target only proprietary schools and exclude 

issues facing students at traditional colleges, such as 

campus safety or sexual discrimination in violation of 

title IX of the HEA.

Discussion: There appears to be some confusion about the 

institutions covered under the scope of both 34 CFR part 

668, subpart F and proposed § 685.222(d). Even prior to 

the proposed changes in the NPRM, § 668.71 was applicable 

to all institutions, whether proprietary, public, or 
116

private non-profit. Similarly, the current borrower 

defense regulation at § 685.206(c) does not distinguish 

between types of schools. The proposed and final 

regulations do not represent a change in these positions.

As discussed under the “Making of a Loan and Provision 

of Educational Services” section of this document, the 

Department’s long-standing interpretation has been that a 

borrower defense must be related to the making of a loan or 

to the educational services for which the loan was 

provided. As a result, the Department has stated 

consistently since 1995 that it does not 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. 60 FR 37768, 37769. Such issues are 

outside of the scope of these regulations, and we note that 

other avenues and processes exist to process such claims. 

We also disagree with commenters that such issues are the 

only types of issues that may be faced by students at 

public and private non-profit institutions. While the 

Department acknowledges that the majority of claims 

presently before it are in relation to misconduct by 

Corinthian, we believe that scope of claims that may be 
117

brought as substantial misrepresentations that relate to 

either the making of a borrower’s loan, or to the provision 

of educational services, is objectively broad in a way that 

will capture borrower defense claims from any type of 

institution.

Changes: None.

Comments: A few commenters opposed the proposed changes 

and argued that the proposed substantial misrepresentation 

standard either exceeds the Secretary’s authority under the 

law or is contrary to Congressional intent. One commenter 

argued that the Department's proposal to use § 668.71 as 

the basis for borrower defense exceeds the Department’s 

statutory authority under section 487 of the HEA, 20 U.S.C. 

1094(c)(3)(A), which authorizes the Department to bring an 

enforcement action for a substantial misrepresentation for 

a suspension, limitation, termination, or fine action. The 

commenter also argued that the HEA does not authorize the 

Department to seek recoupment from schools for relief 

granted for a borrower defense claim based on substantial 

misrepresentation. Another commenter suggested that the 

borrower defense standard should be based only on contract 

law.

Other commenters stated that the substantial 

misrepresentation standard was in violation of the 
118

Congressional intent in the HEA, as proposed. One 

commenter said that, in its view, Congress’ intent in 

Section 455(h) was that borrower defenses should be allowed 

only for acts or omissions that are fundamental to the 

student’s ability to benefit from the educational program 

and at a level of materiality that would justify the 

rescission of the borrower’s loan obligation. In 

discussing the use of § 668.71 for borrower defense 

purposes, another commenter acknowledged that, while 

misrepresentation is not defined in the HEA, the penalties 

assigned to misrepresentation by statute are severe. From 

its perspective, the commenter stated that this indicates 

that Congress did not intend for the misrepresentation 

standard to be as low as negligence and suggested keeping 

the original language of § 668.71.

A few commenters argued that the Department lacks 

justification for the proposed changes to § 668.71, given 

that the Department last changed the definition in a 

previous rulemaking. 

Discussion: We disagree that the Department lacks the 

statutory authority to designate what acts or omissions may 

form the basis of a borrower defense. Section 455(h) of 

the HEA clearly authorizes the Secretary to “specify in 

regulations which act or omissions of an institution of 
119

higher education a borrower may assert as a defense to 

repayment under this part,” without any limitation as to 

what acts or omissions may be so specified. As explained 

previously, we believe that the substantial 

misrepresentation standard, with the added requirements 

listed in § 685.222(d), will address not only much of the 

behavior that we anticipate arising in the borrower defense 

context, but also our concerns in accurately identifying 

and providing relief for borrowers. We believe it is 

within the Department’s discretion to adopt the substantial 

misrepresentation standard for loans first disbursed after 

July 1, 2017 in § 685.222(d), with the added requirements 

of that section, to address borrower defense claims. No 

modification has been proposed to § 668.71(a), which 

establishes that the Department may bring an enforcement 

action for a substantial misrepresentation for a 

suspension, limitation, termination, or fine action. We 

discuss the Department’s authority to recover from schools 

on the basis of borrower defense under “General.”

We do not agree that the Department lacks authority to 

similarly specify the scope of the acts or omissions that 

may form the basis of a borrower defense. The Department 

understands that, generally, the rescission of a contract 

refers to the reversal of a transaction whereby the parties 
120

restore all of the property received from the other,10

usually as a remedy for a material or significant breach of 

contract.11 However, in stating that “in no event may a 

borrower recover ... an amount in excess of the amount such 

borrower has repaid on the loan,” section 455(h) clearly 

contemplates that an amount may be recovered for a borrower 

defense that is less than the amount of a borrower’s loan, 

as opposed to a complete rescission of a borrower’s total 

loan obligation. This position also echoes the 

Department’s consistent approach to borrower defenses to 

repayment. The Direct Loan borrower defense regulation 

that was promulgated in 1994 clearly established that a 

borrower may assert a borrower defense claim 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,” without qualification as to whether the act or 

omission warrants a rescission of the borrower’s loans. 34 

CFR 685.206(c)(1). The regulation also stated that relief 

may be awarded as either “all or part of the loan.” Id. at 

 

10 See Restatement (Third) of Restitution and Unjust Enrichment § 54 (2011).

11 See Restatement (Third) of Restitution and Unjust Enrichment § 37, comment c (2011) (“Any 

breach of contract that results in quantifiable injury gives the plaintiff a remedy in damages, but the 

remedy of rescission is available only in cases of significant default. Short of a repudiation, the 

defendant's breach must be ‘material,’ ‘substantial,’ ‘essential,’ or ‘vital’; it must ‘go to the root’ of the 

defendant's obligation, or be ‘tantamount to a repudiation.’ To replace this familiar catalogue of 

adjectives, both Restatements of Contracts employ the expression ‘total breach.’”). 
121

§ 685.206(c)(2). As explained by the Department in 1995, 

the Direct Loan borrower defense regulations were intended 

to continue the same treatment for borrowers and the same 

potential liability for institutions that existed in the 

FFEL Program. 60 FR 37769-37770. Under the FFEL Program 

at the time, a borrower was allowed to assert a defense to 

repayment on the ground that all or part of his or her FFEL 

Loan was unenforceable. Id. at 37770. 

We also disagree that the HEA does not give the 

Department the discretion to define “substantial 

misrepresentation,” whether for the Department’s 

enforcement purposes in § 668.71 or for use for the 

borrower defense process. As noted, the HEA does not 

define “substantial misrepresentation,” thus giving the 

Secretary discretion to define the term. With regard to 

the commenter who expressed concern that the proposed 

revisions to the definition of “misrepresentation” 

constitute a lessening of the standard to negligence,12 we 

note that even absent the proposed revisions, a 

misrepresentation under § 668.71 does not look to the 

actor’s intent or the materiality of the statement, but 

 

12 Generally, “negligence” refers to a failure to exercise a reasonable duty of care and does not 

consider whether the failure was intentional. See Restatement (Third) of Torts: Phys. & Emot. Harm 

§ 3 (2010).
122

considers whether the statement is false, erroneous, or 

misleading. 

We disagree that there is no justification for the 

changes to 34 CFR part 668, subpart F. Since the 

Department’s last negotiated rulemaking in 2010 on 34 CFR 

part 668, subpart F, the Department utilized its authority 

in 2015 under the substantial misrepresentation enforcement 

regulations to issue a finding that Corinthian had 

misrepresented its job placement rates. The subsequent 

closure of Corinthian led to thousands of claims relating 

to the misrepresentations at issue by Corinthian borrowers 

under borrower defense. These claims prompted, in part, 

this effort by the Department to establish rules and 

procedures for borrower defense, which in turn led to a 

review of and the proposed changes to the Department’s 

regulations at 34 CFR part 668, subpart F. These changes 

were discussed extensively as part of the negotiated 

rulemaking process for borrower defense where reasons for 

each specific change to § 668.71 were explained and 

discussed.

Changes: None.

Comments: Many commenters generally stated that the

proposed standard for substantial misrepresentation is 

vague and suggested that the regulation include an element 
123

of intent or distinguish between intentional and 

unintentional acts. These commenters expressed concern 

that inadvertent and innocent, but erroneous, statements or 

mistakes would lead to a large number of frivolous claims 

by borrowers and result in significant financial 

liabilities for schools. Another commenter stated that the 

standard, absent intent, is unconstitutionally vague and 

does not give fair notice of the conduct that is being 

required or prohibited. 

Other commenters stated that students’ own 

misunderstandings may lead to claims, even for schools that 

provide training and inspections to ensure compliance with 

pertinent guidelines, regulations, and standards. One 

commenter expressed concern that unavoidable changes to 

instructional policies and practices could lead to borrower 

defense claims for substantial misrepresentation. Another 

commenter expressed concern that the proposed standard 

would lead to allegations of substantial misrepresentation 

by students, even where a variety of reasons unrelated to 

the alleged misrepresentation may have contributed to a 

student outcome, which may not yet be apparent. 

Several commenters supported using § 668.71 as a basis 

for borrower defense, but objected to the proposed changes 

to the definition in § 668.71(c), that would change the 
124

word “deceive” in the sentence, “A misleading statement 

includes any statement that has the likelihood or tendency 

to deceive,” to “mislead under the circumstances.” These 

commenters stated that the proposed change would give the 

same weight to inadvertent or unintentional 

misrepresentations as to a willful deception by a school. 

Some such commenters appeared to believe that, without the 

revisions reflected in proposed subpart F of part 668, the 

standard for substantial misrepresentation is a standard 

for fraud and requires proof of intentional deception. 

One commenter stated that the borrower defense process 

does not provide for a contextualized analysis of whether a 

statement is misleading in the same manner as the FTC, and 

argued that this would lead to significant consequences for 

schools and would undercut FTC precedent.

Several commenters agreed with the Department that the 

standard should not require an element of institutional 

intent generally, stating that the Department's approach is 

consistent with existing State and other Federal law, 

citing the FTC’s definition of deception as an example. 

One commenter stated that institutions should be 

responsible for the harm to borrowers caused by 

misrepresentations, even absent intent, and that proving 

intent would be very difficult for borrowers. 
125

Other commenters supported the specific amendment of 

the definition to include “mislead under the 

circumstances.” One commenter stated that the amendment 

was appropriate to provide more context as to whether a 

statement is misleading. Another commenter stated that the 

Department's amendments are consistent with State consumer 

protection law and cited examples of States where courts 

consider an individual’s or the target audience’s 

circumstances in assessing whether an act is deceptive or 

unfair. The commenter also noted that the amendments are 

in keeping with the approaches used by other Federal 

agencies, such as the FTC, the CFPB, and the Office of the 

Comptroller of the Currency. The commenter noted that in 

its experience working with student loan borrowers, 

consideration of the circumstances of a misrepresentation 

is important, because many schools target borrowers in 

specific circumstances who may be more likely to trust a 

school's representations and rely upon promises tailored to 

such students. Another commenter noted that the 

Department's proposed rule is in keeping with wellestablished consumer protection legal precedent under State 

law, which is that schools are liable for deceptive and 

unfair trade practices, including a failure to deliver 

educational services of the nature and quality claimed. 
126

This commenter supported the Department's preamble 

statement, 81 FR 39337 to 39338, that educational 

malpractice is not a tort recognized by State law, but also 

stated that educational malpractice is to be narrowly 

construed.

One commenter supported the Department’s reasoning for 

including omissions among misrepresentations for borrower 

defense purposes, but stated that intent should be a factor 

for the Department’s enforcement actions based upon § 

668.71. The commenter agreed that a school should be 

responsible for even an unintentional error that harms 

borrowers, but believed that that intent or knowledge of 

the school should be a required factor for the purposes of 

institutional eligibility and penalties.

One commenter stated that substantial 

misrepresentation should be limited to false and erroneous 

statements, and not include true but misleading statements. 

The commenter raised concerns about the adequacy of the 

Department’s process for gathering evidence and the 

Department’s experience and expertise in making such 

determinations. 

Discussion: We disagree with the commenters who opined that 

the proposed regulations are broad, vague or subjective. 

As explained previously, section 455(h) of the HEA provides 
127

that the Secretary shall specify in regulations which acts 

or omissions of an institution of higher education a 

borrower may assert as a defense to repayment of a loan 

made under this part. The regulations in § 685.222(d), 

which adopt the regulations in subpart F of part 668 and 

establish certain other requirements, set forth the types 

of activities that constitute misrepresentation by an 

institution and describe the process and procedure by which 

borrowers may receive relief based upon a substantial 

misrepresentation by a school. The regulations in § 

685.222 also set forth the process by which the Secretary 

will evaluate borrower defenses and recover such losses 

from the institutions at issue. The proposed changes to 

the regulations strengthen the Department’s regulatory 

authority to evaluate and determine borrower defense 

claims. Further, they not only establish what constitutes 

a misrepresentation for borrower defense claims, but they 

also clarify the definition for the Department’s 

enforcement purposes under part 668, subpart F. We believe 

that aligning the definition and types of substantial 

misrepresentations for borrower defense with the 

Department’s long-held authority to bring enforcement 

actions under part 668, subpart F, will provide more 

clarity for schools and reduce their burden in having to 
128

interpret and adjust for the new borrower defense 

standards. 

There appears to be some confusion as to whether the 

definition for misrepresentation in part 668, subpart F, 

requires a demonstration of intent, as would be required in 

common law fraud. In proposing to replace the word 

“deceive” with “mislead under the circumstances” in § 

668.71(c), the Department is not seeking to remove any 

intent element, but rather to clarify the definition to 

more accurately reflect the position it expressed in 2010 

as to part 668, subpart F. As noted in the NPRM, 81 FR 

39342, the word “deceive” may be viewed as implying 

knowledge or intent. However, in the Department’s 2010 

rulemaking on part 668, subpart F, we explicitly declined 

to require that a substantial misrepresentation under the 

regulation require knowledge or intent by the school. 75 

FR 66915. We believe that an institution is responsible 

for the harm to borrowers caused by its misrepresentations, 

even if such misrepresentations cannot be attributed to 

institutional intent or knowledge and are the result of 

inadvertent or innocent mistakes. Similarly, we believe 

this is the case even for statements that are true, but 

misleading. We believe this is more reasonable and fair 

than having the borrower, or the Federal government and 
129

taxpayers, bear the cost of such injuries. As noted by 

some commenters, this approach is in accord with other 

Federal and State consumer protection law regarding 

misrepresentation, and we believe it is appropriate for not 

only the Department’s enforcement purposes, but also for 

borrower defense. As explained later in this preamble, we 

believe that we have the capability to evaluate borrower 

defense claims based upon substantial misrepresentations 

and anticipate establishing procedural rules that will 

provide schools with the opportunity to present evidence 

and arguments in accordance with due process, similar to 

what is available in the Department’s proceeding in part 

668, subparts G and H.

In 2010, the Department stated that, in deciding to 

bring an enforcement action under part 668, subpart F, it 

would operate within a rule of reasonableness and consider 

the circumstances surrounding any misrepresentation before 

determining an appropriate response. 75 FR 66914. In 

response to the comment that the proposed standard does not 

view the misrepresentation in context, the Department’s 

addition of the words “under the circumstances” is intended 

to clarify and make explicit the Department’s long-standing 

position that misrepresentations should be viewed in light 

of all of the available underlying facts. As explained in 
130

the NPRM, 81 FR 39342 to 39343, this also echoes the 

approach taken by the FTC with regard to deceptive acts and 

practices.13 In determining whether a statement is a 

misrepresentation, the Department will consider the 

totality of the circumstances in which the statement 

occurred, including the specific group at which the 

statement or omission was targeted. The Department will 

also consider whether the situation was such that the 

borrower would have had reason to believe he or she could 

rely on the information being given to the borrower’s 

detriment, such as because the statement was made by an 

individual by whom the borrower believed could be trusted 

to give accurate information, such as a school admissions 

officer.

Changes: None.

Comments: Some commenters supported the proposed inclusion 

of omissions in the definition under § 668.71. One 

commenter stated that the inclusion of omissions, as well 

as the additional factors listed in § 685.222(d)(2), would 

improve the information provided to students. One 

commenter stated that, in their experience, the inclusion 

of omissions was needed, to prevent schools from taking 

 

13 See 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.
131

advantage of the asymmetry of information and bargaining 

power between themselves and students. This commenter 

emphasized that omissions should be considered in the 

context of the specific audience targeted and cited schools 

that may target immigrants with little experience with the 

United States’ higher education system and limited English 

ability as an example. Another commenter emphasized that 

the amendment would benefit first generation and low income 

students, who may not know what information is important or 

what questions to ask prior to enrolling at an institution. 

One commenter specifically supported the proposed language 

providing that a misrepresentation include omissions of 

“information” in such a way as to make a statement false, 

erroneous, or misleading.

Other commenters disagreed with the inclusion of 

omissions of information as part of the definition of 

substantial misrepresentation. One commenter stated that 

such language provides assistance to students attending 

career colleges, but not students attending traditional 

schools. One commenter stated that amending the standard 

to include omissions would create a strict liability 

standard that would not account for a school's actions or 

intent, and that the standard should distinguish minor and 
132

unintentional claims from material and purposeful 

misrepresentations.

Other commenters stated that the inclusion of 

omissions would not benefit students. One commenter stated 

that amending the definition of misrepresentation to 

include omissions could cause schools to provide students 

with numerous and confusing qualifications or to provide 

students with minimal information to avoid making 

misrepresentations. Another commenter stated that the 

inclusion of omissions would hinder the flow of advice to 

students and cause schools to expend time and money 

reviewing materials for misrepresentations.

One commenter stated that the Department's proposal to 

amend the definition to include omissions runs counter to 

the position the Department expressed in its 2010 

rulemaking on 34 CFR part 668, subpart F, when it rejected 

commenters' suggestions that omissions be included in the 

definition. 

One commenter stated that the Department's proposed 

amendment to include omissions, absent an intent element, 

runs counter to the limit established by the D.C. Circuit 

in the case Ass’n of Private Sector Colls. & Univs. v. 

Duncan, 681 F.3d 427, 452 (D.C. Cir. 2012) that a 

substantial misrepresentation under part 668, subpart F 
133

cannot include true and nondeceitful statements that have 

only the tendency or likelihood to confuse.

One commenter requested clarification regarding the 

effect of disclosures posted on the school's Web site or in 

printed materials. The commenter inquired about whether 

the school needed to disclose information about 

investigations, pending civil rights or legal matters; 

information about the qualifications and availability of 

faculty to teach certain courses or levels of students; and 

how a school's compliance with a State's required 

disclosures would be evaluated. This commenter also asked 

whether the Department would consider limiting the 

application of the new standard to only schools governed by 

States without a reasonable oversight mechanism. This 

commenter also asked for clarification as to what 

constitutes “information,” and asked whether information 

would include aspirational goals or speculative plans; 

subjective beliefs or internal questions about the school's 

educational programs, financial charges, or the 

employability of its graduates; concerns about, the 

possibility, or existence of an upcoming audit; items 

listed in a title IV Audit Corrective Action Plan; items 

identified by the institution or an accreditor for 
134

improvement; or an institution's efforts to seek voluntary 

accreditation. 

One commenter expressed concern that the inclusion of 

omissions in the standard would place schools with high 

default rates at risk. The commenter cited news articles 

calling for schools with default rates higher than 

graduation rates, which would include some HBCUs and 

community colleges, to lose their title IV eligibility. 

The commenter stated that students could argue that a 

failure to disclose such a measure constitutes a 

substantial misrepresentation under the proposed standard.

Discussion: We appreciate the support received from some 

commenters and agree with these commenters who stated that 

the inclusion of omissions will improve the information 

provided by schools.

As discussed earlier in this section, the commenters 

who stated that the revision to § 668.71 would apply only 

to proprietary institutions are incorrect. The final 

regulation applies to all schools. We also discuss our 

reasons for not including an intent element earlier in this 

section and our reasons for not including a materiality 

element later in this section. 

We disagree that the revision is contrary to the 

Department’s purpose in revising part 668, subpart F, in 
135

its 2010 rulemaking. We believe that amending the 

definition to include “any statement that omits information 

in such a way as to make the statement false, erroneous, or 

misleading” merely clarifies the Department’s original 

intent, aligns the definition of misrepresentation used for 

the Department’s enforcement actions with the standard to 

be used in evaluating borrower defense claims, and is 

appropriate given the Department’s experiences since 2010. 

In 2010, the Department declined to include omissions 

in the definition of misrepresentation during its 

rulemaking on part 668, subpart F, on the basis that the 

Department’s regulations require schools to provide 

accurate disclosures of certain information. 75 FR 66917 

to 66918. The Department emphasized that the purpose of 

the regulations was to ensure that all statements made by 

an institution are truthful, id., and that whether such a 

statement was a misrepresentation would be viewed in 

context of the circumstances. Id. at 66914. As noted 

earlier, however, the Department has had more experience 

with omissions in the context of its substantial 

misrepresentation regulations at part 668, subpart F, since 

that 2010 rulemaking. In 2014, the Department issued a 

fine of $29,665,000 to Heald College, of the Corinthian 

Colleges, in part, as a result of a finding that Heald 
136

College had omitted essential and material information 

concerning the methodology used to calculate job placement 

rates.14 This same finding, concerning omissions, has 

resulted in thousands of borrower defense claims filed with 

the Department. As noted by some commenters, given the 

close connection between borrower defense and the 

Department’s purpose of ensuring truthful statements by 

schools when viewed in the entirety of a situation, we 

believe it is appropriate to adopt the regulations at part 

668, subpart F, with some added requirements, for the 

borrower defense regulations and to revise the definition 

at § 668.71 to better meet that purpose and enact the 

Department’s long-standing purpose for part 668, subpart F, 

enforcement actions.

We disagree with the commenter that the inclusion of 

omissions in the definition, absent an intent element, runs 

counter to the limit established by the D.C. Circuit in 

Ass’n of Private Sector Colls. & Univs., 681 F.3d 427. In 

that case, the court held that a substantial 

misrepresentation under part 668, subpart F, cannot include 

true and non-deceitful statements that have only the 

tendency or likelihood to confuse. However, the court also 

 

14 See Dept. of Educ., Notice of Intent to Fine Heald College, OPE-ID: 00723400 (Apr. 14, 2015), 

available at www2.ed.gov/documents/press-releases/heald-fine-action-placement-rate.pdf.
137

stated that it agreed with the Department that a 

misrepresentation can be a true statement that is 

deceitful, and specifically disagreed with the appellant 

that an intent element should be a required part of the 

definition. Id. We believe that the inclusion of 

omissions of information that may make a statement false, 

erroneous, or misleading clarifies the context under which 

a misrepresentation may be a true statement that is 

deceitful and does not infringe upon the court’s ruling 

regarding statements with a likelihood to confuse. We also 

note that it is our understanding that many States’ laws 

and other Federal consumer protection law also include 

omissions of information within prohibitions on deceptive 

acts and practices, and the proposed revision is in keeping 

with such precedent.

With respect to the commenters who expressed concern 

about how these regulations may affect schools’ behaviors 

in their provision of certain types of information to 

students and prospective students, including information 

regarding investigations, pending civil rights or legal 

matters, faculty qualifications or availability, the 

school’s compliance with State law, or a school’s default 

rates, among others, the final regulation explicitly states 

that the Department will consider whether the statement 
138

omitting any such information is misleading “under the 

circumstances.” As noted earlier, the Department will 

consider the totality of the circumstances to determine 

whether a statement is misleading — including whether the 

school is or is not under an affirmative legal obligation 

to disclose such information, or whether concerns such as 

privacy requirements prevent the disclosure or disclosure 

in full of such information. For borrower defense, § 

685.222(d) also requires that the Department consider the 

reasonableness of the borrower’s detrimental reliance on 

the misrepresentation. 

We note, however, that it should not matter where or 

how a misrepresentation, whether as an omission or an 

affirmative statement, takes place, particularly as it 

pertains to the nature of a school’s educational program, 

its financial charges, or the employability of its 

graduates. As we stated in 2010, 75 FR 66918, what is 

important is to curb the practice of misleading students 

regarding an eligible institution. We continue to strongly 

believe that institutions should be able to find a way to 

operate in compliance with these regulations. As discussed 

later in this section, disclosures made by a school in 

publications or on the Internet may be probative evidence 

as to the reasonableness of a borrower’s reliance on an 
139

alleged misrepresentation, depending on the totality of the 

circumstances. 

Changes: None.

Comments: One commenter argued that it would be 

inappropriate to apply the FTC Policy Statement on 

Deception to cases of misrepresentation in higher 

education. The commenter stated that the FTC policy 

focuses specifically on deception perpetrated through 

advertising and is not aimed at establishing individual

claims. The commenter noted that borrowers have more 

extensive interactions with their schools that may 

constitute fraud, and that absent the elements of 

materiality, reliance, and harm, the proposed Federal 

standard would fail to provide adequate protection.

Discussion: We disagree that the substantial 

misrepresentation standard in either part 668, subpart F, 

or in § 685.222(d) is the same as the FTC’s prohibition on 

deceptive acts and practices. We considered a wide variety 

of both State and Federal legal precedents in developing 

the “substantial misrepresentation” definition in § 668.71 

and have added specific elements, such as a reasonable 

reliance requirement, to address specific borrower defense 

claims in § 685.222(d). 

Changes: None.
140

Comments: Some commenters stated that, for borrower 

defense purposes, the standard should specify that 

misrepresentations must be material, in order to avoid 

frivolous claims or claims based upon inadvertent errors or 

omissions. One commenter stated that such a materiality 

standard should not capture small deviations from the 

truth. Another commenter stated that the standard should 

allow only claims at a level of materiality that would 

justify the rescission of the loan at issue. One commenter 

expressed concern that under the standard without an 

accompanying materiality requirement, inadvertent or 

partial omissions of information would give rise to 

borrower claims.

One commenter stated that the Department should 

incorporate an express materiality requirement, emphasizing 

that the lack of such a standard is of particular concern 

because the standard does not incorporate an element of 

intent. The commenter also stated that the need for a 

materiality standard is enhanced, because the Department's 

proposed standard does not seem to require proof of 

detriment to a student as a result of his or her actual, 

reasonable reliance. The commenter stated that the 

definition in § 668.71 only requires that an individual 

show that he or she could have relied on a 
141

misrepresentation and expressed concern about the 

Department’s proposal to include a presumption of reliance 

for group claims, in the absence of a materiality 

requirement. 

Several commenters stated that the inclusion of 

omissions, related to the provision of any educational 

service, is too broad without an accompanying materiality 

requirement in the regulation. These commenters expressed 

concern that students would be able to present claims for 

substantial misrepresentation by claiming that schools had 

failed to provide contextual information, such as how 

faculty-student ratio information works.

Discussion: As discussed in the NPRM, 81 FR 39344, we do 

not believe that a materiality element is required in 

either the proposed amendments to the definition for the 

Department’s enforcement authority under § 668.71 or as the 

definition is adopted for the substantial misrepresentation 

borrower defense standard under § 685.222(d). We believe 

that the regulatory definition of “substantial 

misrepresentation” is clear and can be easily used to 

evaluate alleged violations of the regulations. See 75 FR 

66916; 81 FR 39344. Generally, under both Federal 

deceptive conduct prohibitions and common law, information 

is considered material if it would be important to the 
142

recipient, or likely to affect the recipient’s choice or 

conduct.15 By noting specifically in section 487(c)(3) of 

the HEA, 20 U.S.C. 1094(c)(3), that the Department may 

bring an enforcement action against a school for a 

substantial misrepresentation of the nature of its 

educational program, its financial charges, or the 

employability of its graduates, Congress indicated its 

intent that information regarding the nature of a school’s 

educational program, its financial charges, or the 

employability of its graduates should be viewed as material 

information of certain importance to students. See Suarez 

v. Eastern Int’l Coll., 50 A.3d 75, 89-90 (N.J. Super. 

2012).

As also noted in the NPRM, 81 FR 39344, we believe 

that by requiring that students demonstrate actual, 

reasonable reliance to the borrower’s detriment under § 

685.222(d), the borrower defense regulations incorporate 

similar concepts to materiality. As discussed, materiality 

refers to whether the information in question was 

information to which a reasonable person would attach 

 

15 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.”).
143

importance in making the decision at issue. By requiring 

reasonable reliance to the borrower’s detriment, 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 and whether 

this reliance was to the borrower’s detriment. This would 

be the case both for individual claims, and for the 

presumption of reliance applied in the process for group 

claims under § 685.222(f)(3). We discuss the rebuttable 

presumption of reasonable reliance in greater detail in the 

“Group Process” section of this document. As a result, we 

disagree it should include a materiality element in the 

standard.

Changes: None.

Comments: Many commenters expressed concerns about the 

requirement for borrowers to assert reliance under the 

substantial misrepresentation standard. One commenter 

expressed concern that a borrower could establish that a 

substantial misrepresentation had occurred by providing 

evidence of the misrepresentation and showing that he or 

she could have reasonably relied upon it to his or her 

detriment, notwithstanding the requirement in § 685.222(d) 
144

that the borrower demonstrate actual reasonable reliance 

upon the misrepresentation. 

One commenter supported the use of a reasonable 

reliance standard, given that the standard may allow claims 

for statements, particularly unintentional statements, that 

are not accurate or complete. 

A couple of commenters suggested that the Department 

should not require that borrowers actually and reasonably 

rely upon misrepresentations to obtain relief for borrower 

defense purposes, but rather that borrowers should be 

entitled to relief so long as actual reliance is 

demonstrated without regard for the reasonableness of that 

reliance. Alternatively, one commenter suggested that if a 

reasonable reliance standard were maintained, then the 

reasonableness of the reliance should be judged according 

to the circumstances of the misrepresentation and the 

characteristics of the audience targeted by the 

misrepresentation, which the commenter stated would be in 

keeping with State consumer protection law. 

One group of commenters suggested that the Department 

use the same standard for reliance for the Department's 

enforcement activities under § 668.71, as for borrower 

defenses under § 685.222(d), so that a borrower may assert 

a claim for borrower defense without having to show that he 
145

or she actually relied on the misrepresentation at issue. 

These commenters stated that neither State nor Federal 

consumer protection law typically requires actual reliance 

and that requiring actual reliance would increase the 

burden on both the borrower and the trier of fact without 

serving the purpose of deterring misrepresentations. The 

commenters also stated that actual reliance is not needed 

to protect schools from frivolous claims given the factfinding process and separate proceedings that would be 

initiated by the Department to recover from schools under 

the proposed rule. 

Another commenter also supported using a standard that 

did not require actual reliance, as opposed to showing that 

a borrower could have reasonably relied upon the 

misrepresentation. However, the commenter stated that in 

the alternative, borrowers should only be required to 

certify that they relied upon the misrepresentation, 

without any further proof, to satisfy the reliance 

requirement of the standard. 

Discussion: There appears to be some confusion as to 

whether the substantial misrepresentation standard for 

borrower defense would require actual, reasonable reliance 

to a borrower’s detriment. Although the definition of 

substantial misrepresentation in § 668.71 requires that, 
146

for a misrepresentation to be substantial, it must be one 

upon which a person “could reasonably be expected to rely, 

or has reasonably relied, to that person's detriment,” the 

standard for substantial misrepresentation under 

§ 685.222(d) requires that the borrower show that he or she 

“reasonably relied on” the misrepresentation at issue--in 

other words, that the borrower actually and reasonably 

relied upon the misrepresentation. As discussed later in 

this section, the Department acknowledges that the language 

of § 685.222(d) is confusing as to whether the borrower 

must also prove that he or she actually relied upon the 

misrepresentation to his or her detriment. As a result, we 

will to modify the language of proposed § 685.222(d) to 

clarify that actual, reasonable reliance to the borrower’s 

detriment must be demonstrated under the borrower defense 

substantial misrepresentation standard.

We disagree that the purpose of the borrower defense 

regulations would be served if an actual reliance standard 

(without a reasonableness component) or a standard that did 

not require actual reliance was adopted. As explained in 

the NPRM, 81 FR 39343, a standard that does not require 

actual reliance serves the Department’s interest in the 

public enforcement of its regulations: The Department 

requires title IV-participating institutions not to make 
147

false statements on which borrowers could reasonably rely 

to their detriment, and the Department appropriately will 

impose consequences where an institution fails to meet that 

standard. However, the Department will grant borrower 

defenses to provide relief to borrowers who have been 

harmed by an institution’s misrepresentation, not borrowers 

who could have been harmed but were not; and an actual, 

reasonable reliance requirement is the mechanism by which 

borrowers demonstrate that they were indeed actually 

reasonably relied upon the misrepresentation to their 

detriment. The requirement also allows the Department to 

consider the context and facts surrounding the 

misrepresentation to determine whether other similar 

students and prospective students would have acted 

similarly.16 We believe that the actual, reasonable 

reliance requirement for a borrower defense based upon a 

 

16 It is our understanding that several other Federal agencies charged with consumer protection, 

such as the FTC and the CFPB, when bringing enforcement actions for violations of prohibitions of 

deceptive acts and practices, are not required to prove actual reliance by consumers upon alleged 

misrepresentations. However, we note that such agencies have prosecutorial discretion in bringing 

such cases, and are not charged with evaluating and deciding individual claims for relief by 

consumers as the Department is seeking to do with these regulations. Furthermore, such agencies 

obtain relief for consumers from the culpable actor, while the Department will be providing relief 

through public resources, with a possibility of recovery from the actor in some cases. In contrast to 

the laws these other Federal agencies enforce, many, if not all, States allow consumers to bring 

private actions under their consumer protection laws. However, it is the Department’s 

understanding that the requirements as to whether reliance is required at all, or if the courts will 

consider the reasonableness of such reliance, varies. See, e.g., National Consumer Law Center, 

Consumer Protection in the States: A 50-State Report on Unfair and Deceptive Acts and Practices 

Statutes, at 20, 22 (2009); Schwartz & Silverman, Commonsense Construction of Consumer 

Protection Acts, 54 U. Kan. L. Rev. 1, 18-19 (Oct. 2005). 
148

substantial misrepresentation enables the Department to 

provide relief for borrowers while properly avoiding 

discharges and payments by the Federal government, 

taxpayers, and institutions. What may be deemed sufficient 

evidence to prove whether a borrower has reasonably relied 

upon a misrepresentation to his or her detriment will 

differ from case to case. As a result, we reject the

suggestion that a certification of reliance should 

necessarily and in all cases by itself be found to be 

adequate proof of reliance for all borrower defense claims 

the Department may receive in the future.

Changes: We have revised § 685.222(d) to clarify that a 

borrower must have relied upon a substantial 

misrepresentation to his or her detriment.

Comments: One commenter expressed concern that the 

Department's proposed standard does not require that the 

borrower allege injury or damages as a requirement to 

assert substantial misrepresentation. Another commenter 

stated that students should be required to establish the 

extent of their injuries or damages, so that discharges are 

not granted where students received what they bargained for 

and so that claims are not filed for harmless errors by 

schools. Another commenter stated that the standard should 

require the borrower to show proof of detriment sufficient 
149

to deprive the student of the intended benefits of the 

tuition funded by the loan at issue.

Discussion: To assert a borrower defense under proposed § 

685.222(d), the borrower must demonstrate that they 

reasonably relied upon a substantial misrepresentation in 

accordance with 34 CFR part 668, subpart F, in deciding to 

attend, or continue attending, the school. A “substantial 

misrepresentation” is defined in § 668.71 as a 

misrepresentation on which the person to whom it was made 

could reasonably be expected to rely, or has reasonably 

relied, to that person’s detriment. 

The Department understands that, generally, 

“detriment” refers to any loss, harm, or injury suffered by 

a person or property.17 When §§ 668.71 and 685.222(d) are 

read together, a borrower may assert a borrower defense for 

a misrepresentation, if also in accordance with the other 

requirements of 34 CFR part 668, subpart F, if he or she 

can demonstrate that the misrepresentation was one on which 

the borrower actually reasonably relied, to the borrower’s 

detriment, in deciding to attend, or continue attending, 

the school at issue. However, we acknowledge that the 

language of § 685.222(d) may be confusing. For this 

 

17 See Black's Law Dictionary (10th ed. 2014).
150

reason, we are clarifying in § 685.222(d) that the borrower 

must show reasonable detrimental reliance.

In contrast to detriment, “damages” refers to money 

claimed by, or ordered to be paid to, a person as 

compensation for loss or injury.18 We do not believe that 

the term “damages” is appropriate in the context of 

borrower defense, because the Department is limited by 

statute to providing relief to the borrower on his or her 

Direct Loan and may not provide a borrower with the 

complete amount or types of compensation that might 

traditionally be considered to be damages at law. 

There is no quantum or minimum amount of detriment 

required to have a borrower defense claim, and the denial 

of any identifiable element or quality of a program that is 

promised but not delivered due to a misrepresentation can 

constitute such a detriment. In contrast, proposed § 

685.222(i) provides that the trier-of-fact, who may be a 

designated Department official for borrower defenses 

determined through the process in § 685.222(i) or a hearing 

official for borrower defenses decided through the 

processes in § 685.222(f) to (h), will determine the 

appropriate amount of relief that should be afforded the 

 

18 See Black's Law Dictionary (10th ed. 2014). 
151

borrower under any of the standards described in § 685.222 

and § 685.206(c), including substantial misrepresentation. 

We explain the considerations for triers-of-fact for relief 

determinations under the “Borrower Relief” section of this 

document. 

Changes: We have revised § 685.222(d) to clarify that a 

borrower must have relied upon a substantial 

misrepresentation to his or her detriment.

Comments: Several commenters expressed concern about the 

factors listed in proposed § 685.222(d)(2). A couple of 

commenters suggested that all of the additional factors 

listed in § 685.222(d)(2) should be removed. One commenter 

argued that the factors do not establish the falsity or 

misleading nature of a substantial misrepresentation claim. 

Another commenter stated that the factors are subjective 

and would be difficult to prove or disprove and thus should 

be removed in their entirety.

A couple of commenters disagreed with specific factors 

listed in proposed § 685.222(d)(2). One commenter stated 

that the factor pertaining to failure to respond to 

information was unnecessary, because passive and requested 

disclosures are already enforceable through existing 

consumer compliance requirements. Another commenter stated 

that the factors should not include failures to respond to 
152

information, or that this factor should be revised to 

include only purposeful failures to provide requested 

information. The commenter argued that a failure to 

respond promptly may be due to routine events or extraneous 

factors, such as an enrollment officer’s vacation or 

workload issues, or a student's own delay of enrollment. A 

commenter also requested clarification as to the 

“unreasonable emphasis on unfavorable consequences of 

delay” language. This commenter argued that under this 

factor, routine, truthful provisions of information 

regarding timelines and possible late fees or other 

consequences as a result of actions such as late enrollment 

or making late housing arrangements may be viewed as 

improper conduct. 

One commenter expressed support for the factors listed 

in § 685.222(d)(2), stating that it agreed with the 

Department that misrepresentations should be viewed in the 

context of circumstances, including the possible use of 

high pressure enrollment tactics. 

One commenter expressed concern that decision makers 

would expect to see one or more of the newly added factors 

before finding that a substantial misrepresentation exists. 

This commenter suggested that the Department clarify that a 
153

borrower need not show the factors to have a claim for 

substantial misrepresentation under borrower defense.

Several commenters stated that the factors listed in 

proposed § 685.222(d)(2) were insufficient as part of the 

standard for substantial misrepresentation, as many 

problematic practices relating to high pressure and abusive 

sales practices do not necessarily involve 

misrepresentations as opposed to puffery or abusive or 

unfair practices.

Discussion: We disagree with the commenters’ suggestion to 

remove the non-exhaustive list of factors in 

§ 685.222(d)(2). We appreciate the concerns that the 

factors do not necessarily prove whether a statement was 

erroneous, false, or misleading. However, as explained in 

the NPRM, 81 FR 39343, we believe it is appropriate to 

consider factors that may have influenced whether a 

borrower’s or student’s reliance upon a misrepresentation 

to his or her detriment is reasonable, thus elevating the 

misrepresentation to a substantial misrepresentation under 

§ 668.71 and § 685.222(d) for the purposes of evaluating a 

borrower defense claim. We recognize that such factors 

consider the viewpoint of the borrower as to his or her 

reliance on a misrepresentation and may be subjective. 

However, in evaluating whether a statement is a 
154

misrepresentation, the Department will consider whether the 

statement is a misrepresentation “under the circumstances” 

and consider the totality of the situation, in addition to 

the reasonable reliance factors listed in § 685.222(d)(2). 

We also disagree with commenters that the factors are 

insufficient as part of the substantial misrepresentation 

standard. As discussed earlier in this section, we decline 

to include standards such as unfair or abusive acts or 

practices, which some commenters have stated would address 

issues such as puffery and abusive sales practices that may 

occur absent a misrepresentation, because of a lack of 

clear precedent and guidance. We believe that 

consideration of the factors, if the trier-of-fact 

determines that they are warranted under § 685.222(d)(2), 

strikes a balance between the Department’s interests in 

establishing consistent standards by which the Department 

may evaluate borrower defenses; providing borrowers and 

schools with clear guidance as to conduct that may form the 

basis of a borrower defense claim, and providing 

appropriate relief to borrowers who have been harmed. 

We understand the concern raised by commenters that a 

failure to respond to a borrower’s requests for more 

information, including regarding the cost of the program 

and the nature of any financial aid, 34 CFR 685.222(d)(iv), 
155

may be due to unintentional and routine events such as an 

employee’s oversight and vacation schedule. However, as 

discussed earlier in this section, we disagree that the 

substantial misrepresentation standard should include an 

element of intent. We also disagree that the factor is 

unnecessary, as different States and oversight entities may 

have differing disclosure standards and institutions’ 

compliance with such standards may vary.

Section 685.222(d)(2)(ii) notes that in considering 

whether a borrower’s reliance was reasonable, that an 

“unreasonable” emphasis on the unfavorable consequence of a 

delay may be considered. Generally, we do not believe that 

routine and truthful provisions of information such as 

timelines and fees to a borrower are unreasonable. 

However, as discussed, the standard requires that a 

consideration of any of the factors listed in § 

685.222(d)(2) also include consideration of whether a 

statement is a misrepresentation under the circumstances 

or, in other words, in the context of the situation.

We also disagree that further modification of the 

regulations is needed to clarify that the factors do not 

need to exist for a borrower to have a borrower defense 

under § 685.222(d). We believe that in stating that the 

Secretary “may consider, if warranted” whether any of the 
156

factors listed in § 685.222(d)(2) were present, that the 

Department’s intent is clear that the factors do not need 

to be alleged for a substantial misrepresentation to be 

established.

Changes: None.

Comments: One commenter stated that the preponderance of 

evidence standard established in the regulation, combined 

with the lower proof standard of preponderance of the 

evidence for misrepresentation, would open the door to 

frivolous claims. One commenter expanded on this position, 

asserting that the evidentiary standard in most States for 

fraudulent misrepresentation is clear and convincing 

evidence.

One commenter requested clarification regarding the 

reasonable reliance and the preponderance of evidence 

standard for the purposes of the substantial 

misrepresentation, raising as an example, that an error or 

oversight in one publication should not satisfy the 

preponderance of the evidence standard for substantial 

misrepresentation, if the statement was otherwise correct 

and complete in all of the school's other publications.

Discussion: We disagree that a “preponderance of the 

evidence” is a lesser standard of proof than what is used 

currently. As explained in the NPRM, 81 FR 39337, we 
157

believe that this evidentiary standard is appropriate as it 

is both the typical standard in most civil proceedings, as 

well as the standard used by the Department 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 understand that some commenters have concerns about 

baseless charges and frivolous claims that may be brought 

by borrowers as borrower defenses and lead to liabilities 

for schools. However, as established in § 685.222(e)(7) 

and (h), in determining whether a school may face liability 

for a borrower defense claim or a group of borrower defense 

claims, the school will have the opportunity to present 

evidence and arguments in a fact-finding process in 

accordance with due process. If, for example, during the 

course of such a fact-finding process, the school provides 

proof that a misstatement or oversight in one publication 

was otherwise correct and complete in the school’s other 

publications, such evidence may be determinative as to 

whether a borrower’s reliance on the original 

misrepresentation was reasonable under the circumstances, 

as required under § 668.71 and § 685.222(d). However, the 

probative value of such evidence will vary depending on the 

facts and circumstances of each case. We also discuss 
158

comments relating to the evidentiary standard under 

“General.”

Changes: None.

Comments: Several commenters suggested that we provide 

schools with specific safe harbors or defenses to 

substantial misrepresentation borrower defense claims. One 

commenter suggested such safe harbors could include a 

demonstration that an alleged misstatement is found to be 

true and not misleading when made; proof that a student 

participated in Student Loan Entrance counseling despite a 

claim that the student did not understand repayment 

requirements; proof that a borrower failed to obtain a 

professional license due to his or her own behavior despite 

having been provided with information on professional 

licensing requirements; a showing that the student has been 

made whole by the school; proof that the student has signed 

acknowledgements as to the information about which the 

student is claiming to have been misled; or underlying 

circumstances that are based on standard operational or 

institutional changes.

Another commenter stated that schools should be 

provided with defenses in the form of proof that the 

misrepresentation had been subsequently corrected by the 

school or that the institution had policies, procedures, or 
159

training in place to prevent the misrepresentation at 

issue.

Discussion: We disagree with commenters that specific 

defenses or safe harbors should be included in the 

regulations. Many of the factors listed by commenters, 

such as whether a student participated in entrance or exit 

counseling, proof of the availability of or receipts of 

accurate information by a student, or proof of underlying 

circumstances that are based on standard operational or 

institutional changes that should have been apparent to the 

borrower or student may be important evidence in the 

Department’s consideration of whether a borrower’s reliance 

upon an alleged misrepresentation is reasonable, as 

required by § 685.222(d). However, determinations as to 

the impact of such factors may vary significantly depending 

on the type of allegations made and the facts and 

circumstances at issue. As a result, we do not believe 

that the inclusion of such factors is appropriate. 

Similarly, other factors noted by commenters, such as 

a showing that a student has already been made whole by the 

school may, depending on the specific circumstances, be 

important considerations for the Department in its 

determination of whether a borrower may be entitled to 

relief or to the determination of the amount of relief 
160

under § 685.222(i), which in turn will affect the amount of 

liability a school may face in either the separate 

proceeding for recovery under § 685.222(e)(7) or in the 

group process described in § 685.222(h). Given that the 

importance of such factors will vary depending on the 

circumstances of each case, we also do not believe that the 

inclusion of such factors is appropriate for the 

regulations.

Section 668.71 defines a “misrepresentation” as any 

false, erroneous, or misleading statement. If an alleged 

misstatement can be proven to be true statement of fact 

when made, not false or erroneous, and it is not misleading 

when made, then such statements would not be actionable 

misrepresentations under the standard. However, as 

explained previously in this section, to determine whether 

a statement that was true at the time of its making was 

misleading, the Department will consider the totality of 

the situation to determine whether the statement had “the 

likelihood or tendency to mislead under the circumstances” 

or whether it “omit[ted] information in a way as to make 

the statement false, erroneous, or misleading.” The 

Department will also look to whether the reliance by the 

borrower was reasonable. This would include a 

consideration of whether a misrepresentation has been 
161

corrected by the school in such a way or in a timeframe so 

that the borrower’s reliance was not reasonable. This 

would also mean that, generally, claims based only on the 

speaker’s opinion would not form the basis of a borrower 

defense claim under the standard, if it can be determined 

that under the circumstances borrowers would understand the 

source and limitations of the opinion.19 For the same 

reason, it is our understanding that claims based on 

exaggerated opinion claims, also known as “puffery,” would 

also generally not be able to form the basis of a 

misrepresentation under State or Federal consumer 

protection law.20 However, the determination of whether a 

statement is an actionable misrepresentation will 

necessarily involve consideration of the circumstances 

under which the representation was made and the 

reasonableness of the borrower’s reliance on the statement. 

We do not believe that the existence of policies, 

procedures, or training to be a defense to the existence of 

 

19 It should be noted, however, that a claim phrased as an opinion may still form the basis of a 

substantial misrepresentation, if the borrower reasonably interpreted the statement as an implied 

statement of fact, see, e.g., FTC Policy Statement on Deception, 103 F.T.C. at 184, or if any of the 

factors listed in § 685.222(d)(2) existed so as to affect the reasonableness of the borrower’s reliance 

on the misrepresentation. 

20 See, e.g., Rasmussen v. Apple Inc., 27 F. Supp. 3d 1027 (N.D. Cal. 2014); FTC Policy Statement on 

Deception, 103 F.T.C. 110. 
162

a substantial misrepresentation. As discussed earlier in 

this section, the Department does not consider intent in 

determining whether a substantial misrepresentation was 

made and believes that a borrower should receive relief if 

the borrower reasonably relied upon a misrepresentation to 

his or her detriment. 

Changes: None.

Comments: Several commenters expressed concerns regarding 

the subject matter or topics upon which a substantial 

misrepresentation may be based. A few commenters expressed 

concerns that the substantial misrepresentation standard 

narrows the scope of borrower defenses by not including 

claims relating to campus safety and security, as well as 

those for sexual or racial harassment. One commenter 

expressed the view that not including such non-loan related 

issues is inconsistent with the purpose of the HEA and the 

borrower defense regulations. Another commenter said that 

by excluding such topics, the substantial misrepresentation 

standard targets just proprietary institutions and excludes 

traditional colleges.

Another commenter asked whether statements about 

topics such as cafeteria menu items, speakers hosted by a 

school, or opponents on a team's athletic schedule would be 

considered substantial misrepresentations.
163

One commenter supported using 34 CFR part 668, subpart 

F, as the basis for borrower defense claims, including 

limiting substantial misrepresentation claims to the 

categories listed in subpart F. 

Discussion: We explain earlier our reasons for why 

subjects that do not relate the making of a borrower’s loan 

or the provision of educational services for which the loan 

was provided, such as sexual or racial harassment and 

campus safety or security, are included within the scope of 

the borrower defense regulations. 

As also discussed earlier in this section, we disagree 

that the substantial misrepresentation standard targets 

proprietary institutions and excludes issues facing public 

and private non-profit schools.

In response to questions about whether 

misrepresentations on specific topics may form the basis of 

a borrower defense, we note such determinations will 

necessarily be fact and situation specific-dependent 

inquiries. As proposed, the substantial misrepresentation 

standard considers a number of factors in determining 

whether a borrower defense claim may be sustained. 

Proposed § 685.222(d) specifies that the borrower defense 

asserted by the borrower must be a substantial 

misrepresentation in accordance with 34 CFR part 668, 
164

subpart F, that the borrower reasonably relied on when the 

borrower decided to attend, or to continue attending, the 

school. 34 CFR part 668, subpart F, specifically limits 

the scope of substantial misrepresentation to 

misrepresentations concerning the nature of an eligible 

institution's educational program, 34 CFR 668.72; the 

nature of an eligible institution's financial charges, id.

at § 668.73; and the employability of an eligible 

institution's graduates, id. at § 668.74. If a 

misrepresentation falls within one of these categories, 

then it may be a misrepresentation upon which a borrower 

may assert a borrower defense claim. However, as required 

by the revised language of § 668.71, the Department would 

consider the totality of the situation to determine whether 

the statement was false, erroneous, or misleading “under 

the circumstances.” Additionally, the borrower would have 

to show that he or she reasonably relied upon the 

misrepresentation to his or her detriment in deciding to 

attend the school or in continuing his or her attendance at 

the institution under proposed § 685.222(d). If such 

requirements are met, then it is possible that a 

substantial misrepresentation may form the basis of a 

borrower defense claim. 

Changes: None.
165

Comments: Several commenters expressed concern that the 

standard would result in schools being held liable for 

misrepresentations of contractors and others acting on 

their behalf. According to one commenter, this standard is 

acceptable for enforcement activities conducted by and 

guided by the Department in its discretion, but is not 

suitable for borrower defense. Another commenter stated 

that, as proposed, § 685.222 is unclear, because under 

§ 685.222(a), a borrower defense is limited to the act or 

omission of the school, whereas under § 685.222(d), it does 

not appear to be clear that the act or omission may be by 

the school’s representatives.

Discussion: In response to concerns in 2010 that 

institutions may be held accountable for false or 

misleading statements made by persons with no official 

connection to a school, the Department narrowed the scope 

of substantial misrepresentation to statements made by the 

school, the school’s representatives, or any ineligible 

institution, organization, or person with whom the eligible 

institution has an agreement to provide educational 

programs or those that provide marketing, advertising, 

recruiting, or admissions services. 75 FR 66916. As 

explained in 2010, such persons actually either represent 

the school or have an agreement with the school for the 
166

specific purposes of providing educational programs, 

marketing, advertising, recruiting, or admissions services. 

Section § 685.222(d) similarly names the persons and 

entities making a substantial misrepresentation upon which 

a borrower may assert a claim and echoes the official 

relationships in § 668.71. We believe the definition 

provided in proposed § 685.222(d) does not need further 

clarification. We also believe that the specific persons 

and entities identified in § 685.222(d) upon whose 

substantial misrepresentation a borrower may assert a 

borrower defense claim is appropriate for the same reasons 

stated in 2010 as to their appropriateness for § 668.71 and 

decline to make any changes in this regard.

Changes: None.

Comments: One commenter requested that borrower defense 

claims extend to guaranty agencies and, specifically, 

suggested that § 685.222(d)(2) be revised to enable the 

Secretary to consider certain factors, listed in 

§ 685.222(d)(2), to determine whether a guaranty agency’s 

reliance on a substantial misrepresentation is reasonable.

Discussion: The Department’s authority to regulate 

borrower defenses arises from Section 455(h) of the HEA, 

which describes borrower defenses that may be asserted by a 

borrower to the Department for loans made under the Direct 
167

Loan Program. We do not believe that it is appropriate to 

include guaranty agencies, which are not participants in 

the Direct Loan Program, in the borrower defense 

regulations and decline the commenter’s suggestion. 

Changes: None.

Comments: One commenter concurred with the Department’s 

goal of deterring misrepresentations, but requested that 

the Department exempt foreign institutions with relatively 

small numbers of American students from the regulation. 

The commenter stated that eligible foreign institutions are 

governed by different countries’ laws and oversight 

regimes, and that there are no indicators that the issues 

giving rise to borrower defense claims have affected 

Americans enrolled in foreign institutions. 

Discussion: We do not agree that it would be appropriate 

to ignore any potential harm to students that may 

constitute the basis of a borrower defense from schools 

participating in the Direct Loan Program, whether such 

institutions are foreign or domestic. The standards 

proposed in § 685.222 for borrower defense were drafted for 

the purpose of ensuring that students receive consistent 

and uniform treatment for borrower defense claims, 

regardless of the type of institution. Exempting some 

institutions from the borrower defense process, whether 
168

partially or fully, would undermine the effectiveness of 

the regulation in providing relief for borrowers and 

providing the Department with information on misconduct 

forming the basis of borrower defenses among institutions 

participating the Direct Loan Program. 

Changes: None.

Limitations on Department Actions to Recover 

Comments: Commenters objected to the proposal to remove 

the limitations period in current § 685.206(c) to 

Department action to recover from the school for losses 

arising from borrower defense claims on both loans made 

before July 1, 2017, and those made thereafter. Section 

685.206(c) refers to § 685.309(c), which in turn refers to 

the three-year record retention requirement in § 668.24.

The current regulations also provide that the three-year 

limitation would not apply if the school received actual 

notice of the claim within the three-year period.

Commenters objected for a variety of reasons.

Several commenters argued that it would be unduly 

burdensome and expensive for institutions to retain records 

beyond the mandatory three-year record retention period. 

These commenters also argued that it would be unfair for an 

institution to have to defend itself if it no longer has 

records from the time period in question. One commenter 
169

also noted that it would be difficult for the Department to 

assess claims in the absence of records. One commenter 

disagreed with the Department’s statements in the NPRM that 

institutions have not previously relied on the three-year 

limitations period and student-specific files are likely 

unnecessary to a borrower defense claim. A commenter 

asserted that the records to which the current record 

retention rule applies--including the Student Aid Report 

(SAR), documentation of each borrower's loan eligibility, 

documentation of each borrower's receipt of funds, 

documentation of exit counseling, documentation of the 

school's completion rates, among numerous other categories 

of documents--would be relevant and that the Department had 

failed to demonstrate that resolution of borrower defense 

claims would rarely, if ever, turn on the records to which 

the three-year record retention rule now applies. The 

commenter contended that these records will likely go to 

the heart of borrower claims concerning misrepresentation 

regarding student loans.

Some commenters stated that schools have tied their 

general record retention policies to the three-year student 

aid record retention regulation. Other commenters 

contended that the proposal would place an unfair, and 

unnecessary burden on schools by requiring them to retain 
170

records indefinitely, even though a borrower would 

reasonably be expected to know within a few years after 

attendance whether the student had a claim regarding the 

training he or she had received. Some commenters argued 

that due process requires a defined limitations period so 

that borrowers and schools would know how long to retain 

relevant records. These commenters also suggested that a 

defined limitation period would promote early awareness of 

claims, and proposed a six-year period for recovery actions 

on both misrepresentation and contract claims.

A commenter asserted that periods of limitation are 

enacted not merely to reduce the risk of failing memories 

and stale evidence, but to promote finality of transactions 

and an understanding of the possible risks that may arise 

from transactions. This proposed change, the commenter 

asserts, frustrates these objectives served by periods of 

limitation. One commenter contended that an unlimited 

record retention period would increase the risk that data 

security lapses could occur. 

One commenter suggested that the limitation period for 

recovery actions should be tied to the rule adopted by the 

school’s accreditor, or to the statute of limitations in 

the State, as even non-student specific records, such as 

catalogs (which the Department noted are likely be the 
171

basis of borrower defense claims), are likely to be 

destroyed at the end of these retention periods. Another 

commenter viewed the proposal as an impermissible 

retroactive regulation, by converting what was enacted as 

defense to repayment into an affirmative recovery claim, 

available to the Department for recovery for losses from 

actions of the school that occurred before the new 

regulation took effect. 

Discussion: We fully address in the NPRM at 81 FR 39358 

the contention that removing or extending a limitation 

period is unconstitutional and beyond the power of the 

Department.21 As to the objections that the change would be 

unfair because schools in fact relied on the record 

retention rules, we note first that these record retention 

rules require the school to retain specific, particular 

student-aid related records. We include the specific 

records that must be maintained in order to provide the 

context in which to address the commenters’ assertion that 

these records would go to the heart of borrower defense 

claims. 34 CFR 668.24. The commenters identify no 

 

21 We add only that statutes of limitation applicable to government actions to collect these claims 

affect only the ability to recover by a particular action, and do not extinguish claims. Thus, a suit by 

the government to collect a liability arising in title IV, HEA program remains governed by the 

limitation periods in 28 U.S.C. 2415(a), while actions to collect by Federal offset have not, since 

subsection (i) was added to § 2415 by the 1982 Debt Collection Act to exempt actions to collect by 

administrative offset under 31 U.S.C. 3716, which originally imposed a 10-year statute of limitations, 

until amended in 2008 to remove any limitation period from collection by Federal offset. 
172

lawsuits in which resolution of the dispute actually turned 

on any of the records listed here and, with minor 

exceptions, we are aware of no lawsuits against schools by 

borrowers or government entities, or borrower defense 

claims presented to the Department, in which the records 

described here are dispositive. In a handful of instances, 

recognition of borrower defenses under § 685.206 turned on 

records showing whether refunds owed to students had in 

fact been made, a requirement ordinarily examined in the 

routine required compliance audit and in Department program 

reviews. In a few other cases, Department reviews have 

identified instances in which the school falsified 

determinations of satisfactory academic progress, another 

matter commonly examined in routine audits and program 

reviews, and we are amending the false certification 

discharge provisions to ensure that the Department can 

implement relief when this particular failure is 

identified. In contrast, even a cursory review of claims 

raised by students and student borrowers over the years 

that would constitute potential borrower defense claims 

have turned not on the individualized aid-specific records 

itemized in the Department’s record retention regulations, 

but on broadly disseminated claims regarding such matters 
173

as placement rates,22 accreditation status,23 and employment 

prospects.24

Whether a school actually retains records relevant to 

the borrower’s claim does not determine the outcome of any 

claim, because the borrower--and in group claims, the 

Department--bears the burden of proving that the claim is 

valid. The borrower, or the Department, must therefore 

have evidence to establish the merit of the claim, a 

prospect that becomes more unlikely as time passes. If the 

borrower or the Department were to assert a claim against 

the school, the school has the opportunity to challenge the 

evidence proffered to support the claim, whether or not the 

school itself retains contradictory records.

We acknowledge, however, that institutions might well 

have considered their potential exposure to direct suits by 

students in devising their record retention policies for 

records that may in fact be relevant to borrower defense 

 

22 See 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)

23 California v. Heald Coll., No. CGC-13-534793, Sup. Ct. Cty of San Francisco (March 23, 

2016); Consumer Fin. Prot. Bureau v. Corinthian Colls., Inc., No. 1:14-CV-07194, 2015 WL 10854380 

(N.D. Ill. Oct. 27, 2015); Ferguson v. Corinthian Colls., Inc., 733 F.3d 928 (9th Cir. 2013); 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.); Lilley v. Career Educ. 

Corp., 2012 IL App (5th) 100614-U (Oct. 25, 2012); Fed. Trade Comm’n v. DeVry Educ.Group, Inc., 

C.A. No. 15–CF–00758 (S.D. Ind. Filed Jan. 17, 2016).

24 Suarez v. E. Int'l Coll., 428 N.J. Super. 10, 50 A.3d 75 (App. Div. 2012).
174

type claims. Although we consider applicable law to 

support collection of claims by offset without regard to 

any previously applicable limitation period, we recognize 

that the burden of doing so may be unwarranted after the 

limitation period otherwise applicable had expired and the 

institution had no reason to expect that claims would arise 

later. Under current regulations, there is no limit on the 

time in which the Department could take recovery action if 

the institution received notice of a claim within the 

three-year period. Under the current regulation, an 

institution must have “actual notice of a claim” to toll 

the three-year period. An institution would in fact have 

ample warning that the claims may arise from other events 

besides receipt of a claim from an individual, such as 

lawsuits involving the same kind of claim, law enforcement 

agency investigations, or Department actions. State law, 

moreover, already commonly recognizes that the running of 

limitation periods may be suspended for periods during 

which the claimant had not yet discovered the facts that 

would support a claim, and may impose no limit on the 

length of the suspension, effectively allowing a claim to 

be asserted long after the otherwise applicable limitation 

period had run. The limitation period applicable to a 

particular recovery claim will thus depend-–for current 
175

loans–-on the limitation period State law would impose on 

an action by the student against the institution for the 

cause of action on which the borrower seeks relief, as that

period may be affected by a discovery rule, as well as 

whether an event has occurred within that period to give 

the institution notice. The current three-year limit would 

be retained, subject to the notice provisions, if that 

limit exceeded the applicable State law limitation. For 

new loans, the applicable periods would be those in 

§ 685.222(e)(7) and § 685.222(h)(5); for actions based on 

judgments, no limitation would apply. 

We recognize that the retention of records containing 

personally identifiable information poses data security 

risks. However, the school already faces the need to 

secure such information, and we expect the school to have 

already adopted steps needed to do so. The regulation does 

not impose any new record retention requirement. 

Changes: We have amended § 685.206(c) to remove the 

provision that the Secretary does not initiate a recovery 

action later than three years after the last year of 

attendance, and we have modified § 685.206(c)(3) to provide 

that the Department may bring a recovery action against the 

school within the limitation period that would apply to the 

cause of action on which the borrower defense is based, 
176

unless within that period the school received notice of the 

borrower’s claim. We have further modified the regulations 

to state that notice of the borrower’s claim includes 

actual notice from the borrower, a representative of the 

borrower, or the Department, of a claim, including notice 

of an application filed pursuant to § 685.222 or § 

685.206(c); receipt of a class action complaint asserting 

relief for a class that may include the borrower for 

underlying facts that may form the basis of the borrower 

defense claim; and notice, including a civil investigative 

demand or other written demand for information, from a 

Federal or State agency that it is initiating an 

investigation into conduct of the school relating to 

specific programs, periods, or practices that may affect 

the student for underlying facts that may form the basis of 

the borrower defense claim. 

We have also revised § 685.222(h)(5) and (e)(7) to 

provide that the Department may bring a recovery action 

against the school for recovery of claims brought under § 

685.222(b) at any time, and may bring a recovery action for 

recovery of claims brought under § 685.222(c) or (d) within 

the limitation period that would apply to the cause of 

action on which the borrower defense is brought, unless 

within that period the school received notice of the 
177

borrower’s claim. The Department further modifies § 

685.222(h)(5) to include the same description of events 

that constitute notice as described above.

Comments: One commenter requested that the Department 

continue the three-year statute of limitations period for 

loans disbursed prior to July 1, 2017. Another commenter 

suggested it would be unfair for the Department to hold an 

institution accountable for claims going back more than ten 

years.

Discussion: As noted in the NPRM, the Department will 

continue to apply the applicable State statute of 

limitations to claims relating to loans disbursed prior to 

July 1, 2017. We also note that we will apply all aspects 

of relevant State law related to the statute of limitations 

as appropriate, including discovery rules and equitable 

tolling. However, these comments may reflect a drafting 

error in the NPRM that suggested loans disbursed prior to 

July 1, 2017, would be subject to the new limitations 

period established by the final regulations.

Changes: We have revised § 685.222(a)(5) to make clear 

that the six-year statute of limitations period established 

under that section does not apply to claims under 

§ 685.206(c).

Expansion of Borrower Rights
178

Comments: A number of commenters noted that the 

regulations in proposed § 685.206(c) expand the rights of 

borrowers by allowing borrowers to assert defenses 

regardless of when the loan was disbursed. Under the 

current regulations, a defense to repayment is available 

only when collection on a Direct Loan has been initiated 

against a borrower, such as wage garnishment or tax offset 

proceedings. The commenters asserted that the revisions to 

the borrower defense regulations have reconstituted current 

defenses to collection, so they now serve as the bases for 

expanded borrower rights to initiate an action for 

affirmative debt relief at any time.

Discussion: We disagree that proposed § 685.206(c) would 

be an expansion of borrowers’ rights as to the context in 

which a borrower defense may be raised. As explained by 

the Department in 1995, 60 FR 37769-37770, the Direct Loan 

borrower defense regulations were intended to continue the 

same treatment for borrowers and the same potential 

liability for institutions that existed in the FFEL 

Program–-which allowed borrowers to assert both claims and

defenses to repayment, without regard as to whether such 

claims or defenses could only be brought in the context of 

debt collection proceedings. Specifically, FFEL borrowers’ 

ability to raise such a claim was pursuant the Department’s 
179

1994 inclusion in the FFEL master promissory note for all 

FFEL Loans a loan term25—-that remains in FFEL master 

promissory notes to this day--stating that for loans 

provided to pay the tuition and charges for a for-profit 

school, “any lender holding [the] loan is subject to all 

the claims and defenses that [the borrower] could assert 

against the school with respect to [the] loan” (emphasis 

added).26 See also Dept. of Educ., Dear Colleague Letter 

Gen 95-8 (Jan. 1995)(stating the Department’s position that 

borrower defense claims would receive the same treatment as 

they were given in the FFEL program, which allowed 

borrowers to not only assert defenses but also claims under 

applicable law). 

We also disagree that the revisions to § 685.206(c) 

expand any timeframe for a borrower to assert a borrower 

defense. As explained above, the Department’s borrower 

defense regulation at § 685.206(c) was based upon the right 

of FFEL borrowers to bring claims and defenses, which in 

turn was adopted from the FTC’s Holder Rule provision. The 

FTC has stated that applicable State law principles, such 

as statutes of limitations as well as any principles that 

 

25 This loan term was adapted from a similar contract provision, also known as the Holder Rule, 

required by the Federal Trade Commission (FTC) in certain credit contracts. See 40 FR 533506. 

26 The substance of this loan term was also adopted as part of the FFEL Program regulations at 34 

CFR 682.209(g) in 2009.
180

would permit otherwise time-barred claims or defenses 

against the loan holder, apply to claims and defenses 

brought pursuant to a Holder Rule provision.27 The 

Department’s position on the application of any applicable 

statutes of limitation or principles that may permit 

otherwise time-barred claims is the same as the FTC’s. We 

do not seek to change this position in revising 

§ 685.206(c), which would apply to loans first disbursed 

before July 1, 2017. 

Changes: None.

Administrative Burden 

Comments: A group of commenters questioned the validity of 

the Department’s argument that maintaining a State-based 

standard would be administratively burdensome. The 

commenters suggested that the Department could establish a 

system for determining which State’s laws would pertain to 

students enrolled in distance education programs.

Several commenters criticized the Federal standard as 

being too broad and vague to provide sufficient 

predictability to institutions. One of these commenters 

asserted that the proposed regulations could encourage 

 

27 Letter from Stephanie Rosenthal, Chief of Staff, Division of Financial Practices, Bureau of Consumer 

Protection, FTC to Jeff Appel, Deputy Under Secretary, U.S. Dep’t. of Educ. (April 7, 2016), available at 

www.ftc.gov/policy/advisory-opinions/letter-stephanie-rosenthal-chief-staff-division-financialpractices-bureau.
181

borrowers to file unsubstantiated claims. Many commenters 

noted that borrowers have existing avenues to resolve 

issues with their schools, using the complaint systems 

provided by institutions, accrediting agencies, and States, 

as well as judicial remedies. 

One commenter suggested that the implementation of the 

proposed regulations would hamper interactions between 

school employees and students by creating an environment 

where any interaction could be misconstrued and used as a 

basis for borrower defense. The commenter concluded that 

this dynamic would increase the burden on schools as they 

seek to implement means of communicating to and interacting 

with borrowers that mitigate risk.

Several commenters recommend that the Federal standard 

describe the specific acts and omissions that would and 

would not substantiate a borrower defense claim. Another 

commenter suggested that the final rule include examples of 

serious and egregious misconduct that would violate the 

Federal standard. 

Discussion: Reliance upon State law not only presents a 

significant burden for Department officials who must apply 

and interpret various State laws, but also for borrowers 

who must make the threshold determination as to whether 

they may have a claim. Contrary to the commenter’s 
182

assertion, this challenge cannot be resolved through the 

Department’s determination as to which State’s laws would 

provide protection from school misconduct for 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.

We agree with commenters that the Federal standard 

does not provide significant predictability to institutions 

regarding the number or type of borrower defense claims 

that may be filed or the number of those claims that will 

be granted. However, the purpose of the Federal standard 

is not to provide predictability, but rather, to streamline 

the administration of the borrower defense regulations and 

to increase protections for students as well as taxpayers 

and the Federal government. That being said, the bases for 

borrower defense claims under the new Federal standard–-

substantial misrepresentation, breach of contracts, and 

nondefault, contested judgments by a court or 

administrative tribunal of competent jurisdiction for 

relief–-do provide specific and sufficient information to 

guide institutions regarding acts or omissions pertaining 

to the provision of Direct Loan or educational services 
183

that could result in a borrower defense claim against the 

institution.

We do not agree that implementation of the Federal 

standard will hamper interactions between school personnel 

and students. Institutions that are providing clear, 

complete, and accurate information to prospective and 

enrolled students are exceedingly unlikely to generate 

successful borrower defense claims. While individuals may 

continue to misunderstand or misconstrue the information 

they are provided, a successful borrower defense claim 

requires the borrower to demonstrate by a preponderance of 

the evidence that a substantial misrepresentation or breach 

of contract has occurred.

We decline to describe the specific acts and omissions 

that would and would not substantiate a borrower defense 

claim, as each claim will be evaluated according to the 

specific circumstances of the case, making any such 

description illustrative, at best. We believe the elements 

of the Federal standard and the bases for borrower defense 

claims provide sufficient clarity as to what may or may not 

constitute an actionable act or omission on the part of an 

institution. 

Changes: None.

Authority
184

Comments: A group of commenters expressed concern that the 

proposed Federal standard exceeds the Department’s 

statutory authority. This same group of commenters opined 

that the proposed Federal standard violates the U.S. 

Constitution.

Two commenters suggested that the proposed regulations 

have exceeded the Department’s authority to promulgate 

regulations for borrowers’ defenses to repayment on their 

Federal student loans when advanced collection activity has 

been initiated. One of these commenters suggested that 

loan discharges based on institutional misconduct should be 

pursued only when the Department has court judgments 

against a school, final Department program review and audit 

determinations, or final actions taken by other State or 

Federal regulatory agencies, after the school has been 

afforded its due process opportunities.

Discussion: The Department’s authority for this regulatory 

action is derived primarily from Sections 454, 455, 487, 

and 498 of the Higher Education Act, as discussed in more 

detail in the NPRM. Section 454 of the HEA authorizes the 

Department to establish the terms of the Direct Loan 

Program Participation Agreement, and section 455(h) of the 

HEA authorizes the Secretary to specify in regulation which 

acts or omissions of an institution of higher education a 
185

borrower may assert as a defense to repayment of a Direct 

Loan. Sections 487 and 498 authorize the adoption of 

regulations to assess whether an institution has the 

administrative capability and financial resources needed to 

participate in the title IV, HEA programs.28

Support for regulating in particular areas is also 

found in Section 432(a) of the HEA, which authorizes the 

Secretary to issue regulations for the FFEL program, 

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 compromise a 

claim on a Perkins Loan. 

Section 452(j) of the GEPA authorizes certain 

compromises under Department programs, and the 

Administrative Dispute Resolution Act, 31 U.S.C. 3711, 

authorizes a Federal agency to compromise or terminate 

collection of a debt, subject to certain conditions. 

The increased debt resolution authority is provided in 

Pub. L. 101-552 and authorizes the Department to resolve 

 

28 This discussion addresses the Department’s authority to issue regulations in the areas described 

below. As discussed earlier, the Department’s authority to recoup losses rests on common law as 

well as HEA provisions included among those cited here.
186

debts up to $100,000 without approval from the Department 

of Justice (DOJ).

The HEA vests the Department with the sole authority 

to determine and apply the appropriate sanction for HEA 

violations. The Department’s authority for the regulations 

is also informed by the legislative history of the 

provisions of the HEA, as discussed in the NPRM. 

Changes: None. 

Making of a Loan and Provision of Educational Services 

Comments: Several commenters expressed support for the 

Department’s efforts to limit the scope of borrower defense 

claims by focusing the proposed regulations on acts or 

omissions that pertain to the provision of educational 

services. However, these commenters also suggested that 

the phrase, “provision of educational services” was open to 

interpretation and, as such, may not effectively constrain 

potential claims. One commenter suggested revising the 

phrase to read, “provision of educational services related 

to the program of study.”

A number of commenters requested that the 

clarification included in the preamble to the NPRM, 

explaining that claims pertaining to personal injury, 

allegations of harassment, educational malpractice, and 

academic or disciplinary actions are not related to the 
187

making of a borrower’s Direct loan or the provision of 

educational services be included in the regulatory text, as 

they viewed these specific examples as particularly helpful 

clarifications.

Two commenters listed a number of specific 

circumstances that may or may not fall within the scope of 

providing educational services, and requested that the 

Department provide an analysis of these acts and omissions. 

Another commenter remarked that the Department’s 

efforts to limit the scope of borrower defense claims by 

focusing the proposed regulations on acts or omissions that 

pertain to the provision of educational services fell short 

of its objective. Similar to other commenters, this 

commenter requested that the Department provide explicit 

descriptions of the claims that would and would not meet 

the proposed standard.

Another commenter who shared this view suggested the 

Department include in the final regulations a discussion of 

the factors that would be considered in determining whether 

a borrower defense claim pertained to the provision of 

educational services.

Discussion: We appreciate the support for our efforts to 

appropriately limit the scope of borrower defense claims to 

those that are related specifically to the provision of 
188

educational services or the making of a Direct Loan. We 

understand the commenters’ interest in further 

clarification. However, we do not believe it is 

appropriate to provide detailed institutional-borrower 

scenarios, or a hypothetical discussion of the analytic 

process the Department would undertake to ascertain whether 

a specific borrower’s claim related to the provision of 

educational services or the making of a Direct Loan at this 

time. As is often the case in matters that address an 

individual’s experience as part of the Federal Student Aid 

process, the Department’s determination of whether a claim 

pertains to the provision of educational services or the 

making of a Direct Loan will depend greatly upon the 

specific elements of that claim.

For example, while it may appear to be a relatively 

straightforward clarifying change to amend the regulatory 

language to read, “provision of educational services 

related to the program of study,” such a change could be 

interpreted to mean that claims related to more general 

concerns associated with the institution’s provision of 

educational services would not be considered. That is not 

our intent, and we believe the regulatory language as 

proposed best captures the intended scope of borrower 

defense claims.
189

Similarly, we do not believe that including in the 

regulatory language specific examples of acts or omissions 

that would not be considered in a borrower defense is 

appropriate at this time. These circumstances may evolve 

over time, necessitating a re-evaluation of their 

relevance. The Department can provide additional 

clarification, as needed, through other documents, such as 

a Dear Colleague Letter, Electronic Announcement, or the 

FSA Handbook. 

Changes: None. 

Comments: One commenter recommended that the phrase 

“making of a Direct Loan” be revised to include the phrase 

“for enrollment at the school,” to ensure consistency with 

the proposed regulatory language in § 685.222(a)(5). The 

commenter suggested that this modification would be 

required to ensure that all Direct Loans a borrower has 

obtained attend a school are covered by the regulation. 

Discussion: We agree with the commenter that such a change 

would ensure consistency throughout the regulation. 

Changes: We have revised § 685.206(c) to include the 

qualifying phrase, “for enrollment at the school” when 

referring to the “making of the loan.” 

Comments: Several commenters expressed concern that the 

proposed borrower defense regulations would limit borrower 
190

defense claims to acts or omissions that occurred during 

the same academic year in which the borrower obtained a 

Direct Loan for which he or she is now seeking a loan 

discharge. One commenter suggested this concern could be 

ameliorated by amending the regulatory language in

§ 685.222(a)(5) to include acts and omissions that occur 

prior to enrollment (e.g., marketing, recruitment) and 

after the borrower has left the school (e.g., career 

placement).

Another commenter expressed concern that the 

limitation of scope would create of discrepancy between 

loan proceeds that were used to pay for tuition and loan 

proceeds used to pay for other elements of the 

institution’s cost of attendance. 

Discussion: The preamble to the NPRM explicitly 

acknowledged that the proposed standard described in 

§ 685.206(c) and § 685.222(b), (c), and (d), would include 

periods of time prior to the borrower’s enrollment, such as 

when the borrower was being recruited by the school, and 

periods of time after the borrower’s enrollment, such as 

when the borrower was seeking career advising or placement 

services. 81 FR 39337.

The regulatory language in § 685.222(a)(5) refers to 

the making of a Direct Loan that was obtained in 
191

conjunction with enrollment at the school. This would 

include all eligible elements of the school’s cost of 

attendance for which a Direct Loan can be obtained. The 

language in § 685.222 does not restrict potential borrower 

relief to the portion of a Direct Loan used to pay for 

tuition. 

Changes: None. 

Comments: None.

Discussion: In further reviewing proposed § 685.222(a)(6), 

the Department has determined that including an affirmative 

duty upon the Department to notify the borrower of the 

order in which his or her objections, if he or she asserts 

other objections in addition to borrower defense, to his or 

her loan will be determined is too burdensome because it 

would require the expenditure of administrative resources 

and time, even if not desired by the borrower. The 

borrower may contact the Department to find out the status 

of his or her objections, including borrower defense, if 

desired.

Changes: We have revised § 685.222(a)(6) to remove the 

requirement that the Department notify the borrower of the 

order in which his or her objections to a loan will be 

determined.
192

Limitation Periods (Statute of Limitations)

Comments: Several commenters requested that the Department 

allow students to recoup loan funds already paid beyond the 

proposed six-year statute of limitations. These commenters 

argued that students often do not know that they are 

entitled to relief for many years. Some commenters stated 

that the beginning of the time limit would be difficult for 

borrowers to determine, since it could vary depending on 

the specifics of the alleged misconduct. Another commenter 

stated that some institutions have been defrauding 

borrowers for decades. One commenter stated that since 

there is no time limit for false certification discharges, 

there should not be a time limit for borrower defenses. A 

group of commenters argued that since there is no limit on 

the Department’s ability to collect student debt, there 

should not be a limit on the ability of borrowers to 

recover. Other commenters pointed to the relatively 

smaller number of borrower applications, as opposed to 

numbers of borrower estimated to be eligible for relief, 

from Corinthian as evidence that many borrowers do not know 

they have claims.
193

Discussion: As noted in the NPRM, the six-year statute29 of 

limitations is only applicable to students’ claims for 

amounts already paid on student loans. A borrower may 

assert a defense to repayment at any time. This rule 

comports with the FTC Holder Rule30 and general State law 

principles, as well as general principles relating to the 

defense of recoupment. See, e.g., Bull v. United States, 

295 U.S. 247, 262 (1935) (“Recoupment is in the nature of a 

defense arising out of some feature of a transaction upon 

which the plaintiff’s action is grounded. Such a defense 

is never barred by the statute of limitations so long as 

the main action itself is timely.”) We understand that 

students may not always be in a position to bring borrower 

defense claims immediately, but believe the final 

regulations strike a balance between allowing borrowers 

sufficient time to bring their claims and ensuring that the 

claims are brought while there is still evidence available 

to assess the claims.

Changes: None.

General Process

 

29 In the NPRM, we explain our reasoning for establishing a six-year statute of limitations for the 

breach of contract and substantial misrepresentation standards under § 685.222(c) and (d). Further, 

we note that six-year period echoes the period applicable to non-tort claims against the United States 

under 28 U.S.C. 2401(a). See also 31 U.S.C. 3702. 

30 The FTC Holder Rule is explained in more detail elsewhere in the “State Standard” and “Expansion 

of Borrower Rights” sections.
194

Comments: Many commenters and groups of commenters 

expressed concerns about potential due process issues with 

the process proposed in § 685.222(e) for individual 

borrowers to pursue borrower defense claims. These 

commenters asserted that the Department should allow 

institutions to actively participate in all aspects of the 

process, starting with a right to be notified of the claim 

and an opportunity to review the claimant’s assertions and 

supporting documentation. These commenters further 

proposed that the Department’s hearing official should 

advise the institution about the specific arguments and 

documents used in the fact-finding process. Some 

commenters offered proposed timeframes for each step in the 

review process, while emphasizing that most determinations 

should be made based solely on document review. 

Some of these commenters acknowledged the value of not 

establishing a purely adversarial process, but emphasized 

the need to balance the interests of providing relief to 

students who were treated unfairly with the rights of 

schools to defend themselves, especially in light of the 

possible financial and legal exposure to institutions and 

potentially taxpayers. 

Several commenters also contended that the exclusion 

of school participation in the individual process is 
195

especially problematic because of the fact-specific nature 

of such claims. These commenters expressed their belief 

that most individual cases cannot be thoroughly 

investigated without school input. Some commenters 

suggested that the proposed regulations flip the 

presumption of innocence that applies in many processes on 

its head and unfairly burdens institutions without an 

adequate process to vindicate their claims. 

While many commenters emphasized that the proposed 

process tilts too favorably toward claimants, a few 

commenters asserted that it may not always fully protect 

the rights of adversely affected borrowers. Additionally, 

they noted that the Department’s proposal removed not only 

the option of arbitration, but also the borrower’s choice 

in the makeup of and the representation for the group. 

These commenters asserted that the rights of an individual 

claimant could be adversely affected because of some defect 

in a group claim that the Department interprets will cover 

the affected individual. They further stated that 

borrowers have no recourse to challenge the Department 

official’s determination, who they allege will be acting 

under a set of obtuse and poorly defined rules, resulting 

in determinations benefitting borrowers who were not 

wronged and possibly denying relief to deserving claimants. 
196

Discussion: Schools will not be held liable for borrower 

defense claims until after an administrative proceeding 

that provides them due process. The Department already 

runs such proceedings in its Office of Hearings and Appeals 

on matters such as assessing a school’s liability to the 

Department or limiting, suspending, or terminating a 

school’s title IV participation.

We disagree that moving a claimant from the individual 

process into the group process negatively impacts the 

borrower. In fact, we believe the borrower may receive a 

faster decision using the group process. Additionally, the 

borrower maintains the ability to request reconsideration 

if there is new evidence that was not previously 

considered. Finally, the borrower retains the right to 

“opt-out” of the group process.

The Department will outline specific procedures, 

including other details requested by the commenters, in a 

separate procedural rule. We believe this is the most 

appropriate place for such detail. 

Changes: None.

Comments: Many commenters expressed concerns relating to 

proposed § 685.222(e)(3), which provides for a Department 

official to administer the individual borrower process. 

Many of these commenters were concerned that these 
197

officials would have too much authority in deciding what 

evidence to review and use in decision making. Some of 

these commenters also argued that giving the Department’s 

official the sole discretion over disposition of the claims 

actually denies borrowers certain rights. 

Several commenters claimed that the Department 

official would be subject to political influence and not 

necessarily the unbiased, independent, and impartial party 

needed in this role. 

Discussion: Department officials make independent 

decisions daily regarding the merit of objections to loan 

enforcement raised by borrowers who default on their loans, 

and borrower defense would be no different. Department 

officials also make decisions regarding institutional 

liabilities to the Department and enforcement actions 

against institutions. These officials do so in accordance 

with established standards in the APA for such decisions 

made by administrative agencies, such as ensuring that 

decision makers do not report to individuals responsible 

for managing or protecting the funds of an agency. 

As discussed during negotiated rulemaking, the 

Department also plans to outline more specific details 

about the process for schools and borrowers in forthcoming 

procedural rules.
198

Changes: None.

Comments: Commenters argued that the Department’s proposed 

structure in § 685.222(e) places too much authority with 

the Department and its officials, creating a conflict of 

interest. These commenters had misgivings about 

designating an official who would have the ability to 

perform multiple functions, including adjudicating cases, 

creating groups from individual claims, as well as 

advocating on behalf of the group. Several commenters 

called for separation between the investigative and 

adjudicative functions.

Many of these commenters expressed concern that the 

entire process created conditions that would inevitably 

lead to unfair treatment of schools. This argument is 

based on the hypothesis that the inherent conflicts in the 

proposed investigative and adjudication processes will 

result in a high number of vindicated claims and the cost 

associated with high levels of loan forgiveness will force 

the Department to seek indemnification from schools 

regardless of the legitimacy of the claims. 

Numerous commenters also expressed concerns that some 

of the Department officials hearing cases may not have the 

requisite experience to properly and dispassionately 

evaluate and decide these cases. Several commenters 
199

specifically offered alternatives to the Department’s 

officials, including using independent hearing officials, 

administrative law judges, or a third party such as a 

member of the American Arbitration Association to decide 

cases. Some commenters specifically suggested this 

separation to ensure the decision maker would be more 

insolated form political pressures. 

One commenter also noted that the proposed rule does 

not provide for review of determinations by the Secretary, 

which specifically limits the Secretary’s authority. 

Discussion: As we make clear elsewhere here, the 

Department will undertake any action to recover against a 

school under specific procedures that are being developed 

and will ensure an opportunity for the school to present 

its defenses and be heard. The process will be comparable 

to that provided under part 668, subpart G for actions to 

fine, or to limit, suspend or terminate participation of, a 

school, and under part 668, subpart H for audit and program 

review appeals. The hearing will be conducted by a

Department official who is independent of the component of 

the Department bringing the action. This is currently done 

for appeals under subparts G and H, and like those 

procedures, the new procedures would include an opportunity 

for an appeal to the Secretary. Any final decision reached 
200

in these proceedings would be reviewable under section 706 

of the APA, 5 U.S.C. 706, as are final decisions under 

subparts G and H. The separation of functions under those 

subparts fully complies with the requirements that would 

apply under the APA, to which some commenters have alluded, 

and would be mirrored in the procedure used for recoveries 

against schools. However, neither the APA nor other 

applicable law requires the Department to provide an appeal 

from an administrative decision maker to the Secretary or 

other senior authority, and the decision of the official 

designated the authority to adjudicate individual claims is 

final agency action, similarly reviewable in an action 

brought under section 706 of the APA. The Department has 

conducted a great number of such individual adjudications 

of borrower objections to Federal payment offset and wage 

garnishment over the past decades, and neither those 

procedures, nor those used for Federal salary offset, 

include any provision for an appeal from the decision of 

the designated official to the Secretary. 34 CFR 30.33, 34 

CFR part 31, 34 CFR part 34. 

Changes: None.

Comments: One commenter expressed support for restricting 

borrowers from receiving relief where relief was already 

granted for the same complaint through a separate source. 
201

Conversely, another commenter requested additional legal 

recourse to collect damages beyond the borrower defense to 

repayment process.

Discussion: The individual application process in 

§ 685.222(e)(1)(i)(C) requires the borrower to inform the 

Department of any other claim based on the same information 

and any payments or credits received resulting from such a 

claim. The NPRM included performance bond holders and 

tuition recovery programs as examples of sources of these 

payments or credits. The statutory authority in 

section 455(h) of the HEA provides for defense to repayment 

of a Direct Loan. The Department’s ability to provide 

relief for borrowers is predicated upon the existence of 

the borrower’s Direct Loan, and that relief is limited to 

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

such a loan. By providing relief appropriate to the 

borrower’s loss, and based on the amount borrowed, the 

Department would provide relief under the relevant 

statutory authority. A borrower may pursue the payment of 

other damages for costs not covered by the Direct Loan in 

court or via other available avenues without restriction. 

Changes: None.

Comments: Several commenters expressed concern for 

frivolous, false, exaggerated, or politically driven claims 
202

and the accompanying administrative burden and cost this 

process will place on institutions and the Department. 

Commenters suggested a firm statute of limitations for 

filing claims, increasing the burden of proof for the 

student, limiting opportunities to reopen cases, and a 

prominently stated penalty for filing false claims on the 

application form to prevent false or exaggerated claims.

Discussion: We believe the commenters’ suggestions, though 

well intentioned, would do little to reduce any potential 

frivolous claims. As outlined earlier, we believe we have

established a strong position for the limitations periods 

and the burden of proof in these regulations. 

Additionally, an individual borrower may only request 

reconsideration of an application when he or she introduces 

new information not previously considered. The borrower 

defense application form includes a certification statement 

that the borrower must sign indicating that the information 

contained on the application is true and that making false 

or misleading statements subjects the borrower to penalties 

of perjury. We believe these protections against false or 

frivolous claims are sufficient.

Changes: None.

Comments: Several commenters and groups of commenters 

contended that the Department should provide equal relief 
203

to Direct Loan and FFEL borrowers. These commenters 

objected to the Department’s proposed process in § 685.206, 

which would require FFEL borrowers who want to apply for a 

borrower defense to consolidate their FFEL Loans into the 

Direct Consolidation Loans. These commenters noted that 

over 40 percent of borrowers with outstanding Federal loans 

have FFEL Loans and conveyed that borrowers were typically 

not able to choose among Federal loan programs. One 

commenter noted the inequities pertain not only to 

borrowers, but also to schools. Institutions with 

significant FFEL volume face reduced risk of Department 

efforts to recover funds. One commenter specifically 

indicated that requiring FFEL borrowers to consolidate 

obliterates the use of the group process because FFEL 

borrowers cannot be automatically included in the group 

without further action on their part. 

These commenters also noted inequities in relief for 

FFEL borrowers, which includes no mechanism to seek refund 

of amounts already paid by the borrower. Thus, the 

commenters asked the Department to stop all collection 

activities upon receipt of a FFEL borrower’s application to 

at least reduce the amount the borrower pays on the loan. 

Additionally, these commenters requested that the 
204

Department apply forbearance to FFEL borrowers in the same 

manner as with Direct Loan borrowers.

While expressing a strong preference for identical 

treatment of Direct Loan and FFEL borrowers, one commenter 

also recognized that this might not be possible, and 

suggested that the Department could lessen the imbalance by

specifying that a referral relationship existed between 

lenders and institutions when a large number of borrowers 

at a school had the same lender. Another commenter 

suggested that the Department make findings of groups of 

borrowers entitled to discharge of their loans and require 

FFEL lenders to comply with them.

One commenter articulated that the Department could 

take additional steps to assist FFEL borrowers in multiple 

ways. First, the commenter suggested that the Department 

could compel a lender or guaranty agency to discharge a 

loan. This commenter further suggested that borrowers who 

dispute a FFEL Loan who are denied can appeal a lender or 

guaranty agency’s decision to the Secretary, giving the 

Department final authority in each case. Finally, the 

commenter indicated that the Department could move groups 

of loans under the Department’s responsibility as it would 

in cases where a guaranty agency closes. The commenter 
205

claimed that the Department previously took such action for 

false certification and closed school discharges. 

Discussion: We seek to provide an effective process for 

all borrowers within the Department’s ability under 

applicable laws and regulations.

Current regulations do not require a FFEL lender to 

grant forbearance under these circumstances except with 

regard to a FFEL borrower who seeks to pay off that FFEL 

Loan with a Consolidation Loan, and that requirement 

provides a time-limited option. 34 CFR 682.211(f)(11). 

Because the Secretary has designated that section of the 

final regulations for early implementation, lenders may 

implement this provision before it becomes a requirement on 

July 1, 2017. Thus, when these borrower defense 

regulations take effect on July 1, 2017, FFEL Program 

lenders must grant administrative forbearance when the 

Department makes a request on behalf of a borrower defense 

claimant, pursuant to § 682.211(i)(7). 

We also do not believe we have adequate data to 

identify those lenders and schools that established a 

referral relationship. 

We believe we have outlined the best possible path to 

relief for the remaining FFEL borrowers within our legal 

abilities. We appreciate the commenters’ suggestions for 
206

other ways to assist FFEL borrowers in pursuing borrower 

defenses, but do not believe those suggestions are 

practicable. We recognize that this process requires 

additional steps for FFEL borrowers. To mitigate this, as 

described in the preamble to the NPRM, we will provide FFEL 

borrowers with a preliminary determination as to whether 

they would be eligible for relief on their borrower defense 

claims under the Direct Loan regulations, were they to 

consolidate their FFEL Loans into a Direct Consolidation 

Loan. FFEL borrowers may receive such a determination 

without having to establish a referral relationship between 

the lender of the underlying FFEL Program Loan and the 

school. The notice of preliminary determination will 

provide information on the Loan Consolidation process and 

instructions on how to begin the process. As described in 

§ 685.212(k), after the borrower consolidates into the 

Direct Loan program, he or she may receive an appropriate 

amount of relief on the principal balance.

Changes: None.

Process for Individual Borrowers (§ 685.222(e))

Comments: Multiple commenters and groups of commenters 

suggested that the Department unfairly limited the rights 

of institutions and exceeded its authority to recoup funds 

resulting from borrower defense claims. They noted that 
207

they believe that the HEA grants no such authority. 

Moreover, these commenters pointed out the difference 

between such silence and the specific authority in the HEA 

regarding closed school discharges, false certification 

discharges, and regarding Perkins Loans. 

The same commenters who asserted that the Department 

exceeded its authority with recoupment of successful 

borrower defense claims stated that the Department should 

outline the details of its process if it proves it has such 

authority. Several commenters requested more information 

about the recovery process from schools, focusing on the 

institution’s involvement in the process. Furthermore, 

some commenters requested a specific appeal process for 

attempts to recover funds from schools.

Discussion: As discussed more fully elsewhere in this 

preamble, the Department has ample legal authority to 

recover losses on borrower defenses from schools, and the 

absence of explicit statutory provision authorizing such 

recovery does not affect its authority. We are developing 

specific procedures for conducting such recovery actions 

that will reflect current regulations for appeals of audit 

and program review claims and actions to fine the school, 

or to limit, suspend, or terminate its participation. 

Changes: None.
208

Comments: Multiple groups of commenters supported the 

preponderance of evidence standard in the Department’s 

individual process proposed in § 685.222(e) and appreciated 

that borrowers would not need legal counsel to pursue a 

borrower defense. Multiple commenters also commented on 

the desire that the process not penalize borrowers for the 

absence of written documentation. They noted that many 

borrowers may not have items such as enrollment agreements 

or other items that might assist the Department in 

reviewing their claims. The commenters added that this 

should not be held against the borrowers, as schools 

frequently do not provide borrowers with copies of such 

documents, and borrowers may encounter difficulties in 

obtaining them. 

One commenter suggested that, when documents are not 

available because of the school’s failure to provide the 

borrower with proper documentation, the burden should shift 

to the school to disprove the claims from the borrower’s

attestation. 

Another commenter suggested that the Department 

specify that it will accept a student’s sworn testimony, 

absent independent corroborating evidence contradicting it, 

as fulfilling the preponderance of the evidence standard 

(which requires the borrower to persuade the decision maker 
209

that it is more likely than not that events happened or did 

not happen as claimed). In other words, the commenter 

suggested that, when a borrower submits sworn testimony but 

does not submit corroborating evidence, the Department 

should not take this to mean that there was no substantial 

misrepresentation or breach of contract. Another group of 

commenters suggested that the Department track similar 

claims and consider those claims as evidence when reviewing 

applications.

Another group of commenters recommended that the 

Department accept information on the application form as 

sufficient for the claim, requesting additional information 

only when necessary. This group of commenters pointed out 

that misrepresentations were often from oral statements 

made to the borrower that did not include any written 

evidence. Furthermore, this group of commenters requested 

that the Department fully use all available information it 

and other Federal agencies possess, rather than requesting 

it from borrowers.

Discussion: We disagree that the final regulations should 

specify what weight might be given to different types of 

evidence, such as borrower testimony or statements, under 

the preponderance of the evidence standard specified in § 

685.222(a)(2) for borrower defenses under the Federal 
210

standard for loans first disbursed after July 1, 2017. 

Under § 685.222(a)(2), the borrower has the burden of 

demonstrating, by a preponderance of the evidence, that it 

is more likely than not that the facts on which his or her 

borrower defense claim rests have been met. However, § 

685.222(e)(3) provides that for individually filed borrower 

defense applications, the designated Department official 

will also consider other information as part of his or her 

review of the borrower’s claim. As noted in the NPRM, 81 

FR 39337, in practice, the decision maker in a borrower 

defense proceeding would assess the value, or weight, of 

all of the evidence relating to the borrower’s claim that 

has been produced to prove that the borrower defense claim 

as alleged is true. The kind of evidence that may satisfy 

this burden will necessarily depend on the facts and 

circumstances of each case, including factors such as 

whether the claimant’s assertions are corroborated by other 

evidence. Accordingly, we decline to elaborate further on 

what specific types of evidence may or may not be viewed as 

satisfying the preponderance of evidence standard. 

Changes: None.

Comments: Several groups of commenters encouraged the 

Department to adopt a simple, accessible, and transparent 

process for borrowers. These commenters indicated support 
211

for a process that reduces inequities in resources so that 

borrowers interact only with the Department, even when 

additional information is needed from the school. In 

particular, numerous commenters expressed appreciation 

that, under the proposed regulations, borrowers would not 

be pitted against institutions, which generally possess 

significantly more resources. 

While generally supportive of the Department’s 

process, another group of commenters expressed concern for 

the potentially overwhelming number of applications that 

would be filed in connection with potential borrower 

defense claims and questioned the Department’s capacity to 

employ enough capable staff to handle the large workload. 

The same group noted the benefits of specifying timeframes 

for actions within the process, despite recognizing the 

difficulty in doing so.

Discussion: With these regulations, the Department works 

toward evening the playing field for students. Individual 

claims will be decided in a non-adversarial process managed 

by a Department official, and group claims would be brought 

by the Department against the school, not by students. 

Thus, the process does not require students to directly 

oppose schools. We appreciate the support that some 

commenters expressed for these processes.
212

As we discussed in the NPRM, the Department may incur 

administrative costs and may need to reallocate resources 

depending on the volume of applications and whether a 

hearing is required. 

After having received only a few borrower defense 

claims in over 20 years, the Department has now received 

more than 80,000 claims in just over two years. We 

responded by building an entirely new process and hiring a 

new team to resolve these claims. Our ability to resolve 

claims quickly and efficiently has grown and will continue 

to grow. Particularly because we are still growing our 

capacity, we are unable to establish specific timeframes at 

this point for processing claims. Additionally, processing 

time is considerably affected by the varied types and 

complexities of claims.

Changes: None.

Comments: One group of commenters strongly supported the 

Department’s pledge to provide written determinations to 

borrowers who submit borrower defense claims.

Discussion: We appreciate the support of these commenters.

Changes: None.

Comments: Another group of commenters noted the difficulty 

that many borrowers face in completing even seemingly 
213

simple forms and in explaining wrongdoing in a way that 

clearly makes a complex legal argument. 

Discussion: We appreciate the commenters’ concern and do 

not expect borrowers to submit a complicated, lengthy 

narrative requiring any legal analysis by the borrower to 

apply for relief. We specifically set out to design a 

process that would not be onerous for borrowers and that 

would not require third-party assistance, such as but not 

limited to an attorney. 

Changes: None.

Comments: Two commenters suggested using existing school 

complaint processes to resolve borrower defense claims 

prior to a Department review to reduce administrative 

burden on the Department and on institutions. 

Discussion: Nothing in these regulations prohibits a 

borrower from directly contacting an institution to resolve 

a complaint. Additionally, a borrower may pursue other 

paths to relief, such as filing a claim with a State 

consumer bureau or filing a lawsuit. However, at the point 

where a borrower approaches the Department for assistance, 

we take seriously the obligation to review the claim and to 

respond to the borrower. We believe this process provides 

the best avenue for relief when a borrower applies for a 

borrower defense claim. In addition to using data 
214

collected from the Department’s “FSA Feedback System,” the 

Department will also continue to partner with other Federal 

agencies that are engaged in the important work aimed of 

protecting the rights of students. Depending on the 

specifics of the case, these agencies may include the CFPB, 

DOJ, FTC, the SEC, and the Department of Defense among 

others. The Department will also look to State officials 

and agencies responsible for education quality, student 

financial assistance, law enforcement, civil rights, and 

consumer protection.

Changes: None.

Comments: Multiple commenters expressed support for the 

proposed prohibition on capitalization of interest when the 

Department suspends collection activity following receipt 

of a borrower defense application. However, one of these 

commenters objected to the Department prohibiting interest 

capitalization when collection resumes as a result of the 

borrower’s failure to submit appropriate documentation. 

The commenter believed this could lead to false claims by 

borrowers seeking to avoid repayment.

Discussion: We appreciate the commenters’ support for the 

prohibition of interest capitalization and believe it is in 

line with our concept of the appropriate use of 

capitalization, as the borrower is not newly entering 
215

repayment. Accordingly, we disagree with the commenter who 

objected to prohibiting capitalization upon resumption of 

collection activity where a borrower did not submit 

appropriate documentation. We believe more legitimate 

avenues exist for struggling borrowers to postpone or 

reduce payment rather than filing false borrower defense 

claims, and do not believe that the prohibition of interest 

capitalization in this narrow circumstance provides 

significant incentive for borrowers to incur the 

significant risks associated with filing false claims.

Changes: None.

Comments: One group of commenters noted the importance of 

reconsideration of borrower defense claims, especially for 

borrowers completing applications without assistance. This 

group, however, encouraged the Department to clearly 

explain the borrower’s right to reconsideration, rather 

than merely allowing borrowers to request reconsideration 

with the Department having discretion on whether to 

consider the application. 

Multiple commenters and groups of commenters expressed 

concern with the borrower’s ability to introduce new 

evidence for reconsideration in proposed § 685.222(e)(5). 

Specifically, these commenters noted concerns that 

individual claims could continue indefinitely. These 
216

commenters indicated that the Department should include 

reasonable time limitations for reconsideration of claims. 

Another commenter suggested that the Department 

official who made the determination of the original claim 

should not be permitted to review a request for 

reconsideration and suggested using a panel or board for 

such claims. 

Discussion: We highlight the distinction between 

reconsideration of an application and an appeal process. A 

borrower must submit new evidence in order for the 

Department to reconsider an application, and there is no 

appeal process. We believe it is important to allow a 

borrower to submit new evidence, which he or she may have 

only recently acquired. We do not intend to limit 

borrowers’ rights. However, there needs to be finality in 

the borrower defense process as well, and we do not believe 

it is appropriate to consider applications regarding claims 

that have already been decided unless there is clear 

demonstration that new evidence warrants that 

reconsideration. We will consider the commenters’ 

suggestions regarding the explanation of the 

reconsideration process in our communications with 

borrowers. 
217

We believe the limitations periods for borrower 

defense claims adequately address the concern about time 

limits and do not agree with imposing an artificial 

limitation on borrower applications for reconsideration for 

new evidence based on a specific number or time period.

We see no basis for requiring this evaluation of new 

evidence to be made by an individual other than the 

original decision maker. This is a reconsideration, not an 

appeal, and the original decision maker is in a position to 

efficiently make that decision.31 Therefore, we do not 

prohibit the same official from hearing the reconsideration 

claim.

Changes: None.

Comments: One commenter asked that we restrict a 

borrower’s ability to present new evidence in support of a 

claim already rejected. The commenter said that borrowers 

should be required to show good cause for why the evidence 

was not previously available.

Discussion: We disagree that borrowers should be required 

to show good cause for why evidence was not previously 

 

31 This is hardly unusual: under Social Security regulations, the hearing officer who conducts the 

disability hearing ordinarily conducts the reconsideration determination. 20 CFR 404.917(a). In 

addition, requests for relief from judgments – a somewhat comparable plea to the request for 

reconsideration at issue here are routinely considered by the judge that issued the original decision. 

Fed. R. Civ. P. 60. 
218

available. We recognize that borrowers may not have the 

same access to information that the Department or the 

school may have. Furthermore, we believe that the 

requirements for “new evidence” provide clear guidelines 

for what is required. Section 685.222(e)(5)(i) specifies 

that “new evidence” must be evidence that the borrower did 

not previously provide, but also must be relevant to the 

borrower’s claim, and was not identified by the decisionmaker as being relied upon for the final decision. For 

“new evidence” to meet this standard, the evidence cannot 

just be cumulative of other evidence in the record at the 

time, but must also be relevant and probative evidence that 

might change the outcome of the decision being 

reconsidered. 

Changes: None.

Comments: Multiple commenters suggested that the 

Department specifically permit schools to appeal decisions 

on any individual claim. One commenter added that schools 

would not file frivolous appeals, as the resulting workload 

is too time-consuming. The commenter further suggested 

that if schools are not provided with an appeal process, 

that the Department should provide schools with an 

opportunity to challenge the Department official’s decision 

during any related recoupment action.
219

Discussion: We do not include an appeals procedure in the 

individual borrower claim process. We believe the 

reconsideration process adequately allows borrowers to 

submit new evidence. However, as one commenter requested, 

the regulations do afford an opportunity to present a 

defense when the Department seeks to hold a school liable 

and recover funds in both the individual and group claim 

processes. 

Changes: None.

Comments: Although the Department outlined a separate 

process to recover funds from an institution, a group of 

commenters stated that the Department needed to include the 

borrower to ensure a fair process for the institution. 

Discussion: We believe that using a separate proceeding to 

determine whether a group of borrowers have meritorious 

claims, and if so, to recover from the school for losses on 

those claims, is an appropriate method to achieve a fair 

result. The procedure will accord the institution the 

right to confront witnesses on whom the Department would

rely, and to call witnesses on its own, as it currently has 

under procedures under subpart G of part 668. We also note 

that under § 685.222(j), borrowers are required to 

reasonably cooperate with the Secretary in any such 

separate proceeding. 
220

Changes: None.

Comments: One commenter suggested that borrowers should 

not be permitted to bring individual claims when the facts 

and circumstances have already been considered by hearing 

official in a group claim. The commenter expressed concern 

that proposed § 685.222(h) would allow for this to happen, 

effectively providing borrowers a second bite at the apple 

and violating the legal principle of res judicata. 

Discussion: We discuss the treatment of individual claims 

from a student who opted out of a group proceeding, or who 

disputes the outcome of the group proceeding decision as it 

pertains to his or her claim, in our discussion of the 

group process. 

Changes: None.

Comments: A group of commenters suggested that the 

Department modify language in proposed § 

685.222(e)(1)(i)(A) so that references to the school more 

clearly emphasize that we mean the school named on the 

borrower defense to repayment application. 

Discussion: We agree that the commenter’s suggested change 

clarifies the intent of the regulation.

Changes: We revised § 685.222(e)(1)(i)(A) to reference 

“the” named school.
221

Comments: One commenter suggested that the Department make 

available on an annual basis a list of all borrower defense 

applications submitted (minus any personally identifiable 

information) along with outcome of the request. The goal 

of this list would be to provide transparent information to 

borrowers.

Discussion: We support transparency in this process and 

will consider this suggestion as we move forward with 

implementation of the individual and group processes.

Changes: None.

Comments: One commenter suggested that the Department 

proactively conduct a review of all federally guaranteed 

loans back to 1995 (when the commenter considers the 

regulations to have been last considered) to determine 

potentially eligible loans for a defense to repayment. The 

commenter recommended that the Department identify loans 

for which there is a high likelihood of granting a 

discharge stemming from lawsuits, investigations, etc.

Discussion: We do not believe that the Department 

possesses adequate information to accurately identify 

potentially eligible loans on such a large scale. As 

borrowers have had the ability to bring borrower defense 

claims under the current regulations for some time, we do 

not believe a review of data over more than 20 years is 
222

warranted. Additionally, the Department cannot determine 

through such a review whether specific students were 

subjected to misrepresentation, for example, whether they 

relied on such misrepresentations, and how they were 

affected if they did so. The Department must determine if 

relief is warranted, and merely obtaining a loan to attend 

an institution is not adequate to suggest relief is due. 

Changes: None.

Comments: None.

Discussion: In further reviewing proposed § 

685.222(e)(3)(ii), we have determined that including an 

affirmative duty upon the Department to identify to the 

borrower records that may be relevant to the borrower’s 

borrower defense claim is too burdensome because it would 

require the expenditure of administrative resources and 

time, even if not desired by the borrower. As a result, we 

have revised the § 685.222(e)(3)(ii) to provide that the 

Department will identify records upon the borrower’s 

request. 

We note that we expect that consideration of 

individual borrower defense claims will lead to information 

gathering as part of enforcement investigations. When such 

an investigation is ongoing, we may defer release of 

records obtained in that investigation to individual 
223

claimants to protect the integrity of the investigation.

If requested, records will be made available to individual 

claimants after the investigation is complete and prior to 

the borrower defense decision. We may defer consideration 

of individual claims where we determine that releasing 

potentially relevant records prior to the completion of the 

investigation would be undesirable.

We have also determined that the parallel 

identification of records to schools, which under the 

proposed regulations was permissive, would also cause 

unnecessary administrative delay, given that the factfinding process described in § 685.222(e) will not decide 

any amounts schools must pay the Secretary for losses due 

to the borrower defense at issue. The school will have the 

right and opportunity to obtain such evidence, and present 

evidence and arguments, in the separate proceeding 

initiated by the Secretary under § 685.222(e)(7) to collect 

the amount of relief resulting from the individually filed 

borrower defense claim.

Changes: We have revised § 685.222(e)(3)(ii) to provide 

that the designated Department official will identify to 

the borrower the records the Department official considers 

relevant to the borrower defense upon request. We have 
224

also revised § 685.222(e)(3)(ii) to remove the 

identification of records to schools.

Comments: One commenter expressed support for the 

Department’s proposal to allow claims made by individuals 

as well as groups. However, the commenter suggested that a 

right of appeal for both institutions and borrowers be 

provided in the individual claims process as to open 

schools.

Discussion: During the negotiated rulemaking sessions, the 

Department heard from negotiators as to the importance of a 

timely and streamlined process for borrower defense claims. 

In consideration of such concerns, the Department believes 

that it is appropriate that decisions made by the 

designated Department official presiding over the factfinding process for individually filed applications be 

final agency decisions to avoid delays that may be caused 

by an appeals process. Borrowers are able to seek judicial 

review of final agency decisions in Federal court if 

desired. See 5 U.S.C. §§ 702 & 704. Additionally, the 

borrower will also be able to request that the Secretary 

reconsider his or her claim upon the identification of new 

evidence under § 685.222(e)(5).

Although the fact-finding process described in 

§ 685.222(e) provides schools with an opportunity to submit 
225

information and a response, as discussed in the NPRM, 81 FR 

39347, the fact-finding process for individually filed 

applications do not determine the merits of any resulting 

claim by the Department for recovery from the school. 

Rather, § 685.222(e)(7) provides that the Secretary may 

bring a separate proceeding for recovery, in which the 

school will be afforded due process similar to what schools 

receive in the Department’s other administrative 

adjudications for schools. Given that the institution’s 

potential liability for the Department’s recovery is to be 

adjudicated in this separate process, the Department does 

not believe that an appeal right for schools should be 

included in the § 685.222(e) fact-finding process. As 

discussed earlier in this section, the Department is 

developing rules of agency practice and procedure for 

borrower defenses that will be informed by the Department’s 

rules and protections for its other administrative 

adjudications.

Changes: None.

Comments: None.

Discussion: In further reviewing proposed § 685.222(e)(5), 

the Department has determined that if a borrower defense 

application is under review because a request for 

reconsideration by the Secretary has been granted under § 
226

685.222(e)(5)(i) or because a borrower defense application 

has been reopened by the Secretary under § 

685.222(e)(5)(ii), the borrower should be granted 

forbearance or, if the borrower is in default on the loan 

at issue, then the procedure for a defaulted loan should be 

followed, as when the borrower filed an initial borrower 

defense to repayment application.

Changes: We have revised § 685.222(e)(5) to provide that 

the forbearance and defaulted loan procedures will be 

followed when the Secretary has granted a request for 

reconsideration or has reopened a borrower defense 

application.

Group Process for Borrower Defenses

Statutory Authority

Comments: Some commenters argued that the Department’s 

proposed group borrower defense process would violate the 

HEA. These commenters stated that section 455(h) of the 

HEA specifically limits the Department’s authority to 

specifying acts or omissions that an individual borrower, 

as opposed to a group, may assert as a defense to 

repayment. These commenters argued that the creation of a 

process that would award relief to a borrower who has not 

asserted a defense to repayment exceeds the Department’s 

statutory authority. A few commenters also stated that the 
227

HEA does not authorize the Department to act as a class 

action attorney, and stated that such authority requires 

specific statutory authorization. One commenter suggested 

that any provision providing that the Secretary may 

identify borrowers who have not filed a borrower defense 

application as part of a group process for borrower defense 

should be removed.

One commenter stated a recent recommendation from the 

Administrative Conference of the United States found that, 

while the APA does not specifically provide for aggregate 

adjudication, it does not foreclose the possibility of such 

procedures. The recommendation also stated that agencies 

generally have broad discretion in formal and informal 

adjudications to aggregate claims.

Discussion: We disagree with commenters’ assertion that 

the proposed group process is in violation of the HEA. The 

Department’s statutory authority to enact borrower defense 

regulations is derived from section 455(h) of the HEA, 20 

U.S.C. 1087e(h), which states that “the Secretary shall 

specify in regulations which acts or omissions of an 

institution of higher education a borrower may assert as a 

defense to repayment of a loan....” While the language of 

the statute refers to a borrower in the singular, it is 

common default rule of statutory interpretation that a term 
228

includes both the singular and the plural, absent a 

contrary indication in the statute. See 1 U.S.C. 1. We 

believe that, in giving the Secretary the discretion to 

“specify which acts or omissions” may be asserted as a 

defense to repayment of loan, Congress also gave the 

Department the authority to determine such subordinate 

questions of procedure, such as the scope of what acts or 

omissions alleged by borrowers meet the Department’s 

requirements, how such claims by borrowers should be 

determined, and whether such claims should be heard 

contemporaneously as a group or successively, as well as 

other procedural issues. See FCC v. Pottsville Broad. Co., 

309 U.S. 134, 138 (1940).

We believe that this discretion afforded the Secretary 

under the statute not only allows it to determine borrower 

defense claims on a group basis and to establish such 

processes and procedures, but also authorizes the 

Department to proactively identify and contact borrowers 

who may qualify for relief under the borrower defense 

regulations based upon information in its possession. As 

described in § 685.222(f), the Department would notify such 

borrowers of the opportunity to participate in the group 

process, and inform such borrowers that by opting out, the 

borrower may choose to not assert a borrower defense. By 
229

such notice and opt-out, borrowers who had not previously 

filed an application for borrower relief may assert a 

borrower defense for resolution in the group borrower 

defense process. 

In response to comments that the Department is not 

authorized to act as a class action attorney, we note that, 

in bringing cases before a hearing official in the 

processes described in § 685.222(f), (g), and (h), the 

Department would not be bringing claims as the 

representative of the borrowers. Although the Department 

would be presenting borrower defense claims for borrowers, 

with their consent as described above, the Department 

official would be bringing claims on its own behalf as the 

administrator of the Direct Loan Program, or alternatively 

as a beneficiary of the fiduciary relationship between the 

school and the Department as explained earlier in “Borrower 

Defenses—General.” See also Chauffeur’s Training School v. 

Spellings, 478 F.3d 117 (2d Cir. 2007). We believe that 

the group process we adopt here will facilitate the 

efficient and timely adjudication of not only borrower 

defense claims for large numbers of borrowers with common 

facts and claims, but will also conserve the Department’s 

administrative resources by also adjudicating any 
230

contingent claim the Department may have for recovery from 

an institution. 

Changes: None.

Independence of Hearing Officials

Comments: Many commenters expressed concerns that the 

group borrower defense process would present conflict of 

interest or separation of powers issues and would be 

unfair, given that the proposed process involves a 

Department-designated employee presenting evidence to a 

hearing official who also has been appointed by the 

Secretary, with appeals to be decided by the Secretary. 

Several commenters stated that this issue was of particular 

concern, given the limited or unclear role afforded to 

institutions to participate in the borrower defense process 

and to appeal decisions proposed by the Department. One 

commenter acknowledged that while other Federal agencies, 

such as the FTC, allow agencies to act as both prosecutor 

and judge, such proceedings are governed by the APA, 5 

U.S.C. 554. The commenter stated that the APA provides 

statutory safeguards that ensure fair proceedings, such as 

prohibitions on ex parte communications and prosecutorial 

supervision of the employee presiding over the proceeding. 

This commenter suggested that group borrower defense claims 
231

be presided over by the Department’s Office of Hearings and 

Appeals. 

One commenter stated that determinations in the group 

process should be made by a representative who is not 

affiliated with the Department. Another commenter stated 

that the office responsible for presenting the claim on 

behalf of a group in a group borrower defense proceeding 

should not be the same office that decides the group claim. 

Several commenters suggested specifically that 

determinations be made by administrative law judges or 

their equivalent, who have a level of expertise and 

independence from the Department. One commenter stated 

that the regulations should provide for determinations in 

group borrower defense processes to be made by an

administrative judge.

One commenter stated that the Department should seek 

and use independent hearing officials with experience in 

handling complex disputes, given the large numbers of 

students that may be impacted by such proceedings.

One commenter stated that the Department’s proposed 

group borrower defense process violates both the separation 

of powers doctrine in Article III and the jury trial 

requirement of the Seventh Amendment of the Constitution, 
232

by vesting in the Department exclusive judicial power to 

determine private causes of action without a jury.

Discussion: The Department understands the concerns raised 

by commenters regarding the objectivity and independence of 

the hearing official in group borrower defense cases. 

However, administrative agencies commonly combine both 

investigatory and adjudicative functions, see Winthrow v. 

Larkin, 421 U.S. 35 (1975), and due process does not 

require a strict adherence to the separation of those 

functions, see Hortonville Joint School District No. 1 v. 

Hortonville Educ. Ass’n., 426 U.S. 482, 493 (1976). The 

Department is no different and performs both investigative 

and adjudicative functions in other contexts, including 

those that involve borrower debts32 and institutional 

liabilities.33 

We disagree that the regulations should specify that 

the hearing official presiding over the fact-finding 

processes in § 685.222(f) to (h) must be an administrative 

law judge or an administrative judge. As explained in the 

NPRM, 81 FR 39340, the Department uses the term “hearing 

 

32 For example, the Department provides both schools and borrowers the opportunity to request and 

obtain an oral evidentiary hearing in both offset and garnishment actions against a borrower and in 

an offset action against a school. See 34 CFR 30.25 (administrative offset generally); 34 CFR 

30.33(federal payment offset); 34 CFR 34.9 (administrative wage garnishment). 

33 See 34 CFR part 668, subparts G and H (proceedings for limitation, suspension, termination and 

fines, and appeal procedures for audit determinations and program review determinations).
233

official” in its other regulations, such as those at 34 CFR 

part 668, subparts G and H. In those contexts, hearing 

officials make decisions and determinations independent of 

the Department employees initiating and presenting evidence 

and arguments in such proceedings. Similarly, the 

Department would structure the group borrower defense factfinding processes so that they are presided over by hearing 

officials that are independent of the employees performing 

investigative and prosecutorial functions for the 

Department.

As stated in the NPRM, 81 FR 39349, the group borrower 

defense process involving an open school34 under 

§ 685.222(h) would be structured to provide the substantive 

and procedural due process protections both borrowers and 

the school are entitled to under applicable law, including 

any required under the APA, 5 U.S.C. 554. The Department 

is developing rules of agency procedure and practice 

governing the fact-finding processes described in both 

§ 685.222(e) and § 685.222(f) to (h), which will be 

informed by the procedures and protections established by 

 

34 As described in § 668.222(g), the “closed school” group borrower defense process would apply 

only when the school in question has both closed and provided no financial protection available to 

the Secretary from which to recover losses arising from borrower defenses, and for which there is no 

entity from which the Secretary may recover such losses. Or, in other words, when there is no entity 

from whom the Department may obtain a recovery. 
234

the Department in its other administrative proceedings, 

such as 34 CFR part 668, subparts G and H. 

As explained under “General,” we also disagree that 

the proposed regulations violate Article III and the 

Seventh Amendment of the Constitution. The rights at issue 

in the proposed borrower defense proceedings have the 

character of public rights, which may be consigned by 

Congress to the Department for adjudication. 

Changes: None.

Single Fact-Finding Process 

Comments: One commenter stated that the Department’s 

proposed single fact-finding process for group claims 

described in § 685.222(f) to (h), where a hearing official 

makes determinations as to both institutional liability and 

relief for borrower defense claims, is not justified. This 

commenter stated that the Department had not presented a 

factual basis for the change from the approach in § 

685.206(c), which states that the Department may initiate a 

proceeding to require the school to pay the amount of the 

loan to which a successful borrower defense lies.

A group of commenters stated that the Department 

should not engage in a single fact-finding process for 

group claims. These commenters suggested that the 

Department should gather and consider evidence regarding 
235

borrower defenses, render a decision on borrower relief, 

and then initiate a separate proceeding for recovery from 

schools. The commenters stated that this approach would be 

similar to the Department’s proceedings for group borrower 

defense claims against closed schools and for individually 

filed applications, as well as the Department’s proposed 

processes for closed school and false certification 

discharges.

Discussion: We disagree with commenters that relief for 

borrower defense claims should be determined in a separate 

proceeding from the Department’s right to recovery from 

schools for the open school group borrower defense process 

described in § 685.222(h). For borrower defenses asserted 

as to an open school, the Department is not only 

responsible for making determinations on relief for claims, 

but may also be entitled to recover against the school. 

This right to recover, which will also turn on the facts of 

the borrower defense claim, must be decided in a proceeding 

where the school is afforded procedural and substantive due 

process protections. Particularly in situations where the 

Department has determined that there are multiple claims 

against a school with common facts and claims, we believe 

that a single fact-finding proceeding to determine both 

borrowers’ rights to relief, the amount of relief to be 
236

provided, and the Department’s contingent right of recovery 

against an institution will better serve the interests of 

adjudicative efficiency and of conserving agency resources 

than individual borrower defense determinations followed by 

separate proceedings against the school. 

Changes: None.

Group Process: Bifurcation

Comments: One commenter suggested that the Department use a 

bifurcated process so that the group process is used to 

resolve comment questions of fact and law, and then require 

borrowers in the putative group to file individual claims 

to determine the appropriate amount of relief. Such 

bifurcated proceedings, argued the commenter, would avoid 

windfalls to borrowers who would not have otherwise sought 

out relief and provide exact damages to students seeking 

relief.

Discussion: Section 685.222(f)(1) provides the Department 

with the discretion to form groups that may be composed 

only of borrowers who have filed applications through the 

process in § 685.222(e) or who the Department has 

identified from other sources, as well as groups that may 

include borrowers with common facts and claims who have not 

filed applications. In situations when groups may be 

composed only of borrower defense applicants, or if the 
237

hearing official determines that relief for a group with 

non-applicants can be ascertained without more 

individualized evidence, bifurcated proceedings may not be 

necessary or suitable. However, we believe that the 

regulations do not prevent a hearing official from using 

his or her discretion to structure a fact-finding process 

under § 685.222(g) or (h) as necessary based upon the 

circumstances of each group case, and including ordering a 

bifurcated process if appropriate. 

Changes: None.

Meet and Confer Prior to Initiation of Group Process

Comments: Several commenters suggested the Department 

require or allow borrowers to confer with institutions to 

allow schools to remedy claims, prior to a borrower’s 

participation in the Department’s borrower defense process. 

Discussion: We acknowledge that borrowers and schools may 

communicate and confer outside of the formal processes 

established for borrower defense. However, we do not 

believe it is necessary that the regulations include a 

specific requirement for schools and borrowers to meet and 

confer prior to a borrower’s participation in a group 

borrower defense process under § 685.222(f) to (h).

Changes: None.
238

Initiation of Group Process: Secretarial Discretion

Comments: Many commenters supported the inclusion of a 

group borrower defense process. However, these commenters 

objected to the Department’s proposal in § 685.222(f) that 

the initiation of a group borrower defense process be at 

the discretion of the Secretary. Some commenters argued 

that the discretion to initiate a group borrower defense 

process should not be given to the Secretary, whose 

decision may be influenced by policy or political 

considerations. These commenters also objected to the 

Department’s proposal that the decision to initiate a group 

process would consider fiscal impact as a possible factor 

for consideration, stating that the decision to grant 

relief to large numbers of students should not be based 

upon cost. 

Other commenters stated that the Department should 

provide clear guidelines, triggers, or conditions for 

requiring the initiation of a group process, particularly 

for groups of borrowers who have not filed applications 

with the Department (also referred to as automatic group 

discharges). A group of commenters suggested that such 

conditions should include petitions presenting plausible 

prima facie cases, evidence found by the Department that 

might present plausible prima facie cases, or some 
239

threshold number of cases. One commenter suggested that 

the regulation include provisions whereby multiple 

individual claims would be grouped together if the 

borrowers had attended the same school or trigger an 

investigation by the Department as the claims and the 

feasibility of initiating a group process. Another 

commenter suggested that the regulation include a nonexhaustive list of situations that would require the 

initiation of a group process, absent a written explanation 

from the Department as to why such a group process is not 

appropriate, or why borrowers who had not filed an 

application were not included if a group process was 

initiated. 

One commenter stated that borrowers should be allowed 

to initiate group borrower defense claims, either for 

themselves or through representation by consumer advocates, 

legal aid organizations, or other entities, in addition to 

the Secretary. This commenter stated that possible 

concerns that allowing independent representation would 

give rise to an industry seeking to take advantage of 

borrowers, do not apply if claims are submitted by entities 

such as legal aid organizations, consumer advocates, and 

law enforcement agencies.
240

A few commenters stated that borrowers should be 

allowed to access borrower defense discharges as a group on 

the bases of actions by local, State, and Federal entities. 

One commenter stated that to protect taxpayers, group 

claims should be initiated only in extreme cases, and 

should only come after a final, non-appealable decision has 

been made by a Federal or State agency or court in a 

contested proceeding. 

Discussion: We disagree with commenters that factors or 

conditions mandating the initiation of a group process 

should be included in the regulation. As explained in the 

NPRM, 81 FR 39348, we believe that the Department is best 

positioned to make a determination as to whether the 

circumstances at hand would warrant the initiation of a 

group process. We also believe that it is also appropriate 

for the Department to consider the factors listed in 

§ 685.222(f), such as the existence of common facts and 

claims among a putative group of borrowers, fiscal impact, 

and the promotion of compliance. As explained earlier in 

this section and elsewhere in this preamble, the group 

process will not only determine relief for borrower 

defenses for the group, but will also serve as the method 

by which the Department will receive an adjudication as to 

its right of recovery against a school on the basis of its 
241

losses from any relief awarded to borrowers in the group. 

We believe that it is important that the Department retain 

the discretion to decide if the circumstances warrant the 

initiation of a group process to decide its right of 

recovery from a school. However, we do not believe that 

the initiation of the group process will prevent borrowers 

from being able to proactively seek relief. Borrowers may 

choose to file individual applications for relief under § 

685.222(e) or, even if their applications are identified by 

a designated Department official for a group process, 

choose to opt-out of the group process and receive 

determinations through the individual application process 

if desired. As noted in the NPRM, 81 FR 39348, the 

Department welcomes information from any source, including 

State and other Federal enforcement agencies, as well as 

legal aid organizations, that may assist it in deciding 

whether to initiate group borrower defense process under 

§ 685.222(f), (g), and (h).

We explain our reasoning as to the different standards 

that may form the basis of a borrower defense in the 

respective sections for those standards. We believe it is 

appropriate that group proceedings should be initiated for 

claims based upon any of the allowed standards, as opposed 
242

to just one of the standards or standards outside of those 

described in the regulations. 

Changes: None.

Third-Party Petitions for Initiation of Group Process

Comments: Many commenters stated that outside entities, 

such as student advocates, State AGs, and legal aid 

attorneys should be given a formal role in the group 

borrower defense process. Some of these commenters urged 

the Department to adopt language proposed at the third 

session of negotiated rulemaking in March 2016, which would 

have explicitly established that State or Federal 

enforcement agencies, or legal aid organization, may submit 

a written request to the Department identifying a group of 

borrowers for the initiation of a group borrower defense 

process. Under this proposed language, the Department 

would have responded to such requests in writing. These 

commenters argued that such entities have direct contact 

with borrowers and are likely to have necessary information 

for proving borrower defense claims. Commenters also 

stated that allowing third party petitions is important, 

given that the borrower defense process only allows an 

individual borrower to dispute a group borrower defense 

decision in the proposed regulation by filing an individual 

application. One commenter stated that allowing such third 
243

party requests will result in faster adjudications for 

borrowers and administrative cost-savings for taxpayers. 

Another commenter stated that a formal referral process 

would recognize both the states’ role in the triad of 

higher education oversight and the States’ efforts to 

protect consumers through State general consumer protection 

laws. 

A group of commenters argued that a right for such 

outside entities should be included given that group 

determinations will result in the most widespread relief, 

will be the easiest way for borrowers to access relief, and 

are the only proposed method by which borrowers who have 

not filed applications may access relief.

In response to the Department’s reasoning in the NPRM, 

81 FR 39348, that informal communication facilitates 

cooperation with such entities, one commenter stated that 

providing such third parties with a formal petition in the 

regulation would not preclude informal contact and 

communication, but would rather increase transparency and 

efficiency. The commenter also suggested that, to address 

any concerns that parties that may take advantage of 

borrowers, that the final rule should allow the Secretary 

to decline to respond to a petition if the organization 
244

does not appear to be a bona fide organization that 

represents borrowers.

Discussion: We disagree that a formal right of petition 

for entities such as State AGs, advocacy groups, or legal 

aid organizations should be included in the regulations. 

As explained in the NPRM, 81 FR 39348, in the Department’s 

experience, cooperation with such outside entities has been 

best facilitated through informal communication, which 

allows for more candor and flexibility between the 

Department and interested groups and parties. The 

Department always welcomes cooperation and input from other 

Federal and State enforcement entities, as well as legal 

assistance organizations and advocacy groups. To this end, 

the Department anticipates creating a designated point of 

contact for State AGs to allow for active communication on 

borrower defense issues and also actively encourages a 

continuation of cooperation and communication with other 

interested groups and parties. As also reiterated in the 

NPRM, id., the Department is ready to receive and make use 

of evidence and input from any interested party, including 

advocates and State and Federal agencies. 

We also reiterate our position that the determinations 

arising from the borrower defense process should not viewed 

as having any binding effect on issues, such as causes of 
245

actions that borrowers may have against schools under State 

or other Federal law, that are not properly within the 

purview of the Department. We also encourage borrowers and 

their representatives to weigh all available avenues for 

relief, whether it is through the borrower defense process 

or through avenues outside of the Department.

Changes: None.

Challenges to the Initiation of a Group Process

Comments: Many commenters expressed concern that the group 

borrower defense process would not include an opportunity 

for schools to dispute the initiation of a group process 

and the formation of the group. One commenter stated that 

the lack of a provision for schools to contest the 

formation of the group was in violation of due process. 

Several commenters expressed concern that schools are not 

given a right to contest the Department’s decision as to 

whether there are “common facts and claims” to initiate a 

group process and requested clarification of that factor. 

Several commenters stated that the Department’s proposal 

effectively would allow the Department to certify a class, 

without any of the procedural protections available to 

defendants in a class proceeding under Federal Rule of 

Civil Procedure 23. One commenter expressed concern that 

the proposed regulation does not require that the 
246

Department initiate a group process only where common facts 

and claims are found among the borrowers in the group, but 

rather gives the Secretary discretion to consider a 

nonexclusive list of factors. One commenter stated that 

the Department should define the sources of information the 

Department would use to identify borrowers for inclusion in 

a group process. 

One commenter stated that by not providing a review of 

the Department’s initiation or group certification decision 

by the hearing official or allowing a challenge by the 

school, and by proposing that the Department’s decision to 

initiate a group process may consider the factor of 

“compliance by the school or other Title IV participants,” 

that the purpose of the group borrower defense process is 

to hold schools accountable and make them examples to the 

industry, and not to efficiently handle claims before the 

Department.

Discussion: We disagree that the regulations should 

include an explicit step by which an institution may 

dispute the formation or composition of a group under 

§ 685.222(f). As discussed previously in this section, the 

Department is developing agency rules of practice and 

procedure for borrower defense, which will be informed by 

the legal requirements for administrative adjudications and 
247

the due process protections provided in the Department’s 

other administrative adjudications. For instance, we will 

consider the proceedings including those under 34 CFR part 

668, subparts G and H, which allow for standard motion 

practice and interlocutory appeals. We believe that, as 

proposed, § 685.222(f), (g), and (h) provides hearing 

officials with the flexibility and discretion to allow 

motions by parties as is deemed appropriate. 

We believe that it is appropriate that § 685.222(f) 

notes that the Department may generally consider a 

nonexhaustive list of factors in deciding to initiate a 

group claim. As described earlier, we believe it is 

important for the Department to retain discretion in 

deciding whether to initiate a proceeding to adjudicate its 

right of recovery from a school, as a contingent claim to a 

hearing official’s relief determination for the borrower 

defense claims of a group of borrowers in the same process. 

Similarly, we believe that it is important for the 

Department to retain the flexibility to bring groups of 

varying sizes or types before a hearing official in a group 

process, including groups that are formed in a manner more 

akin to a joinder of parties under Federal Rule of Civil 

Procedure 20 than to a class action under Federal Rule of 

Civil Procedure 23. 
248

Regarding the sources of information the Department 

will use to identify borrowers for inclusion in a group 

process, as explained in the NPRM, in addition to 

applications submitted through the process in § 685.222(e), 

the Department also may identify borrowers from records

within its possession or from information that may be 

provided to the Department by outside sources. We do not 

believe further clarification as to such sources of the 

information is necessary.

We disagree that consideration of the compliance 

impact of a group borrower defense claim is inappropriate 

for the initiation of a group process and also disagree 

that this factor lends an appearance of bias or unfairness 

to the fact-finding processes described in § 685.222(f), 

(g), and (h). As discussed above, the procedure we will 

use for the group process will provide the institution with 

due process protections very similar to those that the 

Department now uses when it fines an institution or 

terminates the eligibility of an institution to participate 

in the title IV, HEA programs, which are found in current 

subpart G of part 668. These rules do not preclude motion 

practice, nor will the rules we develop. Moreover, given 

that such proceedings will involve the Department’s right 

of recovery against schools, we believe that is appropriate 
249

for the regulations to reflect that the Department will 

consider a number of factors in its decision whether to 

initiate a process for the adjudication of such recovery by 

the Department. As stated in the NPRM, the group borrower 

defense process is intended to provide simple, accessible, 

and fair avenues to relief for borrowers, and to promote 

greater efficiency and expediency in the resolution of 

borrower defense claims, and we believe this structure 

furthers that goal.

Changes: None.

Members of the Group

Comments: Many commenters supported the Department’s 

proposal under § 685.222(f)(1)(ii) that borrowers who may 

not have filed an application for borrower defense may be 

included as members of a group for a determination of 

relief. Such commenters urged the Department to establish 

criteria requiring the initiation of such a group process.

A number of other commenters opposed the proposal and 

suggested that only borrowers who have filed an individual 

claim be included in the group process. These commenters 

stated that limiting group members to applicants would 

ensure that only borrowers who have actually been harmed 

would receive relief. Other commenters also argued that 
250

non-applicants should not be included in the group process, 

due to concerns about the use of borrowers’ personal 

information and consent.

Other commenters stated that borrowers should only be 

allowed to participate in the group process if they 

affirmatively opt-in to the process. Several of these 

commenters also cited concerns about the use of borrowers’ 

personal information and consent if an opt-out method is 

used. 

Discussion: We appreciate the commenters’ support for the 

use of a group process to resolve claims for a group with 

non-applicant borrowers as described in 

§ 685.222(f)(1)(ii). However, as discussed earlier in this 

section, we believe that it is appropriate that the 

Department retain the discretion to initiate the group 

process, given that the Department will have the most 

information regarding the circumstances and the 

Department’s contingent interest in the proceedings. 

We disagree with the commenters that suggested that 

the group processes described in § 685.222(f), (g), and (h) 

should only include borrower defense applicants or that we 

should require borrowers to affirmatively opt-in to the 

process. We believe that, where the Department has decided 

to bring a group borrower defense proceeding and non-
251

applicant borrowers with common facts and claims can be 

identified, such borrowers should also be entitled to the 

benefits of the designated Department official’s advocacy 

and the opportunity to obtain relief and findings in such 

proceedings. Additionally, providing such borrowers with 

an opportunity to opt-out of the proceedings, given 

sufficiency of the notice to be provided by the Department 

to such borrowers, follows well-established precedent in 

class action law. See, e.g., Phillips Petroleum Co. v. 

Shutts, 472 U.S. 797 (1985). 

The Department will continue to safeguard borrowers’ 

personal information in this process, according to its 

established procedures. 

Changes: None.

Comments: None.

Discussion: In further reviewing proposed § 685.222(f)(2), 

the Department has determined that if a group process for 

borrower defense is initiated, and the Secretary has 

identified a borrower who has not filed a borrower defense 

application pursuant to § 685.222(f)(1)(ii), the borrower 

should be granted forbearance or, if the borrower is in 

default on the loan at issue, then the procedure for a 

defaulted loan should be followed, as if the borrower had 
252

filed a borrower defense to repayment application under § 

685.222(e)(2).

Changes: We have revised § 685.222(f)(2) to provide that 

the forbearance and defaulted loan procedures will be 

followed for members of a group identified by the Secretary 

who have not filed a borrower defense application.

Opt-out for Group Discharge; Reopening by the Secretary 

after Determination Is Made

Comments: A number of commenters objected to the 

Department’s proposal in § 685.222(i)(2) that borrowers 

would be given an opportunity to opt-out of a group 

determination of relief. One commenter stated that 

providing borrowers with an opt-out would provide borrowers 

with the ability to bring successive, identical claims in 

the group and individual processes, and would create 

unpredictability and administrative inefficiencies. The 

commenter stated that borrowers who have agreed to be part 

of the group process should be bound by any resulting 

decision. One commenter stated that allowing only one 

opportunity for a borrower to opt-out of the group process 

would be consistent with Federal Rule of Civil Procedure 

23, prevent uncertainty and inconsistency, and would 

further the purpose of the group borrower defense process 
253

to promote efficiency and expediency in the resolution of 

claims. 

Other commenters stated that allowing borrowers to 

opt-out of a denial of a group claim, to file an individual 

claim, would place an undue burden on schools to defend the 

same claim multiple times. Some of these commenters stated 

that this situation would deprive schools of protection 

from double jeopardy. These commenters expressed concern 

that the financial resources schools would have to expend 

to defend such claims would lead to tuition increases for 

students. Several commenters stated that allowing such an 

opt-out would allow students to file multiple, unjustified 

claims for the purpose of delaying repayment.

One commenter also suggested that a time limit be 

imposed upon the Secretary’s ability to reopen a borrower’s 

application is bound by any applicable limitation periods. 

Several commenters stated that relief in the group process 

should be opt-out only.

Discussion: We appreciate the concern raised by commenters 

that allowing an opt-out for borrowers after a 

determination for relief has been made will subject schools 

to continuing litigation risk and uncertainty. As a 

result, we will modify § 685.222(i) to remove the post-
254

determination opt-out opportunity for borrowers in group 

proceedings. 

We disagree that a time limit should be placed on the 

Secretary’s ability to reopen a borrower’s application. We 

believe that if the Department becomes aware of new 

evidence that would entitle a borrower to relief under the 

regulations, then the borrower is entitled to relief 

regardless of the passage of time. 

Changes: We have revised § 685.222(i) to remove the 

opportunity for a borrower to opt-out of the proceedings 

after a determination for relief has been made in a group 

proceeding.

Comments: None.

Discussion: In further reviewing proposed § 685.222(g)(4) 

and (h)(4), the Department has determined that if a 

borrower defense application is under review because a 

borrower defense application has been reopened by the 

Secretary under § 685.222(e)(5)(ii), the borrower should be 

granted forbearance or, if the borrower is in default on 

the loan at issue, then the procedure for a defaulted loan 

should be followed, as when the borrower filed an initial 

borrower defense to repayment application.

Changes: We have revised § 685.222(g)(4) and (h)(4) to 

provide that the forbearance and defaulted loan procedures 
255

will be followed when the Secretary has reopened a borrower 

defense application.

Due Process Proceedings

Comments: Several commenters stated that the proposed 

regulations do not provide details of how and what schools 

may dispute in the group borrower defense fact-finding 

process, and requested clarification in the final 

regulations. Other commenters expressed concern that the 

proposed group fact-finding process does not provide 

sufficient due process protections for schools. These 

commenters emphasized that participation by schools would 

create a more fair process and increase the reliability of 

the results. 

One commenter stated that the limited protections in 

the proposed group borrower defense process does not 

provide schools with an opportunity to confront and crossexamine adverse witnesses and thus does not satisfy the due 

process requirements established in Mathews v. Eldridge, 

424 U.S. 319 (1976); Goldberg v. Kelly, 397 U.S. 254 

(1970); and Greene v. McElroy, 360 U.S. 474 (1959) for 

depriving schools of their property rights to funds already 

received. Several commenters suggested that the Department 

use the procedures in 34 CFR part 668, subpart H, to ensure 

due process protections for schools.
256

Commenters expressed concern about institutions’ 

opportunities to receive notice and evidence in the 

proposed group borrower defense process. Many of these 

commenters expressed concern and requested clarification 

regarding the Department’s proposal in § 685.222(f)(2)(iii) 

that notice to the school of the group process would occur 

“as practicable.” One commenter suggested that we include 

language specifying that no notice will be provided if 

notice is impossible or irrelevant due to a school’s 

closure. Other commenters expressed concern that the 

proposed regulations do not specify whether the scope of a 

group will be disclosed to schools and stated that schools 

must be aware of the members of the group in order to be 

able to raise a defense. Another commenter expressed 

concern that the proposed regulations do not require the 

Department to notify the school as to the basis of the 

group; the initiation of the borrower defense process; of 

any procedure or timeline for requesting records, providing 

information to the Department, or making responses; or 

provide schools with an opportunity to appear at a hearing.

Several commenters stated that institutions should be 

provided with notice and copies of all the evidence 

presented underlying the borrower defense claims in a group 

process. Another commenter stated that the proposed 
257

regulation gives the Department complete discretion as to 

what evidence the trier of fact will use to make decisions. 

This commenter stated that, when combined with the proposal 

that the persons advocating for students, as well as the 

persons making decisions, in the group borrower defense 

process are all chosen by the Department, this discretion 

appears to favor students over schools in the group 

process.

Several commenters also stated that institutions 

should be given an opportunity to provide a written 

response to the substance of the group borrower defense 

claim within a certain number of days (45 or 60) after the 

resolution of any appeal on the Department’s basis for a 

group claim or of the notification to the school of the 

group process if no challenge to the group is filed, 

provided with copies of any evidence and records to be 

considered or deemed relevant by the hearing official, be 

allowed to present oral argument before the hearing 

official, and provided with a copy of the hearing 

official’s decision in the group process. One commenter 

emphasized that the decision should identify the 

calculation used by the hearing official for the amount of 

relief given by the decision. These commenters also stated 

that institutions should be provided with a right of appeal 
258

to the hearing official’s decision in both the closed and 

open school group processes. One commenter expressed 

concern that the proposed process does not include any 

process for how an appeal may be filed.

Several commenters expressed concerns that the process 

does not appear to provide to any opportunities for schools 

to conduct discovery or to cross-examine witnesses. Some 

of these commenters expressed the view that, in cases where 

the rebuttable presumption proposed in § 685.222(f)(3) 

applies, schools will need to be able to question borrowers 

in order to rebut the presumption. 

One commenter stated that the group borrower defense 

process should allow for both students to present their own 

claims and institutions to have the same opportunity to 

present a defense, including any affirmative defenses, and 

to appeal adverse decisions. The commenter stated that 

both the school and the borrower should have such 

opportunities to present evidence and arguments in any 

proceeding or process to determine claims, not just 

proceedings where recovery against the school is 

determined. The commenter emphasized that permitting 

school participation would lead to correct results, since 

schools often have information as to any alleged 

wrongdoing.
259

Discussion: The Department understands commenters’ 

concerns regarding the broad guidelines for the group factfinding process established in § 685.222(f), (g), and (h). 

As noted throughout this section, the group borrower 

defense process involving an open school35 in § 685.222(h) 

would be structured to provide the substantive and 

procedural due process protections both borrowers and 

schools are entitled to under applicable law, including 

those provided under the APA, 5 U.S.C. 554, and under the 

Department’s other administrative proceedings. Such 

protections would include those regarding notice; the 

opportunity for an oral evidentiary hearing where the 

parties may confront and cross-examine adverse witnesses if 

warranted,); or those for the submission and exchange 

written material, as provided under enforcement procedures 

at 34 CFR Part 668, Subpart G. The Department is 

developing procedural rules to govern the fact-finding 

processes described in both § 685.222(e) and (f) to (h), 

which will establish these details more firmly and be 

informed by the procedures and protections established by 

 

35 As described in § 668.222(g), the “closed school” group borrower defense process would apply 

only when the school has both closed and provided no financial protection available to the Secretary 

from which to recover losses arising from borrower defenses, and for which there is no entity from 

which the Secretary may recover such losses. Or, in other words, when there is no entity from whom 

the Department may obtain a recovery. 
260

the Department in its other administrative proceedings, 

such as 34 CFR part 668, subparts G and H. 

We appreciate the concern that § 685.222(f)(2)(iii) is 

not clear as to the Department’s intent that notice of a 

group proceeding will occur unless there is no party 

available to receive such notice–-in other words, as would 

be the case under the closed school group borrower defense 

process described in § 685.222(g). We are revising 

§ 685.222(f)(2)(iii) to clarify that no notice will be 

provided if notice is impossible or irrelevant due to a 

school’s closure.

Changes: We have revised § 685.222(f)(2)(iii) to clarify 

that no notice will be provided if notice is impossible or 

irrelevant due to a school’s closure.

Rebuttable Presumption of Reliance

Comments: A number of commenters objected to § 

685.222(f)(3), which provides that a rebuttable presumption 

of reasonable reliance by members of the group applies if a 

group borrower defense claim involves a substantial 

misrepresentation that has been widely disseminated. One 

commenter stated that reliance cannot be presumed any more

than the occurrence of a misrepresentation can be presumed, 

and that such an approach does not comply with general 

legal principles. Another commenter expressed concern that 
261

the rebuttable presumption of reasonable reliance would 

impermissibly preclude schools from presenting evidence as 

to the main fact of a group borrower defense case. These 

commenters expressed concern that the presumption would be 

difficult or impossible for schools to rebut. One 

commenter expressed concern that a school would be unable 

to rebut the presumption for borrowers who are unknown or 

not named as being part of the group for the group borrower 

defense process. One commenter expressed concern that the 

rebuttable presumption of reliance would be difficult for 

schools to disprove, particularly in situations where 

disproving a claim would require documentation that falls 

outside of the record retention requirements.

One commenter stated that the presumption would set up 

a system by which omissions by school employees or agents 

or misunderstandings by students may be considered 

substantial misrepresentations, without the Department 

needing to show reliance or that the misconduct caused the 

harm at issue. The commenter expressed general concern 

that the Department has proposed a negligence standard that 

is not contemplated by the HEA, and that this expansion in 

the standard has not been justified by the Department. The 

commenter argued that the presumption would allow claims 
262

based on accusations of omissions or misunderstandings on 

which the borrower did not rely.

One commenter stated that the presumption would 

threaten institutions with high liability and impose high 

costs on taxpayers. A couple commenters stated that the 

presumption is unfair, absent an intent or materiality 

requirement. 

One commenter stated that it objected to the 

establishment of the rebuttable presumption generally, but 

requested clarification as to what the Department means by 

“widely disseminated,” specifically the size of the 

audience that would be required for a statement to be 

considered to have been widely disseminated and methods of 

dissemination that would trigger the presumption.

Several commenters supported the inclusion of a 

presumption of reasonable reliance on a widely disseminated 

misrepresentation is consistent with existing consumer 

protection law. One commenter stated that the presumption 

recognizes that it is unfair and inefficient to require 

cohorts of borrowers to individually assert claims against 

an actor engage in a well-documented pattern of misconduct.

Discussion: We disagree that the presumption established 

in § 685.222(f)(3) does not comport with general legal 

principles. It is a well-established principle that 
263

administrative agencies may establish evidentiary 

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); Chem. 

Mfrs. Ass’n v. Dep’t of Transp., 105 F.3d 702, 705 (D.C. 

Cir. 1997). As explained in the NPRM, 81 FR 39348, we 

believe that if a representation that is reasonably likely 

to induce a recipient to act is made to a broad audience, 

it is logical to presume that those audience members did in 

fact rely on that representation. We believe that there is 

a rational nexus between the wide dissemination of the 

misrepresentation and the likelihood of reliance by the 

audience, which justifies the rebuttable presumption of 

reasonable reliance upon the misrepresentation established 

in § 685.222(f)(3). A similar presumption exists in 

Federal consumer law. See, e.g., F.T.C. v. Freecom 

Commc'ns, Inc., 401 F.3d 1192, 1206 (10th Cir. 2005); 

F.T.C. v. Sec. Rare Coin & Bullion Corp., 931 F.2d 1312, 

1315–16 (8th Cir. 1991).

We disagree that the rebuttable presumption 

establishes a different standard than what is required 

under the current regulations. As explained under 

“Substantial Misrepresentation,” the Department’s standard 

at part 668, subpart F, has never required intent or 
264

knowledge as an element of the substantial 

misrepresentation standard. Additionally, the current 

standard for borrower defense allows “any act or omission 

of the school...that would give rise to a cause of action 

under applicable State law.” 34 CFR 685.206(c)(1). As 

explained under “Federal Standard” and “Substantial 

Misrepresentation,” under many States’ consumer protection 

laws, knowledge or intent is not a required element of 

proof for relief as to an unfair or deceptive trade 

practice or act. Moreover, we disagree with any 

characterization that the rebuttable presumption would 

remove the reliance requirement for substantial 

misrepresentation in group proceedings. The rebuttable 

presumption does not change the burden of persuasion, which 

would still be on the Department. As § 685.222(f)(3) 

states, the Department would initially have to demonstrate 

that the substantial misrepresentation had been “widely 

disseminated.” Only upon such a demonstration and finding 

would the rebuttable presumption act to shift the 

evidentiary 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. This 

echoes the operation of the similar presumption of reliance 

for widely disseminated misrepresentations under Federal 
265

consumer law described above. See Freecom Commc'ns, Inc., 

401 F.3d at 1206. A school would be entitled to introduce 

any relevant evidence to rebut the presumption and what may 

constitute relevant evidence may vary depending on the 

facts of each case. Similarly, what may be viewed as “wide 

dissemination” may also vary from case to case. 

There appears to be confusion as to whether schools 

would be required to rebut the presumption of reliance as 

to “unknown” or “unidentified” members of the group. Under 

§ 685.222(f)(1)(ii), the Department will identify all 

members of the group. Although the group may include 

borrowers who did not file an application through the 

process in § 685.222(e), the members of the group will be 

known in the group process. 

We appreciate the support of commenters supporting the 

establishment of a rebuttable presumption. As discussed 

earlier, one of the reasons we are establishing a 

rebuttable presumption in cases of a widely disseminated 

substantial misrepresentation is that we believe that there 

is a rational nexus between a well-documented pattern of 

misconduct in the instance of a wide dissemination of the 

misrepresentation and the likelihood of reliance by the 

audience.
266

We also disagree that a materiality or intent element 

is necessary, as explained earlier under “Claims Based on 

Substantial Misrepresentation.”

Changes: None.

Representation in the Group Process

Comments: Many commenters expressed concern that the 

Department would designate a Department official to present 

borrower claims in the group borrower defense fact-finding 

process, when schools would be permitted to obtain their 

own representation in the process. These commenters stated 

that they should be allowed to obtain their own outside 

representation. Some commenters stated that such outside 

representation should be either paid for by the Department, 

or that schools should not be allowed to participate in the 

group process until after the school’s liability has been 

determined.

One commenter stated that borrowers should be allowed 

to have their own representatives in the group borrower 

defense process, either at their own expense or pro bono. 

This commenter stated that borrowers should at least be 

allowed to act as “intervenors” in a group borrower defense 

process, with separate representation, to protect their 

interests.
267

One commenter suggested that the Department establish 

procedures for individual borrowers and their legal 

representatives to petition the Department to initiate a 

group proceeding or, in the alternative, establish a point 

of contact for borrowers to notify the Department of 

potential candidates for group claims. The commenter also 

suggested that borrowers be allowed to file appeals to the 

Secretary in group proceedings, given borrowers’ vested 

interest in obtaining favorable adjudications that will 

make obtaining relief easier for borrowers. 

Discussion: We disagree that borrowers should be allowed 

to initiate group borrower defense claims or be able to 

retain their own counsel and present evidence and arguments 

before a hearing official in a group borrower defense 

process. As explained earlier in this section, we 

acknowledge that the designated Department official 

responsible for presenting the group borrower defense claim 

and initiating a group borrower defense process would not 

be the borrower’s legal representative. However, as the 

holder of a claim to recovery that is contingent upon the 

relief awarded to a group’s borrower defense claims, we 

believe that the Department is the appropriate party to 

present both the group’s borrower defense claims and the 

Department’s claim for recovery against the institution in 
268

question. As explained in the NPRM, 81 FR 39348, we also 

believe that the Department’s fulfillment of this role will 

reduce the likelihood of predatory third parties seeking to 

take advantage of borrowers unfamiliar with the borrower 

defense process. Additionally, we note that, under 

§ 685.222(f)(2)(ii), borrowers may also choose to opt-out 

of a group process and participate in the process 

established in § 685.222(e), if they are not satisfied with 

the Department’s role in the group proceeding. Borrowers 

may also reach out to the designated Department official if 

they have questions about the process.

As discussed earlier in this section, in consideration 

of borrowers’ desire for timely and efficient 

adjudications, we disagree that borrowers should be 

provided with a right of appeal to the Secretary. However, 

we note that borrowers may also seek judicial review in 

Federal court of the Department’s final decisions or 

request a reconsideration of their claims by the Department 

upon the identification of new evidence under § 

685.222(e)(5). 

Changes: None.

Appeals

Comments: Several commenters expressed concern that, in 

the group borrower defense process, liability will be 
269

automatically assigned to a school, and that schools will 

have no opportunity to dispute the liability. One 

commenter stated this is unfair to school owners, and to 

principals and affiliates of schools, from whom the 

Department proposes to seek repayment in certain 

situations. 

Discussion: The commenters are incorrect. Section 

685.222(h)(2) provides both schools and the designated 

Department official in the open school group hearing 

process with the opportunity to file an appeal with the 

Secretary from a hearing official’s decision. Further, 

§ 685.222(g), which does not provide for such an appeal, 

applies only if a school has closed and has provided no 

financial protection available to the Secretary from which 

to recover losses arising from borrower defenses, and for 

which there is no other entity from which the Secretary can 

otherwise practicably recover such losses. If the 

Secretary seeks to recover borrower defense losses from the 

principal or affiliate of a “closed school,” the open 

school process in § 685.222(h) would apply.

Changes: None.

Open and Closed School Group Processes

Comments: Several commenters expressed concern about 

schools’ participation in the closed school group process. 
270

One commenter expressed concern that in the group process 

for closed schools described in proposed § 685.222(g), that 

the hearing official deciding the claims at issue may 

consider additional information or responses from the 

school that the designated Department official considers to 

be necessary. This commenter stated that if there are 

persons affiliated with the school who are prepared to 

participate, then those persons should be given full rights 

of participation in the closed school group borrower 

defense process. One commenter stated that institutions 

should be provided with a right of appeal to the hearing 

official’s decision in both the closed and open school 

group processes.

One commenter requested clarification as to claims 

filed by borrowers who have attended a school that has 

since closed, but where the school has posted a letter of 

credit or other surety with the Department.

Another commenter supported the distinction between 

the open school and closed school group processes.

Discussion: The commenters are incorrect about the nature 

of the closed school borrower defense group process 

described in § 685.222(g). As described, the standard 

provides that § 685.222(g) will apply only if a school is 

closed, there is no financial protection available to the 
271

Secretary from which to recover losses from borrower 

defense claims, and there is no other entity from which the 

Secretary may recover. If there is a letter of credit or 

some other surety that the school has posted to the 

Department and that is currently available to pay losses 

from borrower defense claims, the open school, borrower 

defense group process under § 685.222(h) will apply. If 

there is no ability for the Department to recover on any 

losses resulting from an award of relief in the closed 

school, group borrower defense process, then the Department 

will be unable to exercise its right to recovery against a 

school and the school will not face any possible 

deprivation of property. As a result, we believe it is 

appropriate that schools do not receive a right of 

administrative appeal in the closed school group process. 

If there are persons affiliated with the school who 

disagree with the final decision resulting from the 

process, however, such persons may still seek judicial 

review in Federal court under 5 U.S.C. § 702 and § 704.

Changes: None.

Public Databases

Comments: A group of commenters suggested that decision 

makers be required to document decisions so that they may 

be appealed and reviewed in Federal court. These 
272

commenters and others also requested that the regulations 

require public reporting of borrower defense adjudications 

and that the Department maintain a public, online database 

of decisions resulting from any group process or individual 

application. The commenters stated that such public 

reporting would allow political representatives and 

advocates to review such decisions, suggest improvements, 

and ensure consistency in the Department’s decision making.

One commenter also stated that the Department should 

develop a publicly available information infrastructure, 

such as a docketing system, to allow users to identify and 

track cases that may be candidates for group proceedings or 

informal aggregation and to allow users to learn from 

Departmental decisions. 

Discussion: We appreciate the commenters’ concerns 

regarding transparency and consistency in the borrower 

defense process, and will consider their suggestions as we 

move forward with the implementation of these regulations. 

All of the Department’s administrative determinations are 

presumptively available for public disclosure, subject to 

privacy concerns. We will contemplate and evaluate 

appropriate methods for the release of information about 

borrower defense claims on an ongoing basis as the 

processes and procedures in the regulations take effect.
273

Changes: None.

Informal Aggregation

Comments: One commenter suggested that, in addition to the 

group borrower defense process, the Department allow 

hearing officials to informally aggregate, or to allow 

borrowers to petition for informal aggregation of, separate 

but related cases to be heard in front of the same trier of 

fact. The commenter stated that such informal aggregation 

would expedite the resolution of similar claims, enhance 

consistency, and conserve resources. 

Discussion: We appreciate the suggestion by the commenter, 

but do not believe it is necessary to modify the 

regulations to provide for informal aggregation. Such 

aggregation would be within the discretion of the hearing 

officials presiding over the group processes as part of 

their routine caseload management responsibilities.

Changes: None.

FFEL Borrowers

Comments: Several commenters stated that FFEL borrowers 

should be included in any group discharges for borrower 

defense. One commenter suggested that the Department allow 

FFEL borrowers to participate in the group and individual 

borrower defense processes without having to consolidate 

FFEL Loans into Direct Consolidation Loans or by having to 
274

prove any relationship between the borrowers’ schools and 

lenders. This commenter argued that not all FFEL borrowers 

are eligible for Direct Consolidation Loans, and that the 

proposed regulations do not address the needs of such FFEL 

borrowers.

Discussion: We disagree with the suggestion that FFEL 

borrowers be included in any group discharges for borrower 

defense. As explained under “Expansion of Borrower 

Rights,” FFEL Loans are governed by specific contractual 

rights and the process adopted here is not designed to 

address those rights. We can address potential relief 

under these procedures for only those FFEL borrowers who 

consolidate their FFEL Loans into Direct Consolidation 

Loans. As cases are received, the Department may consider 

whether to conduct outreach to FFEL borrowers who may be 

eligible for borrower defense relief by consolidating their 

loans into Direct Consolidation Loans under § 685.212(k) as 

appropriate.

Changes: None.

Abuse by Plaintiffs’ Attorneys

Comments: Several commenters expressed concern that the 

group process would create opportunities for plaintiffs’

attorneys. The commenters stated that the proposed 

regulations would encourage attorneys to have borrowers 
275

file suspect claims with the Department, while also 

bringing class actions in court. The commenters stated 

that this would result in the Department initiating a group 

process, identifying members of a putative class for the 

court proceeding, and obtaining determinations that class 

action attorneys would then be able to use in court to 

their advantage, while collecting attorneys’ fees.

Discussion: We disagree that the regulations will create 

opportunities for plaintiffs’ attorneys. Under the 

regulations, the Department has the discretion to decide 

whether a group borrower defense process will be initiated, 

and the filing of individual claims may not necessarily 

lead to the initiation of a group borrower defense process. 

Additionally, we recognize that borrowers may seek to 

utilize other avenues for relief outside of the borrower 

defense process and provide in § 685.222(k) that if the 

borrower has received relief through other means, the 

Department may reinstate the borrower’s obligation to repay 

the loan to protect the Federal fiscal interest and avoid 

receipt by the borrower of multiple recoveries for the same 

harm.

Changes: None.

Borrower Relief
276

Process Arbitrary and Outside the Scope of Department 

Authority 

Comments: Some commenters argued that the proposal for 

calculation of borrower relief is arbitrary and that the 

Department is neither qualified nor authorized to conduct 

this calculation. According to one commenter, 

implementation of the proposed framework for calculating 

relief would constitute arbitrary agency adjudication under 

relevant case law. One commenter cited 20 U.S.C. 3403(b) 

and section 485(h)(2)(B) of the HEA as imposing statutory 

limits on the Department’s authority to direct or control 

academic content and programming, and argued that the 

Department would be exceeding its authority by attempting 

to assess the value of an education by including the 

quality of academic programming among the factors to be 

considered in carrying out an adjudication on any borrower 

defense claim. 

Discussion: We disagree that the Department’s proposal to 

adjudicate or calculate borrower relief is arbitrary. By 

directing the Secretary to designate acts and omissions 

that constitute borrower defenses to repayment in section 

455(h) of the HEA, Congress has explicitly charged the 

Department, under the current and new regulations, to 

adjudicate the merits of claims brought alleging such acts 
277

and omissions. Such adjudications necessarily require the 

Department to determine the relief warranted by a proven 

claim against an institution. If a court adjudicating a 

borrower’s cause of action against the institution would 

assess the value of the education provided in order to 

determine relief, section 455(h) requires and authorizes 

the Department to do so as well.

Further, we do not agree that the Department’s 

adjudications on borrower defense claims will involve an 

“exercise [of] any direction, supervision, or control over 

the curriculum, program of instruction, administration, or 

personnel of any educational institution, school, or school 

system . . . or over the selection or content of library 

resources, textbooks, or other instructional materials by 

any educational institution or school system, except to the 

extent authorized by law.” 20 U.S.C. 3403(b). As described 

above earlier, the Department’s adjudications will 

determine whether a school’s alleged misconduct constitutes 

an “act[] or omission[] of an institution of higher 

education a borrower may assert as a defense to repayment 

of a loan . . .”, 20 U.S.C. 1087e(h), and provide relief to 

borrowers and a right of recovery to the Department from 

schools, in a manner that is explicitly authorized by 

statute. Notwithstanding, we believe that the provision of 
278

relief, as the result of and after any conduct by the 

school, through the borrower defense process is not the 

same as the active “exercise [of] any direction, 

supervision, or control” over any of the prohibited areas. 

Changes: None.

Presume Full Relief

Comments: A number of commenters argued in favor of a 

presumption of full relief for borrowers. These commenters 

recommended that Appendix A be either deleted or modified 

to eliminate or alter the proposed partial relief 

calculations. The commenters contended that the proposed 

partial relief calculation process would be complex and 

subjective and potentially deny relief to deserving 

borrowers. 

Multiple commenters argued that calculating partial 

relief would be excessively complicated, expensive, and 

time consuming. According to these commenters, the process 

of calculating relief would lead to the waste of Department 

resources and cause unnecessary delays in the provision of 

relief to borrowers. Additionally, commenters were 

concerned about the possibility that this process would be 

confusing and difficult for borrowers to navigate. 

Some commenters argued that the proposed partial 

relief calculation process would unfairly subject borrowers 
279

who had already succeeded on the merits of their claims to 

a burdensome secondary review process. Commenters noted 

that, in the case of a claim based on a school’s 

substantial misrepresentation, borrowers would have already 

demonstrated entitlement to relief by meeting the 

substantial misrepresentation standard. Consequently, 

these commenters suggested that the relief calculation 

process would create an unnecessary hurdle to the 

appropriate relief for these borrowers. The commenters 

argued that, after being defrauded by their schools, 

student borrowers should not be required to undergo an 

extensive process of calculating the value of their 

education. Further, these commenters argued that the 

partial relief system would be unfair because it affords a 

culpable school the presumption that its education was of 

some value to the borrower. 

Other commenters suggested that it would be unfair for 

the borrower to bear the burden of demonstrating 

eligibility for full relief. Instead, these commenters 

proposed that the Secretary should bear the burden of 

demonstrating why full relief is not warranted. The 

commenters proposed that full relief be automatic for 

borrowers when there is evidence of wrongdoing by the 

school. These commenters suggested either eliminating 
280

partial relief or limiting it to cases in which compelling 

evidence exists that the borrower’s harm was limited to 

some clearly delimited part of their education. 

Commenters suggested that, in addition to being 

difficult to calculate, partial relief would be 

insufficient to make victimized borrowers whole. To 

support the argument in favor of a presumption of full 

relief, these commenters asserted that many Corinthian 

students never would have enrolled had the institution 

truthfully represented its job placement rates.

Some commenters raised concerns about the subjectivity 

of the process for calculating partial relief for 

borrowers. These commenters were concerned that the 

methods proposed in Appendix A for calculating relief are 

too vague, afford excessive discretion to officials, and 

could lead to potential inconsistencies in the treatment of 

borrowers. Some commenters suggested that Appendix A 

should prescribe one particular method for calculating 

relief, rather than providing multiple options in order to 

increase certainty and consistency. 

Some commenters raised concerns about the potential 

impact of resource inequities between schools and borrowers 

on the partial relief calculation process. Specifically, 

these commenters argued that because schools will be able
281

to afford expensive legal representation, schools would 

likely be able to find technicalities in the relief 

calculation process, potentially resulting in the denial of 

relief to deserving borrowers. These commenters were 

particularly concerned about disadvantages faced by 

borrowers who cannot afford legal representation. 

Commenters also noted that borrowers may feel pressure to 

retain legal counsel, which they contended would frustrate 

the Department’s intent to design a process under which 

borrowers do not need legal representation, and are 

shielded from predatory third-party debt relief companies. 

One commenter suggested that the provision of partial 

relief would lead to an excessive number of claims, 

particularly when implemented in conjunction with what was 

described as a low threshold for qualified claims. 

Several commenters also supported the presumption of 

full relief by stating that this approach would be 

consistent with existing legal approaches to relief for 

fraudulent inducement or deceptive practices. Some 

commenters urged the Department to adopt the approach used 

for false certification and closed school discharges--

providing full discharges for all meritorious claims, 

including cancellation of outstanding balances and refunds 

of amounts already paid. 
282

As an alternative to fully eliminating partial relief, 

some commenters suggested limiting the availability of 

partial relief to claims based on breach of contract, based 

on the proposition that when a school breaches a 

contractual provision, it is possible that a borrower 

nevertheless received at least a partial benefit from his 

or her education. 

Several commenters argued that Appendix A should be 

fully removed because it adds confusion to the process and 

it is not clear when or how it should be applied. Some 

commenters argued that we should remove Appendix A and 

revise proposed § 685.222(i) so that full relief is 

provided upon approval of a borrower defense, except where 

the Department explains its reasoning and affords the 

borrower the opportunity to respond.

Discussion: As noted in the NPRM, the Department has a 

responsibility to protect the interests of Federal 

taxpayers as well as borrowers. We discuss below that 

while the borrowers’ cost of attendance (COA), as defined 

in section 472 of the HEA, 20 U.S.C. 1087ll, is the 

starting point in cases based on a substantial 

misrepresentation for determining relief, we do not 

believe, in proceedings other than those brought under § 

685.222(h), that establishing a legal presumption of full 
283

relief is justified when losses from borrower defenses may 

be borne by the taxpayer. While the Department’s other 

loan discharge processes for closed school discharges, 34 

CFR 685.214; false certification, 34 CFR 685.215; and 

unpaid refunds, 34 CFR 685.216, do provide for full loan 

discharges and recovery of funds paid on subject loans, the 

factual premises for such discharges are clearly 

established in statute and are relatively straightforward. 

In contrast, we anticipate that determinations for borrower 

defense claims will involve more complicated issues of law 

and fact. Generally under civil law, determinations as to 

whether the elements of a cause of action have been met so 

as to state a claim for relief and then to establish 

liability are determinations separate from those for the 

amount or types of relief the plaintiff may receive. To 

balance the Department’s interest in protecting the 

taxpayer with its interest in providing fair outcomes to 

borrowers, when a borrower defense based in 

misrepresentation has been established, the Department will 

determine the appropriate relief by factoring in the 

borrower’s COA to attend the school and the value of the 

education provided to the borrower by the school. 

Importantly, the COA reflects the amount the borrower was 

willing to pay to attend the school based on the 
284

information provided by the school about the benefits or 

value of attendance. The Department may also consider any 

other relevant factors. In determining value, the 

Department may consider the value that the education 

provided to the borrower, or would have provided to a 

reasonable person in the position of the borrower. 

Moreover, in some circumstances, the Department will 

consider the actual value of the education in comparison to 

the borrower’s reasonable expectation, or to what a 

reasonable person in the position of the borrower would 

have expected under the circumstances given the information 

provided by the institution. Accordingly, any expectations 

that are not reasonable will not be incorporated into the 

assessment of value. 

We acknowledge commenters’ concerns that references to 

“calculations” or “methods” in the regulations may be 

confusing. As a result, we are revising § 685.222(i) to 

remove such references. Additionally, to address concerns 

that the proposed relief determination requirements appear 

complicated, we are also revising § 685.222(i) to directly 

establish the factors to be considered by the trier-offact: the COA paid by the borrower to attend the school; 

and the value of the education. The Department will 

incorporate these factors in a reasonable and practicable 
285

manner. In addition, the Department may consider any other 

relevant factors. In response to concerns that the 

proposed methods in Appendix A are confusing, we have also 

replaced the methods with conceptual examples intended to 

serve as guidance to borrowers, schools, and Department 

employees as to what types of situations may lead to 

different types of relief determinations. As it receives 

and evaluates borrower defense cases under the Federal 

standard, the Department may issue further guidance as to 

relief as necessary. 

The Department emphasizes that in some cases the value 

of the education may be sufficiently modest that full 

relief is warranted, while in other cases, partial relief 

will be appropriate. In certain instances of full or 

substantial value, no relief will be provided. Thus, it is 

possible a borrower may be subject to a substantial 

misrepresentation, but because the education provided full 

or substantial value, no relief may be appropriate. As 

revised, § 685.222(i) states that the starting point for 

any relief determination for a substantial 

misrepresentation claim is the full amount of the 

borrower’s COA incurred to attend the institution. As 

explained later, the COA includes all expenses on which the 

loan amount was based under section 472 of the HEA, 20 
286

U.S.C. 1087ll. Taken alone, these costs would lead to a 

full discharge and refund of amounts paid to the 

Secretary. Section 685.222(i) then provides that the 

Department will consider the value of the education in the 

determination of relief and how it compares to the value 

the borrower could have reasonably expected based on the 

information provided by the school. In some cases, the 

Department expects that this analysis will not result in 

reduction of the amount of relief awarded. This could be 

because the evidence shows that the school provided value 

that was sufficiently modest to warrant full relief or what 

the school provided was substantially different from what 

was promised such that the value would not be substantially 

related to the value the school represented it would 

provide. The presence of some modest value does not mean 

full relief is inappropriate.

We also note that the revised regulations require 

value to be factored in to determinations for relief, but 

do not prescribe any particular approach to that process.

Because there will be cases where the determination of 

value will be fact-specific to an individual or group of 

individuals--and the determination of value may pose more 

significant difficulties in certain situations than in 

others--the Department believes that the official needs 
287

substantial flexibility and discretion in determining how 

to incorporate established factors into the assessment of 

value. The fact that the case has reached the phase of 

relief determination necessarily means that a borrower has 

experienced some detriment and that a school has engaged in 

substantial misrepresentation or breached a contract, or 

was found culpable in court of some legal wrong. At that 

point in the process, we intend that the Official be able 

to employ a practicable and efficient approach to assessing 

value and determining whether the borrower should be 

granted relief and if so how much. Relief will be 

determined in a reasonable and practicable manner to ensure 

harmed borrowers receive relief in a timely and efficient 

manner. 

We have also revised § 685.222(i) to provide that in a 

group borrower defense proceeding based on a substantial 

misrepresentation brought against an open school under § 

685.222(h), the school has the burden of proof as to 

showing any value or benefit of the education. The 

Department will promulgate a procedural rule that will 

explain how evidence will be presented and considered in 

such proceedings, taking full account of due process rights 

of any parties. We believe that these revisions address 
288

many of the concerns that borrower defense relief 

determinations may be confusing or complicated. 

We also note that the process for determining relief 

in a borrower defense claim has no bearing on the 

Department’s authority or processes in enforcing the 

prohibition against misrepresentation under 34 CFR 668.71. 

Schools may face an enforcement action by the Department

for making a substantial misrepresentation under part 668, 

subpart F. As described under “Substantial 

Misrepresentation,” for the purposes of borrower defense, 

absent the presumption of reliance in a group claim, 

actual, reasonable, detrimental reliance is required to 

establish a substantial misrepresentation under § 

685.222(d). However, for the purposes of the Department’s 

enforcement authority under part 668, subpart F, the scope 

of substantial misrepresentation is broader in that it 

includes misrepresentations that could have reasonably been 

relied upon by any person, as opposed to misrepresentations 

that were actually reasonably relied upon by a borrower. 

It is also conceivable that there could be a case in which 

a borrower did experience detriment through reasonably 

relying on a misrepresentation--for example, by having been 

induced to attend a school he or she would not have 

otherwise–-yet the school provided sufficient value to the 
289

borrower or would have provided sufficient value to a 

reasonable student in the position of the borrower so as to 

merit less than full, or no, relief. Nevertheless, the 

school in such a case may still face fines or other 

enforcement consequences by the Department under its 

enforcement authority in part 668, subpart F, because a 

borrower reasonably relied on the school’s 

misrepresentation to his or her detriment.

We disagree that the relief determination process 

would be subjective. Agency tribunals and State and 

Federal courts commonly make determinations on relief. We 

do not believe the process proposed provides a presiding 

designated Department official or hearing official 

presiding, as applicable, with more discretion than 

afforded triers-of-fact in other adjudicative forums.

We also disagree with commenters who expressed 

concerns that borrowers may be disadvantaged due to 

resource inequities between students and schools. As 

discussed under “Process for Individual Borrowers (§ 

685.222(e)),” under the individual application process, a 

borrower will not be involved in an adversarial process 

against a school. In the group processes described in § 

685.222(f) to (h), the Department will designate a 

Department official to present borrower claims, including 
290

through any relief phase of the fact-finding process. If a 

borrower does not wish to have the Department official 

assert his or her claim in the group borrower defense 

process, the borrower may opt-out of the process and pursue 

his or her claim under the individual borrower defense 

process under § 685.222(e).

We note that, in determining relief for a borrower 

defense based on a judgment against the school, where the 

judgment awards specific financial relief, the relief will 

be the amount of the judgment that remains unsatisfied, 

subject to the limitation provided for in § 685.222(i)(8) 

and any other reasonable considerations. Where the 

judgment does not award specific financial relief, the 

Department will rely on the holding of the case and 

applicable law to monetize the judgment, subject to the 

limitation provided for in § 685.222(i)(8) and any other 

reasonable considerations. In determining relief for a 

borrower defense based on a breach of contract, relief in 

such a case will be determined according to the common law 

of contract subject to the limitation provided for in § 

685.222(i)(8) and any other reasonable considerations.

Changes: We have revised § 685.222(i) to remove references 

to methods or calculations for relief. We have included 

factors that will be incorporated by a designated 
291

Department official or hearing official deciding the claim, 

including the COA paid by the borrower to attend the 

school, as well as the value of the education to the 

borrower. In addition, the Department official or hearing 

official deciding the claim may consider any other relevant 

factors. 

We have revised § 685.222(i) to clarify how relief is 

determined for a borrower defense based upon a judgment 

against the school or a breach of contract by the school. 

We include that for group borrower defense claims 

under § 685.222(h), the school has the burden of proof as 

to any value or benefit of the education. 

We have also revised Appendix A to describe conceptual 

examples for relief.

Calculation of Relief 

Comments: Some commenters raised concerns about the 

appropriateness of the specific factors for consideration, 

and methods to be applied, in calculating partial relief. 

Specifically, some commenters were concerned about relying 

on student employment outcomes to determine the value of a 

borrower’s education. These commenters noted that

graduates exercise substantial discretion in determining 

what type of employment to pursue after graduation, which 

would likely impact relevant calculations. These 
292

commenters also cited variations in median income 

throughout the country as another factor that could 

potentially complicate the calculation process. One 

commenter objected to consideration of the expected salary 

for the field, because expected salaries in certain 

professions are so low. These commenters recommended that 

earnings benchmarks not be considered in the calculation of 

relief because of the risk of discrepancies associated with 

those considerations. 

Some commenters were concerned about the reliability 

of the proposed methods for calculating relief in Appendix 

A. Specifically, commenters raised concerns about the 

method for calculating relief in paragraph (A). Under this 

method, relief would be provided in an amount equivalent to 

the difference between what the borrower paid, and what a 

reasonable borrower would have paid absent the 

misrepresentation. These commenters suggested that this 

assessment would be unreliable because it would involve 

speculation by the official tasked with valuing a 

counterfactual. 

In addition, some commenters disapproved of the method 

in paragraph (C), which would cap the amount of economic 

loss at the COA. These commenters suggested that legally 

cognizable losses often exceed the COA. Some commenters 
293

also disapproved of the proposal to discount relief when a 

borrower acquires transferrable credits or secures a job in 

a related field. According to these commenters, the 

discounted relief would not reflect the true harm 

experienced by the borrowers. These commenters stated that 

transferrable credits often lose their value because they 

are either not used, or used at another predatory or lowvalue school. These commenters also argued that 

discounting relief based on transferrable credits could 

penalize borrowers with otherwise meritorious defenses who 

opt to take a teach out. Some commenters also argued that 

discounting relief when a borrower obtains a job in the 

field with typical wages may penalize borrowers who succeed 

at finding work despite the failings of their programs. 

One commenter was concerned that the method in paragraph 

(C) may be read to place a burden on the borrower to 

produce evidence that the education he or she received 

lacks value. 

One commenter suggested minimizing the potential for 

subjectivity by replacing the proposed methods of 

calculation with a system for scheduling relief based on 

the nature of the claim. This commenter recommended 

providing a table outlining the percentage of loan 

principal to be relieved for each of a series of specific 
294

enumerated claims. Another commenter suggested that the 

Department specify a single theory for calculating damages 

that would apply in each class of borrower defense cases.

Some commenters requested additional information about 

the circumstances that may impact partial relief 

determinations.

Discussion: We acknowledge commenters’ concerns with the 

various methods in proposed Appendix A, some of which 

highlighted specific concerns about different methods’ 

applicability to various fact-specific scenarios. As 

discussed earlier, we also appreciate that references to 

calculations or methods for relief may be confusing. As a 

result, we have revised Appendix A to reflect conceptual 

examples to provide guidance to borrowers, schools, and 

Department employees as to different scenarios that might 

lead to full, partial, or no relief. As stated in revised 

§ 685.222(i), the examples are not binding on the 

Department or hearing official presiding over a borrower 

defense claim. Rather, they are meant to be simple, 

straight-forward examples demonstrating possible relief 

scenarios, and the outcomes of any borrower defense case 

may vary from the examples depending on the specific facts 

and circumstances of each case. 
295

Changes: We have revised Appendix A to describe conceptual 

examples for relief. 

Comments: Some commenters were concerned that the proposed 

regulations would grant Department officials the authority 

to make determinations for which they are not qualified. 

Specifically, commenters were concerned that the proposed 

regulations do not require the Department to rely on expert 

witnesses for certain calculations, despite the fact that 

they may be necessary in some cases.

Commenters also stressed the importance of ensuring 

the independence of the officials involved in making relief 

determinations. Similarly, some commenters requested more 

specificity and transparency regarding who will be 

calculating relief and how they will be conducting those 

calculations. 

Discussion: We believe that Department officials 

designated to hear individual claims, and the Department 

hearing officials who preside over the group claim 

proceedings have the capability to evaluate borrower 

defense claims based upon the Federal standard, similar to 

how Department employees perform determinations in other 

agency adjudications. 

As discussed under “General” and “Group Process for 

Borrower Defense,” the Department will structure the 
296

borrower defense proceedings in ways to ensure the 

independence and objectivity of the Department employees 

presiding over such processes. With regard to commenters’ 

concerns about transparency and specificity, as established 

in § 685.222(e), (g) and (h), the decisions made in the 

proceedings will be made available to involved parties and 

will specify the basis of the official’s determination. 

All of the Department’s administrative determinations are 

presumptively available for public disclosure, subject to 

privacy concerns.

Changes: None.

Group Relief

Comments: Some commenters argued that group relief should 

be limited to situations in which a preponderance of the 

evidence shows that no member of the group received any 

identifiable benefit from his or her education. These 

commenters suggested that group relief would frustrate the 

Department’s efforts to ensure that borrowers receive only 

the relief to which they are entitled. These commenters 

suggested that in the limited circumstances where group 

relief is provided, the amount should be determined based 

on a statistically valid sample of students. Some 

commenters also opposed the Department’s proposal to 
297

consider potential cost to taxpayers in making group relief 

determinations.

Discussion: Section 685.222(a)(2), for loans first 

disbursed after July 1, 2017, explicitly states that

borrower defenses must be established by a preponderance of 

evidence. This requirement applies regardless of whether 

the borrower defenses at issue are raised in the procedure 

for an individual borrower in § 685.222(e) or in the group 

processes under § 685.222(f) to (h). However, for group 

claims, § 685.222(f) establishes that the group process may 

be initiated upon the consideration of factors including 

the existence of common facts and claims among the members 

of the group. How the preponderance of evidence 

requirement may apply in group borrower defenses cases may 

vary from case to case. Additionally, as discussed 

earlier, for cases of substantial misrepresentation, the 

starting point for any relief determination is the full 

amount of the borrower’s costs incurred to attend the 

institution. We have revised § 685.222(i) to provide that 

in such cases against an open school, the burden shifts to 

the school to prove the existence of any offsetting value 

to the borrowers provided by the education paid for with 

the proceeds of the loans at issue. 
298

We disagree with commenters that the regulation should 

specify that relief should be based upon a statistically 

valid sample of students at this time. While a 

statistically valid sample may be appropriate for some 

cases, we believe the determination of what may be the 

criteria for an appropriate sample for group borrower 

defense cases should be developed on a case by case basis.

We discuss our reasons for including fiscal impact as 

a factor for consideration in the initiation of group 

processes under “Group Process for Borrower Defense.” 

Section 685.222(i), which pertains to the relief awarded 

for either a group or individual borrower defense claim, 

does not include a consideration of fiscal impact.

Changes: We have revised § 685.222(i) to provide that in 

group borrower defense cases against an open school, the 

burden shifts to the school to prove the existence of any 

offsetting value to the students provided by the education 

paid for with the proceeds of the loans at issue. 

Expand the Scope of Available Relief 

Comments: Some commenters argued that full relief must 

extend beyond loans, costs, and fees to account for other 

expenses associated with school attendance. These 

commenters cited expenses such as travel expenses, costs of 

not pursuing other opportunities, child care expenses, 
299

consequential losses, and nonfinancial harms including pain 

and suffering. Commenters also noted that borrowers who 

attend fraudulent schools often lose out on portions of 

their lifetime Federal loan and grant eligibility, 

effectively losing several thousands of dollars in Pell 

grants that could be used towards other educational 

opportunities. To support the expansion of relief, one 

commenter cited State unfair and deceptive practices laws, 

under which all types of harms--direct and consequential, 

pecuniary and emotional--may provide the basis for relief. 

Some commenters argued that relief should include 

updates to consumer reporting agencies to remove adverse 

credit reports. Citing the impact of negative credit 

reports on borrowers’ ability to find employment, own a 

home, etc., commenters urged the Department to adopt 

language clarifying that any adverse credit history 

pertaining to any loan discharged through a borrower 

defense will be deleted. Some commenters suggested that 

the language in proposed § 685.222(i)(4)(ii) conform to the 

language in proposed § 685.206(c)(2)(iii), which requires 

the Department to fix adverse credit reports when it grants 

discharges. Additionally, some commenters argued that 

relief should include a determination that the borrower is 
300

not in default on the loan and is eligible to receive 

assistance under title IV. 

One commenter requested simplification of the language 

describing available relief, specifically, removal of the 

portion of § 685.222(i)(5) describing the unavailability of 

non-pecuniary relief on the basis that the provision would 

cause confusion.

Discussion: 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 

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. 
301

Additionally, § 685.222(i)(8) also clarifies that a 

borrower may not receive non-pecuniary damages such as 

damages for inconvenience, aggravation, emotional distress, 

or punitive damages. We recognize 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. We believe that excluding nonpecuniary damages from relief under the regulations would 

help produce more consistent and fair results for 

borrowers. 

The Department official or the hearing official 

deciding the claim would afford the borrower such further 

relief as the Department official or the hearing official 

determines is appropriate under the circumstances. As 

specifically noted in § 685.222(i)(7), 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. We do not believe a 

modification of this provision to conform with § 

685.206(c)(2)(iii) is necessary.

Changes: None.
302

Comments: Some commenters suggested that the proposed 

regulations could result in excessive institutional 

liability. These commenters argued that institutions 

should be liable under a successful claim only for costs 

related to tuition and fees, rather than all amounts 

borrowed. Commenters supported limiting claims for relief 

to the payment of loans issued under title IV, and only the 

portion of loans directly related to the costs of the 

education. Some commenters proposed that relief be limited 

to funds actually received by the institution. One 

commenter cited the measure of student loan debt contained 

in the Department’s Gainful Employment regulations to 

support this proposed cap on relief. In support of this 

position, several commenters argued that some students 

borrow excessively, and institutions play a limited role in 

determining the level or purpose of student borrowing. 

These commenters opposed holding institutions liable for 

loans borrowed to support a student’s living expenses 

because of the attenuated nature of the nexus between any 

act or omission underlying a valid borrower defense claim 

and a student’s living expenses while enrolled. These 

commenters were concerned that assigning responsibility to 

schools in excess of tuition and fees would constitute an 
303

unjustifiable, unprecedented expansion of potential 

institutional liability. 

Discussion: Since their inception, the Federal student 

loan programs were designed to support both tuition and 

fees and living expenses in recognition of the fact that 

students need resources such as food and housing when they 

are pursuing their educations. Indeed, the HEA’s 

definition of cost of attendance, 20 U.S.C. 1087ll, 

includes tuition, fees, books, supplies, transportation, 

miscellaneous personal expenses including a reasonable 

allowance for the documented rental or purchase of a 

personal computer, room and board, childcare, and expenses 

related to a student’s disability if applicable. When a 

student makes the choice to attend an institution, he is 

also choosing to spend his time in a way that may require 

him to take out Federal loans for living expenses, and very 

likely to forgo the opportunity to work to defray those 

costs from earnings. If he had not chosen to attend the 

institution, he would not have taken out such loans for 

living expenses: his Federal aid eligibility depends on 

his attendance at the institution. Therefore we believe 

that an institution’s liability is not limited to the loan 

amount that the institution received, since it does not 

represent the full Federal loan cost to students for the 
304

time they spent at the institution.36 Regarding comments 

suggesting that some students borrow excessively and that 

institutions play a limited role in determining borrowing 

levels, it is important to note that institutions have the 

discretion to determine a reasonable COA based on 

information they have about their students’ circumstances. 

Limiting gainful employment measurements to amounts 

borrowed for tuition and fees was reasonable for the 

context in which that approach was taken-–measurement of 

eligibility of an entire program, based on borrowing 

decisions made by an entire cohort of completers. That 

context is not the paradigm for considering actual loss to 

individual borrowers. As discussed here, an institution 

may already face exposure in a private lawsuit for amounts 

greater than the amount the institution charged and 

received as tuition and fees, and the commenter offers no 

reason, and we see none, why a different rule should apply 

to determining the extent of the institution’s liability 

 

36 Common law recognizes that a party who may rescind a transaction and obtain restitution from 

the defendant of amounts paid to the defendant may also assert a claim for related expenditures 

made in reliance on the rescinded transaction. 

Compensation of such loss by an award of damages is a remedy different in kind from 

rescission and restitution, but the remedies are not necessarily inconsistent when the 

claimant’s basic entitlement is to be restored to the status quo ante. Damages measured by 

the claimant’s expenditure can be included in the accounting that accompanies rescission, in 

order to do complete justice in a single proceeding. Recovery of what are commonly called 

“incidental damages” may thus be allowed in connection with rescission, consistent with the

remedial objective of restoring the claimant to the precontractual position.

Restatement (Third) of Restitution and Unjust Enrichment, §54 note (i). 
305

for the same kinds of claims if successfully proven in the 

borrower defense context. 

Changes: None. 

Fiscal Impact Considerations Inappropriate 

Comments: Commenters argued that full relief should be 

provided without consideration of fiscal concerns. Some 

commenters were concerned that consideration of fiscal 

impact would lead to groups of borrowers being denied 

relief to which they are entitled because of financial 

concerns. These commenters acknowledged taxpayer 

interests, but stated that taxpayers would benefit in the 

long term from a presumption of full relief because the 

presumption would deter fraud and increase institutional 

accountability. Some commenters also suggested that 

partial relief would negatively impact Department 

incentives and conduct by, for example, reducing the 

Department’s incentive to monitor schools appropriately on 

the front end. One commenter opposed consideration of 

fiscal impact because of concerns about the Department’s 

potential to profit off of the student loan program. 

Discussion: We discuss our reasons for including fiscal 

impact as a factor for consideration in the initiation of 

group processes under “Group Process for Borrower Defense.” 

Section 685.222(i), which pertains to the relief awarded 
306

for either a group or individual borrower defense claim, 

does not include a consideration of fiscal impact. 

Changes: None.

Institutional Accountability

Financial Responsibility 

General Standards § 668.171

Scope of Rulemaking

Retroactivity and Authority

Comments: Commenters argued that the proposed financial 

protection triggers exceeded the Department’s authority 

under the HEA to assess financial responsibility on the 

ground that the proposed regulations would be impermissibly 

retroactive. In particular, commenters objected to the 

proposed requirement in § 668.171(c)(3) that a school is 

not financially responsible if it has been required by its 

accreditor to submit a teach-out plan because of a 

Department action to limit, suspend, or terminate the 

school, or if its accreditor has taken certain actions due 

to failure to meet accreditor standards and not later 

notified the Department that the failure has been cured. 

Others objected that proposed § 668.171(c)(1)(i)(A) is 

also impermissibly retroactive by providing that a school 

that, currently or during the three most recently completed 

award years, is or was required to pay a debt or liability 
307

arising from a Federal, State, or other oversight entity 

audit or investigation, based on claims related to the 

making of a Federal loan or the provision of educational 

services, or that settles or resolves such an amount that 

exceeds the stated threshold, is not financially 

responsible. Under proposed § 668.175(f)(1)(i), an 

institution affected by either § 668.171(c)(1)(i)(A) or 

(c)(3) could continue to participate in the title IV, HEA 

programs only under provisional certification and by 

providing financial protection in an amount not less than 

10 percent of the amount of Direct Loan funds or title IV, 

HEA funds, respectively, received in the most recently 

completed fiscal year. 

Discussion: None of the litigation or other provisions of 

the regulation are impermissibly retroactive. They attach 

no new liability to an event or transaction that was 

permissible at the time it occurred and that occurred prior 

to the effective date of the regulations. They simply 

address the risk that certain events that occurred prior to 

the effective date of the regulations create risks that 

warrant protection now. The risks in these instances are 

that these suits, and the other events included in 

§ 668.171(c), can cause the institution to close or so 

substantially reduce operations as to generate closed 
308

school discharge claims, borrower defense claims, or both, 

from the students who are directly affected by the action 

at issue. The school is liable for borrower defense claims 

and closed school discharge claims; the requirement that 

the school provide financial protection does not increase 

any liability that would otherwise attach, but merely 

provides a resource that the Department may access to meet 

liabilities that would already arise if borrowers were to 

seek discharges on either ground. In either case, the 

Department would establish any such liability in the same 

manner in which it would were there no protection provided, 

and would release or refund any portion of the financial 

protection that was not needed to satisfy any claims 

established under those procedures, in which the school 

would have the same opportunity to object to the claims and 

be heard on those objections as it would have if no 

protection had been provided.

Regulated parties have repeatedly challenged 

Department rules that attached particular new consequences 

to actions that have already occurred. Courts have 

regularly rejected claims that regulations that operate 

like the regulations adopted here are impermissibly 

retroactive. A regulation is unconstitutionally 

retroactive if it “alter[s] the past legal consequences of 
309

past actions”37 or, put another way, if it “would impair 

rights a party possessed when he acted, increase a party's 

liability for past conduct, or impose new duties with 

respect to transactions already completed.”38 Thus, whether 

a regulation “operates retroactively” turns on “whether the 

new provision attaches new legal consequences to events 

completed before its enactment.”39 It is, however, well 

settled that “[a] statute is not rendered retroactive 

merely because the facts or requisites upon which its 

subsequent action depends, or some of them, are drawn from 

a time antecedent to the enactment.”40 Nor is a statute 

impermissibly retroactive simply because it “upsets 

expectations based in prior law.”41 Like each of the 

regulations challenged in these cases, the present 

regulations in some instances would attach prospectively 

consequences for certain actions that occurred prior to the 

 

37 Ass'n of Private Sector Colleges & Universities v. Duncan, 110 F. Supp. 3d 176, 196 (D.D.C. 2015), 

aff'd sub nom. Ass'n of Private Sector Colleges & Universities v. Duncan, 640 F. App'x 5 (D.C. Cir. 

2016)(internal citations removed)

38 Ass'n of Proprietary Colleges v. Duncan, 107 F. Supp. 3d 332, 356 (S.D.N.Y. 2015) (gainful 

employment measured by using debt and earnings incurred prior to effective date of new rule); see 

also: Ass'n of Accredited Cosmetology Sch. v. Alexander, 774 F. Supp. 655, 659 (D.D.C. 1991), aff'd,

979 F.2d 859 (D.C. Cir. 1992), and order vacated in part sub nom. Delta Jr. Coll., Inc. v. Riley, 1 F.3d 45 

(D.C. Cir. 1993) and Ass'n of Accredited Cosmetology Sch. v. Alexander, 979 F.2d 859, 864 (D.C. Cir. 

1992)(application of cohort default rate to eligibility using pre-rule data).

39 Id. 

40 Ass'n of Proprietary Colleges v. Duncan, 107 F. Supp. 3d at 356. 

41 Id. 
310

effective date of the regulations, but would not attach any 

new liability to those actions or transactions that were 

permissible when the events occurred.

Moreover, we have clarified that the regulations apply 

to any triggering events that occur on or after July 1, 

2017. We have also removed the two triggers highlighted by 

these commenters as looking to certain past events in a way 

that mitigates almost all of the commenters’ concerns. 

First, we modified the accrediting agency actions trigger 

substantially, to assess as an automatic trigger42 only the 

effect of a closure of a school or location pursuant to a 

teach-out requirement, and consider other accreditor 

actions occurring in the past three years only as a 

discretionary trigger. There is no three-year look-back in 

the automatic trigger. For this and other discretionary 

triggers, there is an opportunity for further review of the 

impact of those events. We have removed the three-year 

look-back in the lawsuits and other actions trigger. These 

changes are described in more detail in the sections 

 

42 Under the proposed regulations, an institution would not be financially responsible for at least one 

year if it was subject to a triggering event that exceeded a materiality threshold or for a State or 

accrediting agency action, three years after that action. In these final regulations, an institution is not 

financially responsible if an automatic triggering event such as a lawsuit or loss of GE program 

eligibility produces a recalculated composite score of less than 1.0 or for a 90/10 or CDR violation or 

SEC action, the occurrence of that violation or action. In both the NPRM and these final regulations, 

discretionary triggers refer to actions, conditions, or events that are evaluated by the Department on 

a case-by-case basis to determine whether they have a material adverse impact on the financial 

condition or operations of the institution. 
311

specific to these triggers. Finally, as we have described, 

the final regulations permit an institution to demonstrate, 

either when it reports the occurrence of a triggering event 

or in an action for failure to provide a required letter of 

credit or other financial protection, that an event or 

condition no longer exists or has been resolved or that it 

has insurance that will cover the debts and liabilities 

that arise at any time from that triggering event.

Changes: We have revised §§ 668.90(a)(iii) and 668.171(h) 

to include consideration of insurance; we have removed the 

three-year period for review from § 668.171(c); we have 

revised the teach-out provisions in § 668.171(c)(1)(iii) to 

consider only the effect on the overall institutional 

financial capability of closures of locations or 

institutions as determined by recalculating the 

institution’s composite score, as discussed more fully 

under the heading “Teach-out Plan”; and we have revised § 

668.171(b) to provide that the regulations address only 

those triggering events or conditions listed in § 

668.171(c) through (g) that occur after July 1, 2017. 

Comments: Several commenters contended that the proposed 

triggers in § 668.171(c) fail to take into account the 

provisions in section 498(c)(3) of the HEA that require the 

Secretary to determine that an institution is financially 
312

responsible if the school can show, based on an audited and 

certified financial statement, that it has sufficient 

resources to ensure against precipitous closure, including 

the ability to meet all of its financial obligations. To 

support this contention, the commenters stated that the 

proposed regulations do not provide a process or procedural 

mechanism for an institution to make this statutory showing 

before the Department would require the institution to 

submit a letter of credit in response to running afoul of 

an automatic trigger.

Similarly, some commenters stated that requiring 

financial protection by reason of the occurrence of a 

single triggering event was contrary to the requirement in 

section 498(c)(1) of the HEA that the Department assess the 

financial responsibility of the institution in light of the 

total financial circumstances of the institution. 

Other commenters stated that section 498(c) of the HEA 

requires the Department to assess financial responsibility 

based solely on the audited financial statements provided 

by the institution under section 487(c) of the HEA. 

Discussion: Section 498(c) of the HEA directs the 

Secretary to determine whether the institution “is able . . 

. to meet all of its financial obligations, including (but 

not limited to) refunds of institutional charges and 
313

repayments to the Secretary for liabilities and debts 

incurred in programs administered by the Secretary.” 20 

U.S.C. 1099c(c)(1). The statute uses the present tense to 

direct the Secretary to assess the ability of the 

institution to meet current obligations. The statute then 

provides that the Secretary shall also develop criteria 

based on financial ratios, which are to be measured and 

reported in audited financial statements. 20 U.S.C. 

1099c(c)(2),(5). Obligations that accrued in the past may 

be reflected in financial statements showing the 

institution’s financial status as of the close of the most 

recent institutional fiscal year, which are to be submitted 

to the Department “no later than six months after the last 

day of the institution's fiscal year.” 34 CFR 

668.23(a)(4). Obligations that accrue after the close of 

that fiscal year are not included in those statements, and

those losses that are considered probable may receive 

limited recognition in those statements. Potential losses 

from pending litigation that are not yet considered 

probable are not included in those statements. 

Thus, as the commenters state, the statute directs the 

Secretary to take into account “an institution's total 

financial circumstances in making a determination of its 

ability to meet the standards herein required.” 20 U.S.C. 
314

1099c(c)(2). Far from precluding the Secretary from giving 

controlling weight to a single significant occurrence in 

making this determination, the statute recognizes that the 

Secretary may do so if certain enumerated single adverse 

events have occurred in the past two to five years (e.g., 

audit liabilities exceeding five percent of the 

institution’s prior year title IV, HEA funding, or a 

limitation, suspension or termination action or settlement 

of such an action). 20 U.S.C. 1099c(e). The Secretary has 

since, at least the 1994 regulations, consistently 

considered even one such “past performance” event as 

sufficient grounds to render an institution not financially 

responsible even if it met or exceeded the requisite 

composite financial score, and if the Secretary 

nevertheless permitted the institution to participate, the 

institution was required to do so under provisional 

certification with financial protection. 34 CFR 

668.174(a), 668.175(f), (g). The current regulations have 

also considered an institution not financially responsible 

if the institution is currently delinquent by at least 120 

days on trade debt, and at least one creditor has sued. 34 

CFR 668.171(b)(3). Thus, in considering the institution’s 

total financial circumstances, the Secretary has 

consistently regarded a single such occurrence as a 
315

sufficient threat to the institution’s ability “to meet . . 

. its financial obligations” as to make the institution not 

financially responsible. In so doing, the current 

regulations do not delegate to the suing creditor, or to 

the guarantor that brought the limitation, suspension, or 

termination action, the determination of the financial 

responsibility of the institution. To the contrary, the 

current regulations already identify particular past or 

present events as raising significant threats to the 

institution’s ability to meet current obligations to 

creditors, to students, and to the taxpayer. The changes 

to the financial responsibility regulations articulate a 

more comprehensive list of adverse events that similarly 

call into question the institution’s ability to meet 

current and impending obligations.

Changes: None.

Comments: Some commenters argued that under the APA, the 

Department cannot enact regulations applicable to time 

periods prior to the enactment of those regulations and 

therefore should remove the proposed § 668.171(c)(3), which 

would impose penalties on an institution that is currently, 

or was any time during the three most recently completed 

award years, subject to an action by its accrediting 

agency. 
316

Discussion: As discussed above, in response to the 

commenters’ objection that the rules are impermissibly 

retroactive, they are not because they affect only future 

participation. In light of the adoption of the composite 

score methodology, in this section, we evaluate risks under 

that methodology as they affect the current financial 

responsibility of the institution. We evaluate on a threeyear look-back period, as a discretionary triggering event, 

only certain accreditor actions.

Changes: We have revised § 668.171(c)(1)(i) so that it 

does not include events that occurred in the prior three 

years, we have revised § 668.171 to apply to events 

occurring on or after July 1, 2017, and we have relocated 

accreditor actions regarding probation and show cause to 

§ 668.171(g)(5) as discretionary triggers. 

Penalty-Financial Protection

Comments: A commenter stated that requiring the 

institution to provide financial protection constituted a 

penalty on the institution, and that requiring the 

institution to provide such protection from its own funds 

constituted a deprivation of the institution’s property 

interest in those institutional funds. The commenter 

stated that the requirement would also deprive the 

institution of its liberty interest by stigmatizing it.
317

The commenter stated that the proposed requirement offered 

the institution no opportunity to dispute the requirement 

prior to the deprivation of these interests, and thus the 

deprivation would be imposed without the due process 

required by applicable law. The commenter stated that 

Congress requires the Department to provide schools with 

meaningful procedures before the imposition of a 

significant penalty. Specifically, the commenter stated 

that section 487 of the HEA requires the Department to 

afford schools “reasonable notice and opportunity for 

hearing” before imposing a “civil penalty.” This 

requirement applies when the Department seeks to limit, 

suspend, or terminate the school’s participation in any 

title IV, HEA program; determine that a school has made a 

substantial misrepresentation; or determine that a school 

has violated statutes or regulations concerning the title 

IV, HEA programs, each of which carry severe penalties.

The commenter asserted that the required financial 

protection under this rule constitutes a civil penalty 

under the HEA, and is in fact far more onerous than the 

other examples in the HEA. Accordingly, the commenter 

contended that the Department must afford parties the same 

process that Congress contemplated in analogous 

circumstances.
318

Discussion: The requirement that the school provide 

financial protection is not a “penalty” under the HEA, 

which clearly labels as “civil penalties” what the 

regulations refer to as “fines.” 20 U.S.C. 1094(c)(3)(B); 

34 CFR § 668.84. In contrast, section 498(c) of the HEA 

refers to financial protections using completely different 

terms: “third party guarantees,” “performance bonds,” and 

“letters of credit.” The fact that the financial 

protections may inconvenience or burden the school in no 

way makes their requirement a “penalty.” However, current 

regulations already require the Department to provide the 

school with the procedural protections that the commenter 

seeks. 34 CFR § 668.171(e) requires that the Department 

enforce financial responsibility standards and obligations 

using the procedures pertinent to the school’s 

participation status; for fully certified schools, the 

regulations require the Department to use termination or 

limitation actions under subpart G of part 668 to enforce 

the requirement that the school’s participation be 

terminated for lack of financial responsibility, or that 

the school’s continued participation be reduced to 

provisional participation status and further conditioned on 

the provision of financial protection. Current regulations 

already assure that the school will receive all the 
319

procedural protections to which the HEA entitles it, not 

because the Department would deprive the school of its 

property right in its funds (which the financial standards 

would not do), but because the method of enforcing the 

financial responsibility obligation is through a 

termination or limitation action, subject to the procedural 

protections of an administrative hearing. 34 CFR part 668, 

subpart G. These requirements will not change under the 

new regulations.

Section 668.90(a) affords the school the opportunity 

to demonstrate, in the administrative proceeding, that a 

proposed limitation or termination is “unwarranted.” That 

same regulation, however, includes some 14 specific 

circumstances in which the hearing official has no 

discretion but to find that the proposed action is 

“warranted” if certain predicate facts are proven. Among 

these restrictions is a provision that, in a proposed 

enforcement action based on failure to provide “surety” in 

an amount demanded, the hearing official must find the

action warranted unless the hearing official concludes that 

the amount demanded is “unreasonable.” In addition, 

§ 668.174 provides explicit, detailed, curative or 

exculpatory conditions that must be met for a school 

subject to a past performance issue to participate.
320

However, these substantive requirements are not 

incorporated in subpart G of part 668, the regulations 

regarding the conduct of limitation or termination 

proceedings. This may have created the impression that an 

institution subject to the requirements of § 668.174 could 

raise a challenge to those requirements in an 

administrative action to terminate or limit the institution 

that does not meet the requirements of § 668.174. This was 

never the intent of the Department. We therefore revise 

the regulations in § 668.90 governing hearing procedures to 

make clear that the requirements in current § 668.174 that 

limit the type and amount of permitted curative or 

exculpatory matters apply in any administrative proceeding 

brought to enforce those requirements. As for the 

restriction in the final regulations on challenges to a 

requirement that the school provide the “surety” or other 

protection, the Department is updating and expanding one of 

the existing 14 provisions in which an action must be found 

warranted if a predicate fact is proven--in this case, the 

occurrence of certain triggering events, established 

through notice-and-comment rulemaking, that pose 

significant risk warranting the provision of adequate 

financial protection, in a minimum amount also established 

as sufficient through this same notice-and-comment 
321

rulemaking, with any added amount demanded and justified on 

a case-by-case basis. The Department is significantly 

revising the triggers proposed in the NPRM to simplify and 

reduce the number of conditions or occurrences that qualify 

as automatic triggers. As we discuss in adopting the 

composite score methodology, we measure the effect of most 

of the triggering events not in isolation, but only as each 

may affect the overall financial strength of the 

institution, as that strength was most recently assessed 

under the financial ratio analysis adopted in current 

regulations. § 668.172. And, for all discretionary 

triggers, the Department undertakes to assert a demand for 

protection only on a case-by-case basis, with full 

articulation of the reasons for the requirement.43 For 

these discretionary triggers, a school may contest not only 

whether the predicate facts have actually occurred, but 

also whether the demanded “surety”--financial protection--

is reasonable.

 

43 As discussed with regard to determining the appropriate amount of 

financial protection, ordinarily the expected result of closure or a 

significant reduction in operations is closed school discharge claims.

We recognize that in some instances financial protection may be 

warranted for an institution that does not participate in a title IV, 

HEA loan program, and its closure thus cannot generate closed school 

claims. Such an institution remains subject to a demand based on a 

discretionary assessment of other potential losses, and we have revised

§ 668.90(a)(3) to ensure that such an institution can object to a 

demand for financial protection if that demand was based solely on the 

10 percent minimum requirement generally applicable.
322

Changes: We have revised § 668.90(a)(3) to incorporate the 

limitations contained in current § 668.174, as well as the 

limits on challenges to demands for financial protection 

based on the automatic triggers in § 668.171(c)-(f) as 

modified in these final regulations.

Composite Score and Triggering Events

General

Comments: Some commenters believed that the Department 

should not promulgate new financial responsibility 

requirements, or have otherwise engaged in a rulemaking to 

do so, without reviewing and making changes to the 

composite score methodology used in the current financial 

responsibility standards in subpart L of part 668, 

particularly in view of changing accounting standards, and 

the manner in which the Department applies, calculates, and 

makes adjustments to the composite score. 

Similarly, other commenters contrasted the process 

used to develop these financial responsibility amendments 

with the process used by the Department to develop the 

subpart L standards. The commenters noted that, in 

developing the subpart L standards, the Department engaged 

in systematic, sustained efforts to study the issue and 

develop its methodology through the formal engagement and 

aid of KPMG, an expert auditing firm, with significant 
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community involvement. That process took approximately two 

years, and began with empirical studies by KPMG into the 

potential impact of the rule over a year before the 

issuance of any proposed language. The commenters stated 

that, in this case, the Department is rushing out these 

revisions without the necessary and appropriate analysis. 

Commenters noted that the Department produced draft 

language on the triggers and letter of credit requirements 

in the second negotiated rulemaking session, but with no 

significant accompanying analysis or basis for its 

proposal, and did not consult effectively or sufficiently 

with affected parties or prepare sufficient information and 

documentation to convey, or for the negotiated rulemaking 

panel to understand, the impact of this portion of the 

proposed regulations. 

Some commenters were concerned that the Department did 

not harmonize the proposed financial responsibility 

provisions with the current composite score requirements 

and questioned whether it was reasonable for the Department 

to require an institution with the highest composite score 

of 3.0 to secure one or more letters of credit based on 

triggering events. The commenters further questioned why 

the Department proposed numerous and overlapping 

requirements, if the Department believes that the current 
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composite score is a valid indicator of an institution’s 

financial health.

Overlapping Triggers

Some commenters argued that it would be unnecessarily 

punitive to list as separate triggering events, and thereby 

impose stacking letter of credit requirements for, items 

that may be connected to the same underlying facts or 

allegations. For example, a lawsuit or administrative 

proceeding settled with a government oversight agency for 

an amount exceeding a set threshold could lead an 

institution’s accrediting agency to place the institution 

on probation, or an institution that fails the 90/10 

revenue requirement might thereby violate a loan covenant. 

As another example, commenters noted that an institution 

could be subject to a lawsuit or multiple lawsuits about 

the same underlying allegations, an accrediting agency may 

take action against the institution in connection with the 

same allegations, and a State agency may cite the 

institution for failing State requirements that relate to 

those same allegations. The commenters stated that 

multiple triggering events did not necessarily warrant 

additional financial protection and believed that this 

“stacking” of triggers is especially punitive to publicly 

traded institutions, which may be required to or 
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voluntarily elect to disclose certain triggering events, 

such as lawsuits in reports to the SEC where making such 

disclosures is then itself an independent trigger. In this 

case, the commenters believed it was unfair to penalize a 

publicly traded institution twice, while any other 

institution with fewer shareholders or one that opts to 

raise capital privately would be subject to only one letter 

of credit requirement. 

Commenters objected that it would be theoretically 

possible that a school could be required to post letters of 

credit exceeding 100 percent of the title IV, HEA funds the 

school receives, effectively crippling the school. The 

commenters cautioned that the Department should not require 

multiple letters of credit stemming from the same 

underlying facts or allegations-—rather, the rules should 

reflect a more refined approach for setting an appropriate 

level of financial protection for each unique set of facts 

or allegations. The commenters suggested that to ensure 

that an institution provides the amount of financial 

protection that relates specifically to its ability to 

satisfy its obligations, the Department should evaluate 

each triggering event that occurs to determine whether any 

additional financial protection is needed. 
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A few commenters suggested that, rather than applying 

the proposed triggering events in a one-size-fits-all 

manner, the Department should consider other institutional 

metrics that serve to mitigate concerns about institutional 

viability and title IV, HEA program risks. For example, 

the commenters suggested that the Department could 

presumptively exclude from many of the new triggers those 

institutions that have low and stable cohort default rates, 

consistently low 90/10 ratios, a general lack of 

accrediting or State agency actions, or any combination of 

these items. The commenters reasoned that, in the context 

of the NPRM, these attributes would generally indicate 

strong student outcomes and less likelihood of borrower 

defense claims arising from the institution. Or, the 

Department could provide that institutions with cohort 

default rates and 90/10 ratios below specified thresholds 

would not be required to post cumulative letters of credit 

under the new general standards of financial 

responsibility. Similarly, the commenters urged the 

Department to assess the circumstances of each triggering 

event to determine whether any additional protection is 

needed rather than requiring cumulative letters of credit 

for each of the triggering events. The commenters believed

that by taking these alternate approaches, the financial 
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responsibility regulations could be tailored to assess 

institutional risk profiles on a more holistic basis, 

rather than in the generally non-discerning manner 

reflected by the NPRM.

Other commenters requested that the Department specify 

in the final regulations the duration of each letter of 

credit for each triggering event, noting that in the 

preamble to the NPRM, the Department stated that schools 

subject to an automatic trigger would not be financially 

responsible for at least one year based on that trigger, 

and in some instances, for as long as three years after the 

event. 

A commenter asserted that the institution should be 

provided the opportunity to demonstrate by audited 

financial statements that it had the resources to ensure 

against precipitous closure pursuant to section 

498(c)(3)(C) of the HEA.

Discussion: After carefully considering the comments, the 

objective of the changes that we proposed, and the 

availability of other measures, we are changing the method 

of assessing the effect of many of the triggering events. 

We explain here briefly the composite methodology currently 

used to evaluate financial strength, and how we will use 

the composite score methodology to evaluate whether, and 
328

how much, those triggering events actually affect the 

financial capability of the particular institution. In 

addition, as discussed later in this preamble, we are 

revising and refining the triggers to consider as 

discretionary triggering events several of the events 

included as automatic triggers in the NPRM. 

The composite score methodology in subpart L used 

under current regulations is the product of a comprehensive 

study of the issue and of numerous financial statements of 

affected institutions, as well as substantial industry 

involvement. The 1997 rulemaking that adopted this method 

established a basic model for evaluating financial 

responsibility that was intended to serve as the core of 

the Department’s evaluation process for proprietary and 

private non-profit institutions, replacing a piecemeal 

approach still reflected in § 668.15(b)(7), (8), and (9). 

The regulations in subpart L were adopted to replace the 

prior structure, in which an institution was required to 

satisfy a minimum standard in each of three independent 

tests. The Department replaced that with “a ratio 

methodology under which an institution need only satisfy a 

single standard-– the composite score standard. This new 

approach is more informative and allows a relative strength 

in one measure to mitigate a relative weakness in another 
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measure.” 62 FR 62831 (Nov. 25, 1997).44 However, we note 

that even the prior financial responsibility standards 

considered whether the school was subject to a pending 

administrative action or suit by a Federal agency or State 

entity. § 668.15(d)(2)(ii)(C). Section 668.15 contained, 

and still contains, provisions addressing matters that may 

well occur after the audited period–-for example, 

delinquency on an existing debt obligation, and a suit by 

at least one creditor, § 668.15(b)(4)(ii), as well as the 

same familiar past performance standards regarding parties 

with substantial control over the institution or the 

institution itself. 34 CFR 668.15(c).45

Although the 1997 regulations replaced the three 

independent financial ratio tests with the new composite 

score methodology as the core measure of financial 

responsibility, those regulations retained most of the 

accompanying provisions dealing with examples of financial 

risks that would not necessarily or even ordinarily be 

reflected in the audited financial statements on which the 

 

44 The composite score methodology assesses three aspects of financial strength but, unlike the prior 

method, assigns relative weights to each of the three assessments to produce a single, “composite” score. 

45 The 1994 financial responsibility regulations implemented the provision of section 498(c)(3)(C) of 

the HEA that would have allowed an institution that failed other financial responsibility to 

demonstrate by audited financial statements that it would not pose a risk of “precipitous closure.” § 

668.15(d)(2)(ii). The 1997 regulations supplanted the standards in § 668.15 with new subpart L, 

which centered the assessment of financial responsibility on the composite score methodology. The 

Department there adopted the “zone” assessment to assess “precipitous closing” rather than the 

separate audited financial statement showing previously permitted. 62 FR 62860-62862 (1997). 
330

composite score rests. The Department made clear in the 

NPRM that, despite requests to revisit or modify the 

composite score component of the financial responsibility 

regulations, we were not doing so. 81 FR 31359. Thus, we 

retain here unchanged the methodology that the commenters 

laud as the product of careful, comprehensive, and engaged 

development. 

In these final regulations the Department addresses 

the significance of new events that occur after the close 

of an audited period, or that are not recognized, or not 

fully recognized, and reflected in audited financial 

statements, to assess whether the school, regardless of its 

composite score, “is able to provide the services described 

in its publications and statements, to provide the 

administrative resources necessary to comply with the 

requirements of this title [title IV of the HEA], and to 

meet all its financial obligations. . . .” 20 U.S.C. 

1099c(c)(1). In doing so, we are expanding the 

consideration of events that would make a school not 

financially responsible in the near term--from the single 

example in current regulations (commercial creditor 

lawsuits) to other major lawsuits and other events that 

pose a potential material adverse risk to the financial 

viability of the school. In the negotiated rulemaking 
331

meetings, and in the NPRM, we articulated the adverse 

events that recent history indicates pose a significant 

risk to the continued ability of an institution to meet 

these several obligations. We address elsewhere in this 

preamble comments directed at events that pose particular 

risks, but discuss here the manner in which these events 

will be evaluated. 

The composite score methodology, as commenters 

stressed and as we acknowledge, is designed to measure the 

viability of an institution from three different aspects 

and develop a score that assigns relative weight to each 

aspect to produce a score showing the relative financial 

health and viability of the institution. In general, 

institutions with a composite score of 1.5 or more are 

financially responsible; those with a score between 1.0 and 

1.5 are in the “zone” and subject to increased reporting 

and monitoring; those with a score below 1.0 are not 

financially responsible, and may participate only on 

conditions that include providing financial protection to 

the Department. However, the limitations of the existing 

composite score methodology are two-fold: the score is 

calculated based on the audited financial statements for 

the most recent fiscal year of the institution, and the 

audited financial statements recognize threatened risks 
332

only if accounting rules require the institution to 

recognize those events. If those events are recognized, 

however, the composite score can readily assess their 

effect on the viability of the institution, with due regard 

for the actual financial resources of the institution, 

including its ability to meet exigencies with internal 

resources and to borrow to meet them. The institution’s 

composite score in each instance has already been 

calculated; to assess the effect of a threat or event 

identified in these regulations, the institution’s 

financial statements on which that composite score was 

calculated will be adjusted to reflect the amount of loss 

attributed to, and other impacts of, that threat, and based 

on the adjusted statements, the Department will recalculate 

the institution’s composite score. This recalculation will 

occur regularly as threats or events identified in these 

regulations are identified. By adopting this approach, the 

final regulations provide an individualized assessment 

rather than the one-size-fits-all method proposed in the 

NPRM that commenters found unrealistic. Unless other 

conditions apply, under the current regulations, an 

institution that undergoes a routine assessment of 

financial responsibility and achieves a composite score of 

1.5 or greater may continue to participate without 
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providing financial protection; an institution with a score 

between 1.0 and 1.5 may participate subject to heightened 

reporting and scrutiny; and an institution with a composite 

score below 1.0 is not financially responsible and may 

participate only with financial protection.46 §§ 

668.171(b)(1), 668.175(c), 668.175(f). Under the approach 

we adopt here, where the recognition of the triggering 

event produces a recalculated composite score of 1.0 or 

greater, we will regard the event as not posing a risk that 

makes or is likely to make the institution not financially 

responsible, and will therefore not require financial 

protection. If the recognition of the event or risk 

produces a failing composite score--less than 1.0--the 

institution is required to provide financial protection. 47

For the purpose of recalculating an institution’s 

composite score, as detailed in Appendix C to these 

regulations, the Department will make the following 

adjusting entries to the financial statements used to 

 

46 As provided under §668.175(f)(3), an institution that has a composite score of less than 1.0 is not 

financially responsible until it achieves a composite score of 1.5 or higher. In other words, if an institution 

with a composite score of less than 1.0 has in the following year a composite score between 1.0 and 1.5, 

the institution is still subject to the requirements under the provisional certification alternative, including 

the letter of credit provisions, even though it scores in the zone.

47 As the Department stated in the 1997 rulemaking, “However, an analysis of data of 

closed institutions indicates that institutions that fail the ratio 

test should not be allowed to continue to participate without some 

additional surety to protect the Federal interest.”
334

calculate an institution’s most recent composite score. 

For clarity, the adjusting entries refer to the line items 

in the balance sheet and income statements illustrated in 

Appendix A for proprietary institutions and Appendix B for 

non-profit institutions.

For a proprietary institution, for events relating to 

borrower-defense lawsuits, other litigation, or debts 

incurred as a result of a judicial or administrative 

proceeding or determination, or for a withdrawal of owner’s 

equity, the Department will debit Total Expenses, line item 

#32, and credit Total Assets, line item #13, for the amount 

of the loss–-the amount of relief claimed, the debt 

incurred, the amount withdrawn, or other amount as 

determined under § 668.171(c)(2). Except for the 

withdrawal of owner’s equity, the corresponding entries for 

a non-profit institution are a debit to Total Expenses, 

line item 38b (unrestricted), and a credit to Total Assets, 

line item #12, for the amount of the loss.

For a proprietary institution, for events relating to 

a closed location or institution or the potential loss of 

eligibility for GE programs, the Department will debit 

Total Income, line item #27, and credit Total Assets, line 

item #13, for the amount of the loss. The loss is the 

amount of title IV, HEA funds the institution received in 
335

the most recently completed fiscal year for the location or 

institution that is closing or for the GE programs that are 

in jeopardy of losing their eligibility for title IV, HEA 

funds in the next year. In addition, the Department will 

debit Total Assets, line #13, and credit Total Expenses, 

line #32, for an amount that approximates the educational 

costs that the institution would not have incurred if the 

programs at the closing location or the affected GE 

programs were not offered. We believe it is reasonable 

that this reduction in costs is proportional to the ratio 

of Cost of Goods Sold (line item #28) to Operating Income 

(line item #25)--that is, the amount it cost the 

institution to provide all of its educational programs 

divided by the revenue derived from offering those 

programs. 

The corresponding entries for a non-profit institution 

are, for the loss, a debit to Total Revenue, line item 

#31b, and a credit to Total Assets, line item #12. The 

reduction in costs is calculated by dividing Operating 

Expenses, line item #32, by Tuition and Fees, line item 

#27, and multiplying the result by the amount of the loss, 

the amount of title IV, HEA funds received by the location 

or affected GE programs. To account for the reduction in 
336

costs, the Department will debit Total Assets, line item 

#12, and credit Total Expenses, line item 38b.

Recognition of recent or threatened events can be 

appropriately measured under the composite score 

methodology if the event causes or is likely to cause a 

loss that can be quantified. All but two of the events 

that we retain as automatic triggers pose risks that we can 

quantify in order to assess their impact on the 

institution’s composite score. Lawsuits, new debts of any 

kind, borrower defense discharge claims, closure of a 

location, loss of eligibility of gainful employment 

programs, and withdrawal of owner equity all have effects 

that may be quantified so that their effects can be 

assessed using the composite score methodology. 

In at least two instances, there is no need to attempt 

to quantify the loss, because the loss is self-evident. An 

institution that fails the requirement to derive at least 

10 percent of its revenues from non-title IV sources is so 

dependent on title IV, HEA funds as to make the loss of 

those funds almost certainly fatal, and we see no need to 

quantify that amount through the composite score 

methodology. That risk requires financial protection 

regardless of the most recent composite score achieved by 

the institution. Similarly, an institution whose cohort 
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default rate exceeds 30 percent in two consecutive years is 

at risk of losing title IV, HEA eligibility the following 

year and requires no composite score calculation. These 

risks require financial protection regardless of the most 

recent composite score achieved by the institution. 

An action taken by the SEC to suspend trading in, or 

delist, an institution’s stock directly impairs an 

institution’s ability to raise funds–-creditors may call in 

loans or the institution’s credit rating may by downgraded. 

However, unlike lawsuits and other threats, it is difficult 

to quantify readily the amount of risk caused by that 

action and assess that new risk using the prior year’s 

financials and the composite score derived from those 

statements. Nevertheless, because the impaired ability to 

raise funds caused by these actions is potentially 

significant, that risk warrants financial protection 

without the reassessment of financial health that can be 

readily performed for more quantifiable risks. 

Nevertheless, because the impaired ability to raise funds 

caused by these actions is potentially significant, that 

risk warrants financial protection without the reassessment 

of financial health that can be readily performed for more 

quantifiable risks. 
338

We recognize that the institution’s current year 

financial strength may differ from that reported and 

analyzed for the prior fiscal year. That difference, 

however, can be favorable or unfavorable, and would be 

difficult to reliably determine in real time. Given that 

uncertainty, we consider it a reasonable path to use as the 

baseline the data in the most recent audited financials for 

which we have computed a composite score, and adjust that 

data to reflect the new debt or pending threat. Any 

disadvantage this may cause an institution will be 

temporary, because the baseline will be corrected with 

submission, evaluation, and scoring of the current year’s 

audited financial statements. In assessing the composite 

score of the new financial statements for purposes of these 

standards, we will continue to recognize, for purposes of 

requiring financial protection, any threats from triggering 

events that would not yet be fully recognized under 

accounting standards. However, improvements in positions 

demonstrated in the new audited financials may offset the 

losses recognized under these regulations. If those 

improved positions produce a composite score of 1.0 or 

more, despite the loss recognized under these regulations,

the institution may no longer be required to provide 

financial protection. 
339

With regard to the suggestion by the commenters that 

the Department allow an institution to submit new month-end 

or partial-year audited financial statements from which the 

composite score would be recalculated, we believe that 

doing so would be costly and unworkable, because those 

financial statements do not reflect a full year’s 

transactions, and would potentially recognize only new 

debts, or partially recognize new litigation or other 

claims for which the institution determines that a loss is 

probable. We note that the composite score methodology was 

designed to measure the financial performance of an 

institution over an entire 12-month operating cycle, the 

institution’s fiscal year, and believe that attempting to 

calculate a composite score for a partial year would 

produce anomalous results. In addition, it is not clear

how an institution could produce audited financial 

statements by the end of the month in which a triggering 

event occurred. Further, the suggestion does not appear to 

offer a realistic approach because separate actual or 

threatened losses may occur throughout the year, and for 

each event, this proposal would require a new set of 

financial statements. 

This approach will affect only institutions that have 

a recalculated composite score of less than 1.0. If 
340

recognition of the event produces a recalculated composite 

score of between 1.0 and 1.5 for an institution that had a 

routine composite score of 1.5 or more, the recalculated 

score does not change the existing score to a zone score, 

so the institution is not required to comply with the zone 

requirements. § 668.175(d). For some institutions, a 

single event or threat may produce a failing composite 

score, while for others, a series of actions or events may 

together place the institution at substantial risk. Using 

the composite score methodology to assess new or threatened 

risks, instead of using a dollar- or percentage-based 

materiality threshold for individual triggering events, 

allows the Department to assess the cumulative effect on 

the institution of individual threats or events regardless. 

Thus, we will require financial protection only when the 

recalculated composite score is failing and the cumulative 

effect produces a failing score.

In response to the commenters who objected that the 

proposed triggering scheme would arbitrarily “stack” 

protection requirements, the composite score methodology 

distinguishes among levels of financial strength, and as we 

explain below, permits the Department to align the amount 

of protection required with the relative risk or weakness 

posed by successive triggering events or conditions. We 
341

agree with the commenters that an institution should not be 

required to provide financial protection for every 

automatic triggering event for which the underlying facts 

or circumstances are the same or where a direct causal 

relationship exists between two or more events, like the 

circumstance noted by the commenters where a 90/10 

violation causes a loan agreement violation, or a 

settlement generates an accreditor sanction. 

In response to the objection that these regulations 

could require financial protection equal to all of the 

title IV, HEA funds received in the prior year, we adopt 

here an approach that tailors the amount of protection 

required to a minimum amount we consider sufficient to 

cover the losses to the government reasonably likely to 

occur upon closure, plus any additional amount that we 

estimate is reasonable to expect based on the circumstances 

presented by the risks posed for the particular 

institution. Under current regulations, an institution 

that does not meet financial responsibility standards may 

participate under provisional certification requirements by 

providing a letter of credit equal to at least 10 percent 

of the prior fiscal year title IV, HEA program funds 

received. § 668.175(f)(2)(i). This restriction applies to 

any institution that no longer qualifies for continued 
342

participation in the zone, or, as particularly pertinent 

here, achieves anything less than a score of 1.0–-for 

example, a score of .90. Because the composite score makes 

these kinds of distinctions among scores, current 

regulations give dispositive weight to its results in 

critical determinations regarding an institution’s ability 

to participate. Thus current regulations have long 

attached controlling significance to what may be relatively 

slight differences in composite score outcomes. We adopt 

here a rule that an institution that receives an adjusted 

composite score of less than 1.0 must provide financial 

protection in an amount not less than 10 percent of the 

prior fiscal year’s title IV, HEA funding, and, as the 

composite score decreases, the institution may be required 

to provide an added amount of protection where supported by 

the particular facts and circumstances-–including the 

history of the institution, the nature of the risks posed, 

the presence of existing liabilities to the Department, the 

presence, amount, and rate at which borrower defense claims 

are being filed, and the likelihood that the risk will 

result in increases in borrower defense claims. 

The requirement to provide at least a 10 percent 

letter of credit is rooted in the 1994 regulations 

regarding provisional certification of institutions that 
343

did not meet generally applicable financial responsibility 

standards. 34 CFR 668.13(d)(1)(ii)(1994). We adopt here 

this 10 percent as a minimum requirement because we 

consider financial protection in the amount of 10 percent 

of prior year title IV, HEA funding to be the minimum 

amount needed to protect the taxpayer from losses 

reasonably expected from an institution’s closing. These 

losses include, at a minimum, costs of closed school 

discharges. Closed school discharges can affect all loans–

-including PLUS loans--obtained to finance attendance at 

the closing institution. This includes any loans obtained 

for enrollment in years before the year in which the 

institution closes, not merely those loans received by 

students for attendance at the institution in the year in 

which it closes. Thus, a closure could, in some instances, 

generate closed school discharge losses in amounts

exceeding the total amount of Direct Loan funds that the 

institution received in the year preceding the year of that 

closure.

Liabilities of an institution could also include 

liabilities for funds unaccounted for by audit, because the 

institution as a fiduciary is liable for the costs of title 

IV, HEA funds it received unless it affirmatively 

demonstrates by the required compliance audit that it spent 
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those funds properly. An institution that closes may have 

neither the resources nor the incentive to secure an audit 

of its expenditures of these funds. The liability of an 

institution that fails to account for those funds includes 

the full amount of Pell Grant funds received, and, for 

loans that are received for that period and are not 

discharged, the subsidy costs for those loans, which varies 

from year to year among loan types.48 An institution that 

closes may also owe liabilities to the Department for debts 

arising from audits, program reviews, or fine actions, or 

from borrower defense claims. Closure of the institution 

would also jeopardize recovery of all these liabilities, 

and the risk to the taxpayer in those instances is 

considerably greater than the costs of closed school 

discharges. 

We have already experienced closed school discharge 

claim losses in one of the most recent and significant 

school closures, that of Corinthian, that permits 

 

48 Because every institution must affirmatively account for the title IV, HEA funds it has caused to be 

awarded during an entire fiscal year as properly spent, an institution receiving funds on the cash 

monitoring or reimbursement method does not meet this obligation simply by having payments approved 

under the requirements applicable to funding under those methods, which do not necessarily involve the 

comprehensive examination conducted in an audit. Similarly, because the institution must make this 

accounting on a fiscal year basis, the fact that an institution may offer short programs several of which 

may be completed within a fiscal year does not limit the potential loss in the case of a precipitous closure 

to the amount of funds received for a program that may be curtailed by such a closure, rather than all the 

funds for which it was responsible for the entire fiscal year. 
345

development of estimates of liabilities. Corinthian was 

composed of three chains of some 37 separate institutions, 

operating at 107 campuses, with 65,000 students enrolled in 

2014. It received $1.439 billion in title IV, HEA funding 

in FY 2013, the last full fiscal year preceding its 

closure. During the year preceding its closure, Corinthian 

sold 50 campuses, with some 30,000 students enrolled, to a 

new entity, a transaction that allowed a major portion of 

Corinthian students to complete their training. In 

addition, under agreement with the Department, Corinthian 

continued training at the campuses it retained until its 

closure in April 2015. 

The Department has to date granted closed school 

discharges of some $103.1 million for some 7,858 Corinthian 

borrowers, with the average discharge some $13,114.49 

Additionally, the Department has thus far approved 3,787 

borrower defense discharges, totaling $73.1 million. 

Together, Corinthian’s liabilities through both closed 

school and borrower defense total more than $176 million, 

with additional claims expected to be approved later. A 

letter of credit at the level of 10 percent of prior year 

title IV, HEA funding would have been $143 million-–enough 

 

49 As of October 2016.
346

to cover the estimated total closed school discharges and 

far too little to cover the school’s total liabilities on 

individual student loan losses.50

From this history, we estimate that an institution 

that closes in an orderly wind down, under which the 

majority of the students are able to continue their 

education by transfer or otherwise, will generate closed 

school discharge claims of at least 10 percent of the 

amount of all title IV, HEA funding received in the last 

complete fiscal year prior to the year in which the 

institution finally closes. Therefore, we adopt 10 percent 

of prior year title IV, HEA funding as the minimum amount 

of financial protection required of an institution that 

achieves a recalculated composite score of less than 1, or 

otherwise faces the risks (90/10, cohort default rates, SEC 

action) for which we do not recalculate a composite score. 

This is consistent with many years of Department practice. 

Obviously, not all closures will arise in such 

fortuitous situations. It is realistic to expect that for 

other closures, including those that are more precipitous, 

a far greater percentage of borrowers will qualify for 

closed school discharges. Moreover, these regulations are 

 

50 The Department also fined Corinthian $30 million. 
347

expected to increase the number of instances in which we 

will give a closed school discharge by providing relief 

without an application where we have sufficient information 

to determine eligibility. In addition, based on the 

Corinthian experience, we expect that the law enforcement 

agency actions that can constitute triggering events will 

generate borrower defense claims as well.51 Other 

liabilities to the Department may already exist or are 

expected to arise. Under these regulations, therefore, the 

Department demands greater financial protection in cases in 

which these risks are identified, in addition to the 

minimum 10 percent. We include other conditions as 

discretionary triggering events, but in particular 

circumstances, those conditions can separately indicate 

that the potential losses that may arise warrant levels of 

financial protection greater than 10 percent. If the 

Department demands greater financial protection than the 10 

percent level, the Department articulates the bases on 

 

51 These losses can be very substantial. The Department has already granted $73 million in borrower 

defense discharge relief to some 3800 Corinthian Direct Loan borrowers under § 685.206, and thousands 

of Corinthian borrower claims are pending. The average amount of loan indebtedness discharged for 

these 3800 was $19,300; many thousands of other Corinthian borrowers may have valid claims for 

relief, and the Department has been reaching out to some 335,000 of these individuals. See: United 

States Department of Education Fourth Report of the Special Master for Borrower Defense to the 

Under Secretary, June 29, 2016. If even 20 percent of these other borrowers qualify for relief, the 

loss to the Federal taxpayer would add another billion dollars to the $73 million in losses already 

experienced. 
348

which that added protection is needed, which can include 

any of the considerations discussed here. If an 

institution has already arranged financial protection, the 

Department credits the amount of protection already 

provided toward the amount demanded, if the protection 

already provided has the same terms and extends for the 

duration of the period for which protection is required 

pursuant to these regulations. In determining the proper 

amount of financial protection, then, we intend to look 

closely at any evidence that these kinds of liabilities may 

ensue from the risk posed by adverse events to a particular 

institution. We note, in particular, that section 

498(e)(4) of the HEA, by indicating which specific 

histories of compliant behavior are enough to bar the 

Department from requiring personal guarantees from owners 

or institutions, has identified those histories that 

indicate future risk. 20 U.S.C. 1099c(e). Since 1994, the 

Department has implemented the statute in precisely this 

way, by adopting these histories as per se financial 

responsibility failures, warranting surety and provisional 

certification. §§ 668.174(a), 668.175(f)(1)(ii). 

Similarly, section 498(c)(1)(C) of the HEA specifically 

directs the Secretary to consider whether the institution 

is able to meet its refund obligations to students and the 
349

Department. 20 U.S.C. 1099c(c)(1)(C). The Department has 

implemented this provision by requiring an institution that 

has a performance rate of less than 95 percent in either of 

the two most recently completed fiscal years to provide 

surety in an amount of 25 percent of the amount of refunds 

owed during the most recently completed fiscal year. 

§668.173(d). We intend to apply these long-standing and 

statutorily sanctioned predictors of potential liabilities 

in determining the amount of financial protection that we 

may require over and above that minimum amount to cover the 

costs of closed school discharges. Thus, we may determine 

that the potential loss to the taxpayer of the closure or 

substantial reduction in operations of an institution that 

has failed the 95 percent refund performance standard to be 

25 percent of refund obligations in the prior year, in 

addition to the 10 percent of prior year title IV, HEA 

funding needed to cover closed school discharges. We may 

determine that the potential loss to the taxpayer of the 

closure or substantial reduction in operations of an 

institution that has had audit or program liabilities in 

either of the two preceding fiscal years of five percent or 

more of its title IV, HEA funds to present a potential loss 

of that same percent of its most recent title IV, HEA 

funding, in addition to the 10 percent of funding needed to 
350

defray closed school discharge losses. We may determine 

that the closure or substantial reduction in operations of 

an institution that has been cited in any of the preceding 

five years for failure to submit in a timely fashion 

required acceptable compliance and financial statement 

audits presents a potential loss of the full amount of 

title IV, HEA funds for which an audit is required but not 

provided, in addition to any other potential loss 

identified using these predictors. 

Relying on the composite score methodology also helps 

clarify how long financial protection for risks or 

conditions should be maintained, because some events have 

already occurred, and will necessarily be assessed in the 

next audited financial statements and the composite score, 

which is routinely calculated. Others, such as pending 

suits or borrower defense claims, will not be reflected in 

the new financial statements, and those risks may still 

warrant continuing the financial protection already in 

place. Along these lines, we will maintain the full amount 

of the financial protection provided by the institution 

until the Department determines that the institution has

(1) a composite score of 1.0 or greater based on the review 

of the audited financial statements for the fiscal year in 

which all losses from any triggering event on which the 
351

financial protection was required have been fully 

recognized, or (2) a recalculated composite score of 1.0 or 

greater, and that any triggering event or condition that 

gave rise to the financial protection no longer applies. 

We believe it is reasonable to require an institution 

to maintain its financial protection to the Department as

noted above until the consequences of those events are 

reflected in the institution’s audited financial statements 

or until the institution is no longer subject to those 

events or conditions. If the institution is not 

financially responsible based on those audited statements, 

or the triggering events continue to apply, then the 

financial protection on hand can be used to cover all or 

part of the amount of protection that would otherwise be 

required. Doing so minimizes the risks to the Federal 

interests by having financial protection in place in the 

event that an institution does not sufficiently recover 

from the impact of a triggering event--any cash or letter 

of credit on hand would be retained and any funds under a 

set-aside arrangement would reduce or eliminate the need to 

offset current draws of the title IV, HEA funds.

With regard to the comment that a letter of credit 

could exceed 100 percent of the title IV, HEA funds 

received by an institution, we note that the regulations 
352

adopted here set 10 percent of prior year title IV, HEA 

funding as the minimum financial protection required for an 

institution that achieves a recalculated score below a 1, 

or fails the 90/10, cohort default rate, or SEC triggers, 

and permit the Department to demand greater protection when 

the Department demonstrates that the risk to the Department 

is greater. 

Changes: We have revised § 668.171(c)(1) to provide that 

losses from events or risks listed as triggering events are 

generally evaluated by determining whether the amount of 

loss recognized for this purpose, if included in the 

financial statements for which a composite score was most 

recently calculated under § 668.172, would produce a 

composite score less than 1.0. In § 668.171(c)(2) we have 

specified that the actual or potential losses from the 

actions or events in § 668.171(c)(1) are accounted for by 

revising an institution’s most recent audited financial 

statements and that the Secretary recalculates the 

institution’s composite score based on the revised 

statements regularly. If the recalculated composite score 

is less than 1.0, the institution is not financially 

responsible and must provide financial protection. 

Triggering Events
353

Comment: Some commenters objected that the Department had 

produced no data to support the assertion that the 

triggering events in fact pose the risks that would warrant 

their use. Other commenters stated that the requirement to 

provide financial protection based on the mere filing of a 

lawsuit seeking the proposed recoveries was speculative,

not based on actual data showing that an adverse result was 

reasonably expected to result from that suit and was thus 

arbitrary and lacked a reasonable basis. Another commenter 

asserted that the Department’s reference to the Corinthian 

situation does not support adopting the rule proposed here, 

and that current regulations were sufficient to enable the 

Department to obtain from Corinthian the protections needed 

to mitigate or eliminate the risks now cited to justify the 

new rules. The commenter asserted that Corinthian failed 

financial responsibility tests in FY 2011, could have been 

required to post a letter of credit, but was not required 

to do so, nor was it required to post a letter of credit 

for FY 2014, when Corinthian again failed the tests.

Discussion: As discussed for each of the triggers, each 

reflects a new financial obligation already incurred and 

not yet reflected in the composite score for the 

institution, or a new financial risk that is realistically 

imminent, whether or not yet recognized in the audited 
354

financial statements. Current regulations permit the 

Department to demand 10 percent or more financial 

protection, but provide no structured scheme to assess 

whether a particular event actually jeopardizes the 

institution, and if so, by how much, and what amount of 

protection is needed beyond that 10 percent minimum 

described in the regulations. We described in the NPRM the 

history of Corinthian’s evaluation under the existing 

financial responsibility scheme.52 Even if Corinthian’s 

financial statements had been accurate when presented, they 

would not have accounted for the risk posed by the pending 

California attorney general action, that ended in a 

judgment for $1.1 billion, and the LOC that would likely 

have been demanded–-a small fraction of the title IV, HEA 

funding for the prior year–-would barely have covered the 

liabilities already established by the Department against 

Corinthian. The Corinthian experience highlighted the need 

to identify events that posed realistic jeopardy in the 

short term, and to secure financial protection before the 

loss was incurred and the institution on account that that 

loss no longer had the ability to provide that protection. 

Similarly, current standards would not require protection 

 

52 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 financial tests in current regulations. 81 FR 39361.
355

where an institution was on the very cusp of loss of title 

IV, HEA eligibility, as with cohort default rate and 90/10 

sanctions. 

Changes: None.

Automatic Triggering Events

Lawsuits and other actions § 668.171(c)(1)(i)

Lawsuits Settlements/Resolutions

Comments: Under proposed § 668.171(c)(1)(i)(B), (ii), and 

(iii), a school may not be financially responsible if it is 

currently being sued by a State, Federal, or other 

oversight entity, or by private litigants in actions, 

including qui tam suits under the False Claims Act, that 

have survived a motion for summary judgment. 

Some commenters objected that requiring financial 

protection based on suits by private parties was 

unreasonable because the commenters considered those suits 

to have no bearing on the financial responsibility and 

administrative capability of the institution. Others 

considered reliance on the filing of suits that had not yet 

resulted in judgments against the institution to constitute 

an unreasonable standard that deprived the institution of 

its due process rights to contest the lawsuits. A 

commenter objected to the inclusion of government suits 

because the commenter considered proprietary institutions 
356

to often be the target of ill-planned and discriminatory 

suits by State and Federal agencies. A commenter stated 

that suits filed by State AGs have been shown in some cases 

to be politically motivated and argued that such suits 

should not be the basis for a letter of credit as they may 

unfairly target unpopular members of the higher education 

industry, depending on the party affiliation of the AG. 

The commenter stated that the suits are not required to be 

based in fact and rarely lead to a finding, that the 

judicial process should be allowed to follow its usual 

course, and that requiring schools to post letters of 

credit prior to a judicial ruling in the case amounts to 

finding a school guilty and requiring the school to prove 

innocence. The commenter stated that the risk posed by the 

filing of a suit cannot be determined simply from the 

complaint filed in the suit, and the actual risk posed by 

such suits, some commenters urged, could be reasonably 

determined only after determining the merits of the suit. 

Commenters objected that these triggering events would 

require a school to submit a letter of credit before there 

was any determination of merit or wrongdoing by an 

independent arbiter, and stated that such suits should not 

be taken into account until judgment. The commenters 

stated that they believed that, contrary to the 
357

Department's statement in the preamble that suits by State 

and Federal agencies are likely to be successful, most 

cases settle due to the outsized leverage of the 

government, despite their merits. In addition, the 

commenters believed that suits filed by State AGs should 

not be the basis for a letter of credit because these suits 

have been shown in some cases to be politically motivated 

and to unfairly target institutions. 

Another commenter urged the Department to remove the 

lawsuit triggers, arguing that the mere filing of an 

enforcement action by a State, Federal, or other oversight 

entity based on the provision of educational services 

should not be considered a trigger. The commenter stated 

that lawsuits are easy to file, allegations are not facts, 

and, even assuming good faith on the part of State and 

Federal regulatory agencies, sometimes mistakes are made. 

The commenter contended that the litigation process creates 

the incentive for sweeping allegations that may or may not 

be verifiable, or there may be cases filed by an agency in 

the hope of making new law or establishing a new standard 

for liability or mode of recovery beyond that applied by 

courts in ruling on such claims. A commenter was concerned 

that an “other oversight agency” could refer to a town or 

county zoning board or land use agency that could threaten 
358

to file a multi-million dollar suit for pollution, or a 

nuisance suit like a violation of a local sign ordinance, 

or failure to recycle soda cans, as a way to leverage 

concession from the institution for other reasons. These 

suits would be covered under proposed § 668.171(c)(1)(ii) 

even though they have nothing to do with the educational 

mission of the school. The commenter contended that giving 

such unbridled power to non-State, non-Federal, noneducation-related oversight entities would effectively 

place the “sword of Damocles” over the head of every 

college president who needs to negotiate a dorm or a new 

parking facility. 

Many commenters objected to consideration of 

settlements with government agencies under proposed

§ 668.171(c)(1). As proposed, the regulation might make a 

school not financially responsible if during the current or 

three most recently completed award years it was required 

to pay a debt to a government agency, including a debt 

incurred under a settlement. Commenters viewed this 

provision as overly broad and punitive, and suggested that 

settlements be excluded from this provision. A commenter 

believed that an institution under investigation will have 

a strong incentive to avoid a settlement that would 

precipitate the triggering event in proposed 
359

§ 668.171(c)(1)(i)(A), which would require it to provide 

the Department a potentially expensive or unobtainable 

letter of credit. A commenter noted that bringing suit can 

be an important tool in facilitating settlement, and cited 

a case where a State AG filed a consumer fraud suit against 

an institution. The parties were able to negotiate a 

settlement that provided $2.1 million in loan forgiveness 

and $500,000 in refunds for students. Imposing a letter of 

credit in such situations would deter such favorable 

settlements. Commenters asserted that many businesses 

settle claims with the government due to the cost of 

litigation and the outsized leverage of the government, 

regardless of the merits of the underlying claims.

Commenters objected to consideration of debts already 

paid, asserting that if a school pays a liability as a 

result of an agency action, the school has already paid an 

amount that was deemed appropriate by the agency and should 

not be subject to the additional punitive requirement of 

posting a letter of credit. The commenters argued that 

this is especially true if the school's payment resulted in 

repayments to students such that a letter of credit is no 

longer necessary to provide for possible student claims.

Similarly, other commenters claimed that lawsuit 

triggers would create every incentive for borrowers who get 
360

behind in their loan payments to file claims or suits 

against an institution, regardless of how frivolous those 

suits or claims may be, and therefore these triggers should 

not be part of the borrower defense rulemaking.

Evaluation

A commenter urged the Department to make the lawsuit 

and investigation triggers in § 668.171(c)(1) evaluative 

instead of automatic, so that the Department would evaluate 

the type of suit, the merit of the claims, the amount of 

money at stake, and the likelihood of success. With this 

system in place, only institutions with a serious financial 

risk would be required to obtain a letter of credit, 

leaving other institutions room to negotiate with State AGs 

or other enforcement entities. 

Other commenters objected to assessing the value of 

the lawsuits (in proposed § 668.171(c)(v)) by using “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” as wrongly presuming 

that every student in the period (or three years if none is 

stated) would receive a full refund, and may have no 

relation to the event on which suit was brought. While the 

commenters do not suggest using the damages proposed in any 

complaint, which they claim are often speculative and 
361

designed to grab media attention rather than reflect a true 

damage calculation, a better way to assess value would be 

an analysis of the merits of the specific litigation at 

issue, guided by past recoveries and settlements for 

similar actions. Some commenters objected that State AGs 

and private litigants will likely include demands for 

relief in pleadings that equal or exceed the thresholds set 

by the Department in order to gain additional leverage over 

an institution. Other commenters objected that State AG 

suits will also exceed the thresholds because they will 

state no dollar amount of relief, and thus be deemed to 

seek restitution in the amount of all tuition received for 

a period. 

Some commenters believed that an institution should be 

afforded the opportunity to demonstrate, by an independent 

analysis, that the actual amount at issue is below the 

thresholds set for the applicable action and therefore the 

action is not material. Some commenters suggested that the 

Department allow an institution to seek an independent 

appraisal from a law firm, accounting firm, or economist 

that would state the actual amount at issue in the lawsuit. 

Others stated that this analysis could be accomplished as 

part of an appeal process with a hearing official deciding 
362

the amount based on evidence from the institution and the 

Department.

Threshold

Some commenters stated that it is common for 

plaintiffs suing colleges and universities to allege 

damages far exceeding any amount that could feasibly be 

obtained in either a settlement or final judgment, as a 

tactic to maximize any final settlement amount and 

contingency fees to the attorney. For this reason, the 

commenters argued that requiring a letter of credit based 

solely on a claim exceeding 10 percent of an institution’s 

assets is arbitrary and unwarranted, as the claimed amounts 

often have little factual basis or legal support. Further, 

the commenters were concerned that enacting this new 

standard would lead to plaintiffs’ attorneys stating claims 

in excess of the 10 percent threshold to create negotiating 

leverage. 

Other commenters believed that the $750,000 and 10 

percent of current assets thresholds were arbitrary because 

they do not take into account that the size of schools 

varies significantly and, as such, their exposure may vary 

significantly. The commenters reasoned that a larger 

school that serves a greater number of students may be 

subject to a larger liability, but may also be able to 
363

adequately withstand that liability. For these reasons, 

the commenters suggested that the triggering events in 

§ 668.171(c)(1) should be removed entirely, but if they are 

not removed, the commenters urged the Department to exclude 

the settlement provisions and the $750,000 threshold 

because debts of that size are not indicative of the 

financial stability of the school.

Some commenters noted that Federal and State 

settlements are often very small, and therefore believed 

those settlement amounts would not likely reach or exceed 

the proposed threshold of 10 percent of current assets. 

The commenters urged the Department to eliminate the 10 

percent threshold in the final regulations, arguing that a 

settlement, in and of itself, should be sufficient to 

trigger a letter of credit. Other commenters believed that 

the threshold of $750,000 for the lawsuit triggers was so 

low that an auditor would not consider that amount to be 

material and therefore would not include the lawsuit in the 

footnotes of an institution’s financial statements. They 

suggested that the Department set the materiality threshold 

as the higher, rather than the lesser, of $750,000 or 10 

percent of current assets. The commenters reasoned that 

the lesser amount would almost always be the audit 

threshold ($750,000) which, in the case of any large 
364

school, will not be material. Alternatively, the 

commenters suggested that the Department remove the auditbased threshold and simply rely on the 10 percent of 

current assets threshold.

No Amount Claimed 

Objecting to the method of calculating a claim in a 

suit in which the plaintiff does not state a dollar amount 

of relief, a commenter noted that in a number of State 

courts--in New York, Maryland, and Maine, for example--a 

specific dollar-amount demand is not permitted in many 

civil actions. In such cases, proposed 

§ 688.171(c)(1)(v)(A) would require that the amount be 

calculated “by totaling the tuition and fees the 

institution received from every student who was enrolled at 

the institution during the period for which relief was 

sought, or if no period is stated, the three award years 

preceding. . . .” The commenter feared that applying this 

principle would result in a “deemed” ad damnum of at least 

three years’ total revenue–-and it would be a fortunate 

institution that maintained sufficient current assets to 

keep the made-up “deemed” ad damnum below 10 percent of 

current assets. In addition, the commenter notes that 

other States, like Virginia, do not permit recovery in 

excess of the written ad damnum, regardless of what a jury 
365

may award--for example, if the demand is $10,000 and the 

jury awards ten million dollars, only the demanded amount 

is awarded. The commenter opined that in those States, the 

incentive is to massively over-plead the value of the case, 

so that an attorney’s client is not forced to accept less 

money after encountering a generous jury. The underlying 

point is the same: neither a stated ad damnum in any 

lawsuit nor the “deemed” ad damnum of proposed 

§ 688.171(c)(1)(v)(A) bears any necessary relationship to 

the actual value of the suit, to the likely range of 

recovery, or to the effect of the suit on the financial 

responsibility of the educational institution. 

Second, the commenter argued that a pending private 

lawsuit seeking large damages should not be considered a 

trigger event, as proposed in § 688.171(c)(1)(iii). The 

commenter cautioned that considering filed-but-not-decided 

litigation to impair the financial responsibility of an

institution would overly empower opportunistic or 

idealistic members of the plaintiff’s bar. The commenter 

asserted that the proposed position would give every lawyer 

with a draft lawsuit containing enormous damage claims a 

chokehold on any school. The commenter noted that although 

proposed § 688.171(c)(1)(iii)(A) is intended to restrict 

this triggering event to only those claims that survive 
366

summary judgment, the commenter asserted that in some 

States, this restriction would be ineffective. The 

commenter asserted that, for example, in New York State 

courts, a plaintiff can file a “Motion For Summary Judgment 

in Lieu of Complaint,” under CPLR Section 3213, to initiate 

the case. A plaintiff can demand a response on the date an 

answer would otherwise be due; if the defendant were to 

file a cross-motion for summary judgment as a response, the 

court ostensibly would deny both and treat the crossmotions as an answer and complaint, and the case would go 

forward. But the case would have “survived a motion for

summary judgment by the institution,” and would then 

constitute a trigger event at its outset. 

The commenter further asserted that California State 

courts permit not only summary judgment, but also a 

separate procedure for resolution of entire claims by 

“summary disposition.” Cal. Code of Civ. Pro. Section 

437c. The grant of judgment to the institution on any 

relevant claim by summary disposition would not seem to 

affect whether a trigger event has occurred, even if the 

only relevant claim was disposed of. The commenter 

asserted as well that in Virginia, summary judgment is 

technically available, but, as a practical matter, the 

commenter states that it is never granted because a motion 
367

for summary judgment cannot procedurally be supported by 

documents, affidavits, depositions, or other similar 

evidence. Moreover, the real effect of this provision 

would be to deter institutions from ever moving for summary 

judgment, fearing that the motion would be denied therefore 

generating a triggering event. 

For these reasons, the commenter concluded that 

institutions would have to bring every covered private case 

to trial, at much greater financial and emotional expense 

not only to the school but also to the opposing parties. 

The commenter expressed concern that the proprietary school 

sector was a target for enterprising trial lawyers, and 

that because of the heightened scrutiny faced by financial 

institutions making lending decisions, it would be 

impossible for many institutions facing one of these 

triggering events to obtain a sufficient letter of credit 

to comply with the regulations. The commenter cautioned 

that an institution in such a circumstance would have 

little choice but to cease operations, even if its 

financial basis remained fundamentally sound–-and even if 

the claims represented by the proposed triggering events 

were insubstantial or frivolous.

Similarly, another commenter stated that in 

litigation, plaintiffs are able to survive a motion for 
368

summary judgment due to a variety of factors. The 

commenter said that judges may decline to dispose of a case 

on summary judgment because there remains an issue of 

material fact that may have little to do with the 

underlying false claim or provision of educational 

services. The commenter offered that a final judgment 

requires a higher level of proof than a motion for summary 

judgment and would therefore be a fairer threshold. In 

addition, the commenter noted that private rights of action 

are fundamentally different than agency or government 

actions that are subject to well-established policies and 

procedures. Further, the commenter anticipated that 

private parties will likely request relief in excess of the 

proposed thresholds of $750,000 or 10 percent of current 

assets to gain additional leverage in seeking a settlement. 

With regard to proposed § 668.171(c)(1)(iii), some 

commenters asked the Department to clarify whether the mere 

filing of a False Claims Act case is a triggering event or 

if paragraphs (A) and (B) apply to that case (as well as 

private litigation). The commenters offered that the mere 

filing of a False Claims Act case should not subject an 

institution to a letter of credit. While the commenters 

recognized the seriousness of a False Claims Act case, they 

stated that these cases do not garner intervention from the 
369

Federal government and are typically settled for amounts 

that are dramatically less than the stated damages in the 

complaint. Further, while the commenters appreciated the 

Department’s attempt to ensure it was only capturing 

meritorious private litigation under § 668.171(c)(1), they 

believed that the provision would penalize an institution 

for settling a case for nuisance value or harming a school 

for filing a motion for summary judgment which it 

ultimately loses.

Discussion: Proposed § 668.171(c)(1) included a range of 

governmental actions and certain actions by private 

parties, and proposed § 668.171(c)(6)(ii) included any 

other litigation that the institution was required to 

report in a filing with the SEC. Regardless of the 

substantive basis or motivation of the party suing, each of 

these suits could pose a serious potential threat to the 

continued existence and operation of the school, and as 

such, they affect the assessment of the school’s ability to 

meet its financial obligations. We see no basis for 

ignoring that risk simply because some suits in each of 

these types may in fact be frivolous, assert exaggerated 

demands, rest on attempts to make new law, or attempt to 

extract concessions from the school in what the commenter 

calls areas unrelated to the school’s educational mission. 
370

We consider pending suits under these regulations for two 

reasons. First, a judgment entered in any of these suits 

may significantly jeopardize the existence or continued 

operations of the institution, and that threat bears 

directly on the statutory requirement that the Secretary 

determine whether the institution for the present and near 

future, the period for which the assessment is made, “is 

able to meet . . . all its financial obligations.” 20 

U.S.C. 1098c(c)(1)(C). Second, that consideration looks 

not merely at obligations already incurred, but looks as 

well to the ability of the institution to meet “potential 

liabilities”–-whether the institution has the resources to 

“ensure against precipitous closure”–-and thus demands that 

we assess threats posed by suits not yet reduced to 

judgments that would be recognized in the financial 

statements submitted annually and evaluated under the 

current composite score methodology. In response to the 

comment regarding treatment of qui tam suits under the 

False Claims Act, we confirm that those actions are 

evaluated like any other litigation not brought by a 

Federal or State agency enforcing claims that may relate to 

borrower defenses. They are evaluated under the summary 

judgment test. 
371

Responding to the objection that we should consider 

only claims reduced to judgment, we stress that ignoring 

the threat until judgment is entered would produce a 

seriously deficient assessment of ability to meet financial 

obligations, and worse, would delay any attempt by the 

Department to secure financial protection against losses 

until a point at which the institution, by reason of the 

judgment debt, may be far less able to supply or borrow the 

funds needed to provide that protection. We reject this 

suggestion as contrary to the discharge of the duty imposed 

on the Department by section 498 of the HEA. Similarly, we 

see no basis for the contention that taking into account 

risk posed by pending suits somehow deprives an institution 

of its due process right to contest the suit. If the risk 

posed is within the statutory mandate to assess, as we show 

above, taking that risk into account in determining whether 

an institution qualifies to participate in the title IV, 

HEA programs cannot deprive the institution of any 

constitutionally protected right. The institution remains 

free to respond to the suit in any way it chooses; it is 

frivolous to contend that we are barred from considering 

whether that risk warrants financial protection for the 

taxpayer as a condition for the continued participation by 

that institution in this Federal program. 
372

Besides these general objections to the consideration 

of pending suits, the comments we received addressed 

several distinct aspects of the proposed consideration. 

These included comments addressed to the inclusion of suits 

by an oversight entity, which may include a local 

government component, in the category of government suits; 

the proposal that suits be evaluated on their merits by a 

third party, by Department officials, or by a Department 

hearing official; objections to inclusion of debts arising 

from settlements; objections that the thresholds in the 

proposed rule were unrealistic or arbitrary; objections to 

the proposed method of calculating the amount claimed where 

the institution contends that the amount claimed exceeds 

the amount that applicable law would support; objections to 

the proposed calculation of the amount in actions that did 

not seek a stated amount of relief; objections to the 

proposed use of summary judgment as a test of the potential 

risk posed by the suit; and objections to consideration of 

debts already incurred and paid in prior years. We discuss 

each in turn and, as discussed earlier explaining the use 

of an adapted composite score methodology, we are modifying 

the proposed regulations in several regards that we intend 

and expect to assess the risk posed by pending suits in a 
373

manner that alleviates several of major concerns raised by 

commenters. 

We address first the changes to the proposed 

thresholds, because adoption of the composite score 

methodology of assessing risk affects the response to those 

objections and other concerns as well. Each institution is 

well aware of its most recent composite score, and as 

explained above, the amount of risk posed by each suit 

considered under the regulations will be assessed by 

recognizing that loss in the financial statements on which 

that composite score was based, and determining whether 

that recognition will produce a failing composite score. 

Any institution can readily evaluate that effect and take 

that result into account in responding to the suit. A 

pending suit that produces a failing score will be 

recognized as a threat until the suit is resolved and that 

result produces a score of 1.0 or more, whether by 

favorable judgment or settlement. Second, we include an 

opportunity for an institution to demonstrate that loss 

from any pending suit is covered by insurance. Commenters 

advised that we should not treat lawsuits as potential

triggering events because the risks posed by these suits 

are commonly covered by insurance. If the institution 

demonstrates that insurance fully covers the risk, the suit 
374

is simply not considered under these financial 

responsibility standards. The institution can demonstrate 

that insurance fully or partially covers risk by presenting 

the Department with a statement from the insurer that the 

institution is covered for the full or partial amount of 

the liability in question. 

In response to the proposal that the regulations 

should provide for an evaluation of the merit of a suit by 

a third party, by a Department official, or by a Department 

hearing official, we see no practical way to implement such 

a procedure. Litigants already have the ability to engage

in court-sponsored or independent mediation, in which both 

parties can adequately present their positions; if both 

parties are amenable to such a two-party assessment, the 

parties can readily pursue that course through mediation, 

and we see no need for the Department to undertake that 

role. We see little or no value in entertaining and 

evaluating a presentation solely from a defendant 

institution, whether that evaluation were to be performed 

by a Department official or an administrative hearing 

official in a Department proceeding. As noted, a party 

whose defense is financed by insurance may find the insurer 

conducting precisely such an evaluation in conducting the 
375

litigation, and that assessment will influence the conduct 

of the litigation. 

In addition, the proposal that the Department or a 

third party assess the merit of an action by a government 

agency would require the Department or a third party to 

interpret the statutes and regulations on which that agency 

based its actions as well as assess whether the action was 

a reasonable exercise of the agency’s authority. We have 

no authority to second guess the actions of another agency 

in the exercise of its authority, and we would neither 

presume to do so nor adopt a procedure in which we would 

credit such second-guessing by a third party. 

The proposed regulation would treat “oversight 

authority” actions like actions of Federal or State 

agencies. By this term, we include local government 

entities with power to assert and recover on financial 

claims. This consideration applies only to affirmative 

government financial claims against the institution, not to 

government actions that deny approvals or suits that seek 

only injunctive or other curative relief but make no demand 

for payment. Local authorities can take enforcement 

actions that can pose a serious financial risk to the 

institution, and we see no basis for disregarding that risk 

or undertaking any internal or third-party assessment of 
376

the merit of the claim. Given the wide range of such 

government actions, we agree that those that do not 

directly seek relief that affects or relates to borrower 

defenses under this regulation might warrant a different 

assessment of risk than those closely related to borrower 

defenses. Generally the risks posed by the events deemed 

automatic triggers are events that threaten the viability 

of the institution, and the risks to the taxpayer posed by 

those threats include risks posed by closed school 

discharges and unaccounted-for Federal grant and loan 

funds. Federal or State agency suits asserting claims 

related to the making of a Direct Loan or the provision of 

educational services, as the latter term is considered 

under Department regulations, pose an additional risk and 

warrant a different assessment of risk, because these 

Federal or State actions not only pose a threat to the 

viability of the institution but are also reasonably 

expected to give rise to, and support, borrower defense 

claims. For those suits, we continue to consider it 

reasonable to treat the amount claimed in the suit or 

discernable from the scope of the allegations to quantify 

the potential loss from these suits.53 However, we 

 

53 The most prominent recent example of such government actions that have resulted in judgments--

those against Corinthian--does not suggest that assigning this level of risk to a government borrower 
377

acknowledge the value of having the obligation to require 

financial protection depend on something more than the mere 

filing of a lawsuit if delaying surety does not jeopardize 

our ability to obtain appropriate financial protection. 

The summary judgment scheme we adopt for all other 

litigation may result in significant delay before 

protection is required for borrower defense-related suits, 

which may impair our ability to obtain adequate surety. 

Rather than delaying protection requirements until summary 

judgment or even a point close to trial, or creating some 

third-party evaluation of the merit of government agency 

suits involving borrower defense-related claims, we will 

rely on the outcome of the initial opportunity available in 

the litigation process itself for an institution to 

challenge the viability of the suit--the motion to dismiss. 

Thus, under these regulations, a government suit related to 

potential borrower defenses is a potential triggering event 

only if the suit remains pending 120 days after the 

institution is served with the complaint. This change 

provides the institution with ample time to move to dismiss 

 

defense-related suit is unreasonable, and, for that reason, as well, we decline the proposal to consider 

claims that such suits should be discounted. 
378

the suit on any ground, including failure to state a claim 

on which relief can be granted.54 

For suits by a Federal or State agency not directly 

implicating borrower defenses, and suits by other 

government agencies, we consider the summary judgment test 

applicable to private party lawsuits--not a motion to 

dismiss test--to provide a reasonable basis for testing the 

degree of risk posed.55 Moreover, the threat posed by any 

of these suits may have no substantial effect on the 

composite score of the institution; as explained above, 

threats evaluated here require financial protection only if 

the threats together produce a failing composite score 

under these regulations. 

 

54

 The Federal Rules of Civil Procedure require an answer or motion to dismiss to be filed within 20 days 

of service of the complaint, and also allow a defendant to move at any time for summary judgment. Fed. 

R. Civ. Proc. 12(a), (b); 56(b). 

55 The Federal Rules of Civil Procedure have for almost 50 years 

authorized motions for summary judgment upon proper showings of 

the lack of a genuine, triable issue of material fact. Summary 

judgment procedure is properly regarded not as a disfavored 

procedural shortcut, but rather as an integral part of the 

Federal Rules as a whole, which are designed “to secure the just, 

speedy and inexpensive determination of every action.” . . . 

Before the shift to “notice pleading” accomplished by the Federal 

Rules, motions to dismiss a complaint or to strike a defense were 

the principal tools by which factually insufficient claims or 

defenses could be isolated and prevented from going to trial with 

the attendant unwarranted consumption of public and private 

resources. But with the advent of “notice pleading,” the motion 

to dismiss seldom fulfills this function any more, and its place 

has been taken by the motion for summary judgment. 

Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S. Ct. 2548, 2555, 91 

L. Ed. 2d 265 (1986).
379

We recognize that settlements may well achieve highly 

desirable outcomes, and that regulations should not create 

a disincentive to settlements. Regardless of the position 

taken in these regulations, a debt actually incurred under 

a settlement entered into in the current fiscal year will 

be recognized in the financial statements of the 

institution eventually submitted for the current year, and 

will be part of the financial information on which the 

institution’s composite score will be calculated for the 

current year. The concerns raised about treatment of 

settlement obligations are therefore concerns only about 

how the regulations treat during the current fiscal year 

those settlement debts incurred during the current year, 

not their subsequent treatment. A settlement debt that the 

institution can meet will likely not jeopardize its 

financial score when actually evaluated, and we approach 

such debts from the same perspective by assessing their 

effect when incurred using the composite score method as 

adopted here. We do not expect that an institution will 

enter into a settlement that jeopardizes its viability, and 

by removing the thresholds and assessing that debt in a 

holistic manner, we believe that the regulation will remove 

any disincentive to enter into settlement. If an adjusted 

composite score includes a potential liability from a suit 
380

or oversight action that eventually results in a 

settlement, the previously recorded risk will be 

accordingly adjusted downward to the settlement amount.

We are retaining the summary judgment test for all 

non-governmental suits, because awaiting a final judgment 

that may cripple the institution would substantially 

frustrate our objective to acquire financial protection at 

a time when a significant threat is posed and while the 

institution is far more likely to be able to afford to 

provide that coverage. That alternative is unacceptable 

for those reasons, and those who object to use of a summary 

judgment standard pose no alternative judicial test that 

avoids these problems. We recognize that a complaint that 

lacks substantive merit may avoid dismissal if sufficiently 

well pled, but that such a suit survives summary judgment 

only with a showing of some evidence sufficient to support 

recovery.56 The obvious inference from a choice not to file 

 

56 As one writer has observed, “summary judgment stands as the only 

viable postpleading protector against unnecessary trials.” Martin H. 

Redish, Summary Judgment and the Vanishing Trial: Implications of the 

Litigation Matrix (2005), 57 Stan. L. Rev. 1329. The comments that 

some States adopt summary judgment or summary adjudication procedures 

that differ either in labels (e.g., California) or in some detail from 

the Federal standard do not show that the test is not available or 

sufficient to meet this objective. Where a plaintiff asserts several 

causes of action, a summary adjudication under Cal.C.C.P. § 437c(f) or 

similar law, or partial summary judgment that disposes of some but not 

all causes of action, those claims not disposed of remain pending and 

proceeding to trial, and therefore continue to pose risk. Furthermore,

the regulations treat a failure to file for summary disposition by a 
381

for summary judgment is that a defendant fears that such a 

motion would not be well-founded, an assessment that 

implies a concession that the suit does pose a risk. Such 

a suit is at that point hardly frivolous, and constitutes a 

significant threat to the viability of the institution. 

Summary judgment is available in Federal court litigation, 

in which we expect a significant amount of even private 

party litigation to be brought, such as qui tam actions 

under the False Claims Act. As to the shortcomings of the 

summary judgment test under particular State law as 

asserted by the commenter, we note that the commenter 

pointed to only a few States in which the commenter 

asserted that summary judgment (or summary disposition) is 

less effectively available than in Federal courts. 

 

defendant as a concession that the plaintiff has sufficient evidence to 

withstand a motion, and therefore that the claim has sufficient support 

to merit presentation to a jury. The fact that a State permits a 

plaintiff to seek summary judgment immediately upon commencement of the 

action (e.g., N.Y. C.P.L.R., rule 3213, 28 U.S.C.A. (McKinney) does not 

frustrate use of this summary judgment test by a defendant institution; 

the institution is required merely to answer the plaintiff’s motion. 

N.Y. Uniform Dist. Ct. Act § 1004 (McKinney). The institution is not 

required to make a cross motion for summary judgment, and may move 

later for summary judgment. N.Y. C.P.L.R., rule 3212, 28 U.S.C.A. 

(McKinney). The comment cites Virginia law as restricting the 

defendant’s use of declarations and affidavits as making summary 

judgment less effective a test there. Even if this support is 

disfavored, the defendant is free to support the motion with 

“admissions, interrogatories, and documents produced” in discovery. 

Nicoll v. City of Norfolk Wetlands Bd., 90 Va. Cir. 169 (Va. Cir. Ct. 

2015). The tool, therefore, remains substantially available to test 

meritless cases. 
382

Institutions are already subject to those limitations, and 

face scrutiny by any party from whom the institution seeks 

investment or loans for the risks posed by such suits. The 

consideration we undertake here is no different in kind. 

In response to the commenters who raised concerns 

about assessing the potential recovery sought in an action 

that articulates no specific financial recovery, we cannot 

ignore the threats posed by such suits. The fact that a 

particular suit may avoid stating a dollar amount of 

damages in the complaint in no way affects whether the suit 

poses a significant risk to the school. The potential 

recovery in such suits may not be obvious from a complaint, 

but will ordinarily be articulated in a number of different 

ways, at least one of which would be routinely available. 

For example, the plaintiff may have articulated a specific 

financial demand in a written demand made prior to suit. 

Second, a plaintiff may have offered to settle the claim 

for a specific amount.57 Third, defendants engage in 

discovery, the amount of financial relief claimed is highly 

 

57 We recognize the settlement negotiations are privileged, and this option does not in any way 

diminish that privileged status. Private parties commonly disclose voluntarily to government 

agencies material that is privileged without risk of losing that privilege, and parties that share a 

settlement proposal with the Department under this option would not lose that protection, Thus, the 

Department would not disclose, in response to a Freedom of Information Act request, material 

regarding settlements if that material fell within exemption 4 of that Act, 5 U.S.C. 552(b)(4). 34 CFR 

5.11. Such information includes commercial or financial information provided voluntarily and not 

customarily disclosed by the party to the public. 
383

relevant to the handling of the suit, and we expect that a 

defendant would invariably seek such information in 

discovery. We recognize that suits brought by Federal and 

State authorities may and commonly do seek “rescission,” 

“restitution,” and “disgorgement” in unspecified amounts 

from the school, with civil penalties, for patterns and 

practices affecting students enrolled for years up to the 

filing.58 The institution may be able to demonstrate that 

the complaint seeks unstated financial relief that as pled, 

pertains only to students enrolled in a particular program, 

location, or period of enrollment, and not all students 

enrolled at the institution, and may calculate the maximum 

recovery sought using data for that cohort. 

Together, these changes are expected and designed to 

enable a school faced with the kinds of suits the 

commenters describe to either vigorously contest the suits 

as the school sees fit or to settle them. In either case, 

even a suit or settlement that might warrant financial 

protection in one year, that protection would be required 

only until the institution later may achieve a passing 

 

58 We derive the default recovery amount of three years of tuition and fees from actions such as 

Consumer Fin. Prot. Bureau v. Corinthian Colleges, Inc., No. 1:14-CV-07194, 2015 WL 10854380 (N.D. 

Ill. Oct. 27, 2015)(claims for actions over three year period); see also California v. Heald College, No. 

CGC-13-534793, Sup. Ct. Cty of San Francisco (March 23, 2016). (claims based on actions of varying 

duration). An institution may demonstrate that lesser amounts are applicable. 
384

composite score despite recognition of the settlement 

obligation. 

Changes: We have revised § 668.171(c)(1) to remove both 

the $750,000 and 10 percent of current asset threshold 

amounts for events that constitute an automatic trigger. 

Section 668.171(c) is revised to consider government 

actions unrelated to borrower defense claim subjects, and 

any private party lawsuits, to constitute a triggering 

event only if the suit has survived a motion for summary 

judgment or disposition, or the institution has not 

attempted to move for summary judgment and the suit 

progresses to a pretrial conference or trial. Section 

668.171(c)(2) is revised to identify the sources from which 

an institution may discern the amount of financial recovery 

sought if that amount is not stated in the complaint. 

Accrediting Agency Actions 

Teach-out Plan § 668.171(c)(1)(iii)

Comments: Under proposed § 668.171(c)(3)(i), an

institution is not financially responsible if it is 

currently or was at any time during the three most recently 

completed award years 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.
385

Some commenters suggested making the submission of a 

teach-out plan under 34 CFR 602.24(c) a separate, automatic 

trigger. The commenters argued that, unlike accreditor 

sanctions, the teach-out provisions are clearer 

circumstances that suggest the institution may imminently 

close. 

Commenters argued that a letter of credit for 

institutions that trigger the teach-out provision is 

unnecessary and duplicative of existing protections in the 

regulations. The commenters stated that in the scenario of 

a closing institution, it is highly unlikely that the 

school will be able to obtain a letter of credit, and 

argued that, as a result, requiring the closing school to 

submit a letter of credit could convert a planned, orderly 

closing into a sudden shut down, thus leaving students 

stranded and harming taxpayers. 

Some commenters warned that including the voluntary 

closure as a trigger would have unwanted effects. The 

commenters argued that this trigger would incent schools to 

keep locations open, despite the fact that the locations 

may no longer be serving its purpose and its continued 

presence may constitute a drain on institutional resources. 

Forced to choose between a location that is running 

slightly in the red and a letter of credit calculated 
386

against the entire institution's title IV expenditures, the 

commenters believed institutions may have no choice but to 

keep the doors open.

Moreover, the commenters argued that requiring a 

letter of credit makes little sense in the circumstance in 

which a school closes one or more locations, but the 

institution remains open. The commenters offered that in 

any scenario involving the closure of a location but not 

the main campus, the Department may pursue derivative 

student claims against an institution when those students 

receive a loan discharge pursuant to proposed § 685.214. 

Some commenters also contended that the closure of 

locations is typically designed to increase the financial 

soundness of an institution and believed that the 

Department's records would show that most individual 

locations are closed only after an orderly teach-out and 

without triggering many (or any) closed school discharges. 

They argued that the closing of one or more locations of a 

school does not necessarily signal financial instability of 

a school; it may signal prudent fiscal controls. Closing 

locations that are not profitable or that cannot 

effectively serve students makes the institution as a whole 

more financially responsible and better able to serve its 

remaining students. Consequently, the commenters cautioned 
387

that schools should not be punished for making reasonable 

business decisions to conduct an orderly wind down of an 

additional location. The commenters recommended that no 

letter of credit be imposed in the circumstance of the 

proposed closure of individual locations, and that the 

Department address on a case-by-case basis the 

appropriateness of requiring a letter of credit from a 

school that announces a teach out of the entire school. 

Alternatively, if the Department maintains the letter of 

credit requirement based on a school's intention to close a 

location, the commenters suggested that the letter of 

credit should only apply to locations that service 25 

percent or more of the institution's students.

Similarly, other commenters suggested that the 

Department adopt a materiality threshold, such as the 

number of students enrolled or affected or the title IV 

dollar amount associated with those students, because the 

closure of an additional location may have no adverse 

effect on an institution. 

In response to the Department’s request for comment on 

whether a threshold should be established below which the 

closure of a branch or additional location would not 

trigger the letter of credit requirement, as noted 

previously, commenters urged the Department to eliminate 
388

the closure of a branch or additional location as a 

triggering event, or at minimum, make the trigger 

discretionary rather than mandatory. If the Department 

does not do so, the commenters asserted that a threshold is 

then both necessary and appropriate, but the commenters 

believed that a letter of credit should be required only if 

the closure of a branch or additional location would have a 

material financial impact on the school as a whole. The 

commenters offered that the Department could request a 

letter of credit if the closure of a branch or additional 

location:

• Would reduce total school enrollment by 30 percent 

or more;

• Would reduce total school title IV receipts by 30 

percent or more; or

• Would reduce total school tuition revenues by 30 

percent. 

Other commenters suggested that the Department extend 

the 10 percent materiality concept to this situation and 

apply the letter of credit requirement only if the closure

of a location involves more than 10 percent of the school’s 

population. 

Some commenters noted that locations are often part of 

campus models that, among other things, bring postsecondary 
389

education to areas that might otherwise have none, and 

believed that institutions may elect to forgo these 

innovative efforts if they are unable to close a location 

without incurring a significant financial penalty.

Other commenters suggested that the Department clarify 

whether the letter of credit provisions would be applied 

based on the title IV, HEA funds received by the main or 

branch campus, and how the letter of credit provisions 

would apply to teach-out plans that might be submitted for 

a branch campus instead of the entire main campus. 

Discussion: Under the teach-out provisions in 34 CFR 

602.24(c)(1), an accrediting agency must require an 

institution to submit a teach-out plan whenever (1) the 

Department initiates an emergency action or an action to 

limit, suspend, or terminate the institution’s 

participation in the title IV, HEA programs, (2) the 

accrediting agency acts to withdraw, terminate, or suspend 

the institution’s accreditation, (3) the institution 

notifies the accrediting agency that it intends to cease 

operations entirely or close a location that provides 100 

percent of a program, or (4) a State licensing or 

authorizing agency notifies the accrediting agency that the 

institution’s license or authority to provide an 

educational program has been or will be revoked. The 
390

occurrence of any of these actions may call into question 

an institution’s ability to continue, placing at risk the 

welfare of students attending the institution. However, in 

keeping with our treatment for other automatic triggering 

events, instead of using a materiality threshold, the 

Department will recalculate the institution’s composite 

score (1) based on the loss of title IV, HEA funds received 

by students attending the closed location during the most 

recently completed fiscal year, and (2) by reducing the 

expenses associated with providing programs to those 

students, as specified in Appendix C to these regulations. 

We believe that this approach will corroborate the position 

of some of the commenters that closing an unprofitable 

location was a good business decision in cases where the 

recalculated composite score is higher but not less than 

the original score. Otherwise, a failing recalculated 

composite score shows that closing the location had an 

adverse impact on the institution’s financial condition.

Changes: We have added a new § 668.171(c)(1)(iii) to 

provide that an institution is not financially responsible 

if it is required by its accrediting agency to submit a 

teach-out plan under § 602.24(c) that covers the 

institution or any of its branches or additional locations 

if, as a result of closing that institution or location, 
391

the institution’s recalculated composite score is less than 

1.0. In addition, we provide in Appendix C to subpart L, 

the adjustments to the financial statements that are needed 

to recalculate the composite score. 

Show Cause or Probation § 668.171(g)(5)

Comments: Under proposed § 668.171(c)(3)(ii), an 

institution is not financially responsible if it is 

currently, or was at any time during the three most 

recently completed award years, 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 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.

Some commenters were concerned that the scope of the 

proposed accrediting agency triggering events is too broad 

because it includes matters that do not necessarily pose 

any existential threat to the viability of an institution. 

The commenters stated that an institution placed on 

probation or show-cause status does not, in all cases, 

signal an imminent threat to the continued viability of the 
392

institution that should automatically require a letter of 

credit; in the tradition of accreditation, while these 

designations are meant to identify and make public areas of 

concern at an institution, the goal remains that of selfimprovement and correction.

Other commenters agreed that an institution placed on 

show cause by most accrediting agencies is typically at 

substantial risk of losing its accreditation, and loss of 

accreditation would likely have some impact on its finances 

and operations. However, the commenters noted that, in 

many cases, the agency placed the institution on show cause 

because it had demonstrated significant financial and 

operational deficiencies that were already having an impact 

on its business and educational outcomes. Therefore, the 

commenters cautioned that in many cases, it is the reason 

behind the show cause order (i.e., concerns about the 

financial and operational capacity of the institution), and 

not the show-cause status itself, that suggests an 

institution is not financially responsible. 

Some commenters stated that in many cases, an 

accrediting agency places an institution on probation for 

issues of academic quality or dysfunction at the governance 

level even while the institution’s operations and finances 

remain strong. The commenters stated that, while the 
393

issues that lead to the probation are certainly not 

minimal, it would take an institution longer than six 

months to correct them. In addition, the agency will need 

time to evaluate the changes and determine that the 

institution is now in compliance. Moreover, the commenters 

maintain that there is no clear evidence that institutions 

on probation routinely or uniformly experience operational 

or financial outcomes as a result of being on probation, 

particularly when the issues leading to the probation are 

unrelated to finance or operations. Again, the commenters 

cautioned that uniformly concluding that all institutions 

on probation that cannot correct non-compliance issues in 

six months are not financially responsible is overly broad. 

In addition, the commenters noted that it effectively 

punishes an institution that is on probation for issues not 

related to financial and operational deficiencies by 

requiring the institution to provide a letter of credit and 

participate in the title IV, HEA programs under a 

provisional certification. 

The commenters believed that if the Department intends 

to rely on accrediting actions to determine financial 

responsibility, then the Department must review the content 

of the accrediting actions and act based on the reasons for 

those actions. As a matter of due process, each 
394

accrediting agency action imposing probation makes highly 

individualized findings of non-compliance that provide 

clear indicators regarding the institution’s risk, as 

determined by the agency. For these reasons, the 

commenters suggested that the Department revise the show 

cause and probation provisions to refer specifically to 

agency standards related to finances, operations, or 

institutional ethics or integrity or related areas.

Other commenters supported tying accrediting agency 

actions to financial or operational issues but, in the 

alternative, would also support the Department’s suggestion 

during the negotiated rulemaking process that there be a 

way for an accrediting agency to inform the Department as 

to why its probation or show-cause action will not have an 

adverse effect on the institution’s financial or operating 

condition (see 81 FR 39364). Along somewhat similar lines, 

other commenters believed that, if an accrediting agency 

takes an action against a school based on financial 

responsibility concerns, that action should not supplant 

the Department's own analysis under subpart L of the 

regulations. 

Other commenters stated that accreditors do not 

consider a show-cause order a negative action--to the 

contrary, accreditors routinely use it as a mechanism to 
395

promote institutional change and compliance. The 

commenters argued the Department itself has not previously 

taken the view that a show-cause order or probation was a 

significant threat to an institution's financial health by 

noting that a recent report listing the institutions the 

Department required to submit letters of credit did not 

identify an accrediting agency action as the basis for 

requiring any of those letters of credit. The commenters 

also noted that the Department's recent spreadsheet listing 

the institutions on heightened cash monitoring indicates 

that 13 of the 513 institutions were placed there for 

Accreditation Problems, which the Department defined as 

“accreditation actions such as the school's accreditation 

has been revoked and is under appeal, or the school has 

been placed on probation.” The commenters asserted the 

spreadsheet establishes (1) that the Department already has 

a mechanism for seeking financial protection from 

institutions experiencing accreditation problems, and (2) 

that a mere show cause order historically has not been 

viewed as posing the same risk as revocation or probation. 

In addition, the regulations governing recognized 

accreditors permit an accreditor to afford an institution 

up to two years to remedy a show-cause before it must take 

action, and the commenters believe that this allowable 
396

timeframe effectively codifies the notion that a show-cause 

order is neither a sign of impending financial failure, nor 

a matter than an institution would expect to resolve in six 

months’ time. See 34 CFR 602.20.

Other commenters agreed with the Department that 

actions taken by an accreditor could be a sign that the 

institution may imminently lose access to Federal financial 

aid. In those cases, the commenters believed that asking 

for additional funds upfront would be a sensible step as an 

advance protection for taxpayers. However, the commenters

point to recent review of accreditor actions over the last 

five years showing that the current sanctions system is 

highly inconsistent. The commenters stated this 

inconsistency was true with respect to terminology, the 

frequency with which actions happen, and how long an 

institution stays on a negative status. (Antoinette 

Flores’s “Watching the Watchdogs,” published in June 2016). 

Given this inconsistency, the commenters recommend making 

the following changes to the proposed accrediting 

triggering events.

Commenters suggested that the Department make 

accreditor actions a discretionary trigger because, given 

the inconsistency among accreditors, establishing an 

automatic trigger tied to negative sanctions may be 
397

difficult. They stated that accreditors do not interpret 

what it means to be on probation or show cause in the same 

way. In addition, the commenters stated that making 

sanctions by accreditors an automatic trigger also risks 

making them unlikely to take action when they should. 

The commenters note that a clear finding from the 

research, “Watching the Watchdogs,” is that many 

accreditors put institutions on a negative status for a 

very short period of time, while other accreditors required 

institutions facing a sanction to stay in that status for 

at least a year. The commenters were concerned that 

setting a clear threshold of six months would give an 

institution too much leverage to argue that its accreditor 

should withdraw the sanctions sooner than the accreditor 

otherwise would. 

Discussion: In view of the significant number of comments 

that a probation or show cause action taken by an 

accrediting agency may not be tied to a financial reason or 

have financial repercussions, and could have serious 

unintended consequences as an automatic trigger, we are 

revising this trigger to make it discretionary. As such, 

we will work with accrediting agencies to determine the 

nature and gravity of the reasons that a probation or show 

cause action was taken and assess whether that action is 
398

material or would otherwise have an adverse impact on an 

institution’s financial condition or operations. Moreover, 

under this approach, the proposed six-month waiting period 

for an institution to come into compliance with accrediting 

agency standards is no longer necessary. 

Changes: We have reclassified and relocated the automatic 

probation and show-cause trigger in proposed § 

668.171(c)(3)(ii) as a discretionary trigger under § 

668.171(g)(5) and revised the trigger by removing the sixmonth compliance provision.

Gainful Employment § 668.171(c)(1)(iv)

Comments: Under proposed § 668.171(c)(7), an institution 

would not be financially responsible if, as determined 

annually by the Secretary, the number of title IV 

recipients enrolled in gainful employment (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 who are enrolled in all the GE 

programs at the institution. An institution is exempt from 

this provision if fewer than 50 percent of its title IV 

recipients are enrolled in GE programs.

Some commenters noted that many institutions subject 

to the GE regulations have limited program offerings, and 

in some cases offer only one program. For those 
399

institutions, a single program scoring in the zone will 

result in more than 50 percent of its students being 

enrolled in zone-scoring programs. The commenters further 

noted that the GE regulations provide for a runway for 

institutions to bring programs into compliance, and 

institutions do so through cost reductions that are passed 

along to students. The commenters reasoned that imposing a 

letter of credit requirement on such an institution would 

deprive it of curative resources and ultimately lead to a 

closure of the program, rather than its remediation.

In response to the Department’s request for comment on 

whether the majority of students who enroll in zone or 

failing GE programs is an appropriate threshold, commenters 

offered several observations and recommendations.

First, the commenters believed that a simple tally of 

the number of GE programs that may be failing or in the 

zone at a given point in time will not produce a 

consistently accurate assessment of an institution's 

current or future financial stability. The first set of 

debt-to-earnings rates, for example, are based on debt and 

earnings information for students who graduated between the 

2008-09 and 2011-12 award years (assuming an expanded 

cohort). See generally 34 CFR 668.404. By the time the 

associated debt-to-earnings ratio for these programs are 
400

released (likely early 2017), many institutions will be 

offering new or different programs that are designed to 

perform favorably under the GE framework. Though, as of 

2017, a significant number of the students may still be 

enrolled in the institution's older GE programs, these 

programs will no longer be integral to the institution's 

business model, and indeed, may be in a stage of phase-out. 

For this reason, the commenters suggested that any 

reasonable assessment of an institution's financial health 

would need to account for the phase-out of older GE 

programs and the strength of the newer ones.

Second, the commenters recommended that the Department 

exclude from this determination any GE programs that are in 

the zone, or at a minimum, GE programs that have only been 

in the zone for two or fewer years. The commenters argued 

that, because a GE program must be in the zone for four 

consecutive years for which rates are calculated before it 

loses eligibility, the inclusion of a zone program prior to 

this point does not justify the presumption that the 

program may lose eligibility.

Finally, the commenters suggested that, rather than 

exempting institutions where fewer than 50 percent of the 

title IV recipients are enrolled in GE programs, the 

regulations should simply compare the number of students 
401

who receive title IV, HEA funds and are enrolled in failing 

GE programs to the total number of students. The 

commenters believed this approach would be a better and 

more straightforward measure of the risk of financial 

failure posed to the entire institution.

Discussion: We appreciate the concerns and suggestions 

made by the commenters regarding the GE trigger and are 

persuaded that the trigger should be revised to (1) account 

for the time that an institution has to improve a GE 

program in the zone, and (2) focus more on the financial 

impact of failing programs instead of the percentage of 

students enrolled in GE programs. 

We proposed including zone programs in the GE trigger 

because there are no assurances that an institution will 

attempt to improve or succeed in improving those programs. 

However, we agree that the proposed trigger could influence 

an institution to discontinue an improving program 

prematurely or hold an institution accountable for poorly 

performing programs that it voluntarily discontinues. In 

proposing the 50 percent threshold, we were attempting to 

limit this trigger to those situations where the potential 

loss of program eligibility would have a material financial 

impact on an institution. But, as alluded to by the 

commenters, the percentage threshold based on title IV 
402

recipients may not apply to situations where an institution 

discontinues a zone program, or cases where 50 percent of 

the title IV recipients enrolled at an institution account 

for a small fraction of (1) the total number of students 

enrolled, or (2) institutional revenue. 

To address these concerns, we are revising the GE 

trigger by considering only those programs that are one 

year away from losing their eligibility for title IV, HEA 

program funds and assessing the impact of that program’s 

closure and any potential loss under the recalculated 

composite score approach. Specifically, the Department 

will use the amount of title IV, HEA program funds the 

institution received for those programs during its most 

recently completed fiscal year as the potential loss and 

recalculate the composite score based on that amount and an 

allowance for reductions in expenses that would occur if 

those programs were discontinued.

Changes: We have revised the GE trigger as described 

above. We have also revised the GE trigger in § 

668.171(c)(1)(iv) to provide that the loss used in 

recalculating the institution’s composite score under § 

668.171(c)(2) is the amount of title IV, HEA program funds 

the institution received for affected programs during the 

most recently completed fiscal year. Lastly, we specify in 
403

Appendix C to subpart L, the changes needed to reflect that 

loss of funding and the reduction in educational expenses 

associated with discontinuing those programs.

Withdrawal of Owner’s Equity § 668.171(c)(1)(v)

Comments: Under proposed § 668.171(c)(8), an institution 

whose composite score is less than 1.5 is not financially 

responsible if there is any withdrawal of owner’s equity 

from the institution by any means, including by declaring a 

dividend.

Some commenters appreciated the provision in 

§ 668.171(d)(2) that would allow an institution whose 

composite score is based on the consolidated financial 

statements of a group of institutions, to report that an 

amount withdrawn from one institution was transferred to 

another entity within that group. However, the commenters 

argued that, since the Department is aware of the 

institutions whose composite scores are calculated based on 

consolidated financial statements, requiring those 

institutions to report every intercompany funds transfer 

imposes an unnecessary burden because the reporting 

provides little if any benefit to the Department. 

Therefore, the commenters recommend amending proposed 

§ 668.171(c)(8) to expressly exclude any withdrawal of 
404

equity that falls within the circumstances described in 

§ 668.171(d)(2). 

Other commenters assumed that this provision is 

intended to apply only to proprietary institutions because 

nonprofits do not have owners. However, because in 

financial reporting, the term “equity” is often used 

conceptually to refer both to owner’s equity for businesses 

or net assets for nonprofits, the commenters recommended 

that the Department clarify in the final regulations that 

this provision applies only to proprietary institutions. 

Discussion: We agree that, where a composite score is 

calculated based on the consolidated financial statements 

of a group of institutions, funds transfers between 

institutions in the group should not be reported as 

withdrawals of owner’s equity. The trigger for the 

withdrawal of owner’s equity was based on the reporting 

requirement under the zone alternative in current 

§ 668.175(d)(2)(ii)(E), which applies only to proprietary 

institutions. We agree to clarify in the regulations that 

as a triggering event under § 668.171(c), the withdrawal of 

owner’s equity applies only to proprietary institutions.

In addition, by recalculating the composite score we 

capture the impact of withdrawals of owner’s equity in 
405

cases where the withdrawals were not made solely to meet 

tax liabilities. 

Changes: We have revised the withdrawal of owner’s equity 

trigger now in § 668.171(c)(1)(v) to specify that it 

applies only to a proprietary institution and that it does 

not include transfers to an entity included in the 

affiliated entity group on whose basis the institution’s 

composite score was calculated. In addition, we specify in 

§ 668.171(c)(2)(iv)(B) that except for a withdrawal used 

solely to meet tax liabilities, as provided under 

§ 668.171(h)(3)(ii), the Secretary will recalculate the 

institution’s composite score to account for that 

withdrawal.

Cohort Default Rates § 668.171(f)

Comments: Under proposed § 668.171(c)(9), an institution 

is not financially responsible if its two most recent 

official cohort default rates are 30 percent or greater, 

unless the institution files a challenge, request for 

adjustment, or appeal with respect to its rates for one or 

both of those fiscal years and that action 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.
406

Some commenters urged the Department to remove the 

cohort default rate trigger, citing concerns that this 

trigger would have unintended consequences. The commenters 

believed that, because of the corresponding letter of 

credit requirements, it is likely that banks would curtail 

their lending to affected institutions making it more 

difficult for those institutions to initiate, or continue 

with, innovative educational efforts that are often 

capital-intensive. 

In response to the Department’s request for comment on 

whether a cohort default rate of 30 percent or more for a 

single year should be a triggering event, some commenters 

believed that the proposed two-year trigger should not be 

changed. One commenter suggested that this trigger should 

apply to any institution whose most recent cohort default 

rate is 30 percent or higher, arguing that keeping default 

rates below 30 percent is a very low standard for an 

institution to meet--only 3.2 percent of institutions have 

a default rate of 30 percent or higher. The commenter 

noted that, among all students attending institutions of 

higher education where the default rate is 30 percent or 

higher, 85 percent attend public institutions and just 11 

percent attend proprietary institutions. The commenter 

urged the Department not to exempt public institutions from 
407

this trigger if the Department’s goal is to protect as many 

students as possible. 

Discussion: We wish to make clear that the Department will 

not apply the cohort default rate trigger until any 

challenge, request for adjustment, or appeal that an 

institution qualifies to file, under subpart N of the 

General Provisions regulations, is resolved. If that 

action is resolved in favor of the institution, the 

Department will take no further action and make no further 

requests of the institution with regard to this trigger. 

Otherwise, after the challenge, request, or appeal is 

resolved, the Department will apply the cohort default rate 

trigger and request the corresponding financial protection 

from the institution. 

We disagree with the notion that a bank will curtail 

its lending to an institution solely because the Department 

requests financial protection under this trigger. Like 

other creditors, a bank would assess the risks inherent in 

making a lending decision, including regulatory risks. In 

this case, under the statutory provisions in section 

435(a)(2) of the HEA, pending any appeal for, or adjustment 

to, its cohort default rates the institution is one year 

away from losing its eligibility for title IV, HEA funds. 

Although an institution’s intention to initiate or continue 
408

innovative educational efforts are laudable, we believe it 

is questionable that a bank would jeopardize funds 

requested by the institution after having assessed the 

risks of whether the institution could repay those funds in 

the event that the institution’s eligibility under the 

title IV, HEA programs is terminated in the near term. 

With regard to the Department’s request for comment, 

we are persuaded to maintain the proposed two-year 

threshold. 

With respect to the comment that, to protect as many 

students as possible, the Department should not exempt a 

public institution from the cohort default rate trigger, we 

note that while cohort default rates for all institutions 

are publicly available and can be used by students and 

parents in making enrollment decisions for particular 

institutions, the purpose of this trigger is to protect the 

Federal interest in the event an institution loses its 

eligibility for title IV, HEA funds in the coming year. In 

that circumstance for a public institution, we already have 

financial protection in the form of full faith and credit 

of the State to cover any liabilities that may arise (see 

the discussion under the heading “Public Domestic and 

Foreign Institutions”).

Changes: None. 
409

Non-Title IV Revenue (90/10) § 668.171(d)

Comments: Under proposed § 668.171(c)(5), a proprietary 

institution is not financially responsible if it does not 

derive at least 10 percent of its revenue from sources 

other than title IV, HEA program funds during its most 

recently completed fiscal year.

Some commenters believed this trigger was unjustified, 

arguing that an institution’s eligibility to participate in 

the title IV, HEA programs is not at risk after a one-year 

failure. The commenters stated that section 487(d)(2) of 

the HEA provides that no penalties are imposed on an 

institution until it loses title IV eligibility by failing 

the 90/10 revenue test for two consecutive years, and that 

the sanctions that are specified do not include the 

financial responsibility consequences proposed under this 

trigger. For these reasons, the commenters concluded that, 

lacking specific statutory authority, the Department should 

remove this trigger from the final regulations. 

Other commenters were concerned that institutions 

actively game the 90/10 requirements by (1) delaying title 

IV disbursements until the next fiscal year; (2) combining 

locations that exceed the 90 percent revenue limit with 

those that do not, and (3) raising tuition, which forces 

students to take out private loans that increase revenue 
410

from non-title IV sources. The commenters believed that 

these gaming strategies are the reason that only a few 

institutions fail the 90/10 revenue test each year (14 

institutions for the 2013-14 reporting period) and urged 

the Department to limit the use of these strategies, 

recommending for example, that Department track for three 

years the 90/10 compliance for each location included at 

the institution’s request under a single PPA or that the 

Department should not grant those requests when 

institutional 90/10 compliance is in question. 

Discussion: As we noted in the preamble to the NPRM, an 

institution that fails the 90/10 revenue test for one year, 

is one year away from losing its title IV eligibility. 

Under § 668.28(c)(3), an institution that fails the revenue 

test must notify the Department of that failure no later 45 

days after the end of its fiscal year. If the institution 

fails again in the subsequent fiscal year, it loses its 

eligibility for title IV, HEA funds on the day following 

the end of its fiscal year, not at the end of the 45-day 

reporting period. After the end of its fiscal year, the 

institution’s ability to continue to make disbursements to 

enrolled students is severely limited under the provisions 

in § 668.26. Consequently, in view of the institution’s 

dependence on revenues from title IV, HEA funds that it is 
411

no longer eligible to receive, it is likely that the 

institution would close, possibly precipitously, leading to 

closed school discharges and program liabilities owed to 

the Department. These are the same outcomes that would 

result from an existential threat, such as a crippling 

lawsuit or loss of accreditation, for which financial 

protection is authorized under the financial responsibility 

provisions in section 498(c) of the HEA. 

Contrary to the commenters’ assertion that there is no 

risk to an institution’s eligibility after a one-year 

failure, the HEA contemplates that risk under section 

487(d)(2)(B) by providing that after a one year failure, 

the institution automatically becomes provisionally 

certified and remains on that status for the following two 

years, unless it fails the 90/10 revenue test in the 

subsequent year and loses eligibility. Moreover, the 

Department’s authority to establish 90/10 as a basis for 

determining whether an institution is financially 

responsible is anchored under the provisions in section 

498(c)(1) of the HEA, not the provisions governing the 

institution’s eligibility under the 90/10 revenue 

provisions. 

With regard to the comments about institutions evading 

the 90/10 requirements, we note that changes to these 
412

requirements are beyond the scope of this rulemaking. 

Administratively however, the Department will continue to 

diligently enforce the 90/10 requirements and work closely 

with the Office of the Inspector General to help ensure 

that institutions properly calculate their 90/10 rates.

Changes: None.

Publicly Traded Institutions § 668.171(e)

General 

Comments: Under proposed § 668.171(c)(6), a publicly 

traded institution is not financially responsible if the 

SEC warns the institution that it may suspend trading on 

the institution’s stock, the institution’s stock is 

delisted involuntarily from the exchange on which it was 

traded, the institution disclosed in a report to the SEC 

that it is subject to a judicial or administrative 

proceeding, the institution failed to file timely a 

required report with the SEC, or the exchange on which the 

institution’s stock is traded notifies the institution that 

it is not in compliance with exchange requirements.

Commenters believed that the NPRM did not provide 

meaningful rationale for some of the provisions that the 

Department asserts require financial protection, pointing 

for example to an institution’s failure to file a timely 

report with the SEC, or noncompliance with exchange 
413

requirements, and noting that the Department only suggested 

that such events could lead to institutional failure. In 

response to the Department’s request for comment regarding 

how these triggers could be more narrowly tailored to 

capture only those circumstances that could pose a risk to 

an institution’s financial health, the commenters offered 

that the final regulations should provide that in every 

instance where an SEC action occurs, the Department will 

only take action after it affords the institution a notice 

and hearing and thereafter makes a reasoned determination 

that the event is likely to result in a material adverse 

effect. The commenters further stated that, to be a 

triggering event, any SEC action should be a final, nonappealable judgment or suspension and not merely a warning 

or notification. The commenters also stated that because 

many companies inadvertently and regularly miss a periodic 

filing deadline, the final regulations should require a 

finding of materiality, as applied to the delinquency of 

the filing, and the Department should consider whether the 

filing failure is an isolated incident or part of a pattern 

of conduct, and whether the missed filing was the fault of 

the institution.

Similarly, in response to the Department’s request for 

comment, other commenters identified the following 
414

situations that they believed would provide for a more 

appropriate set of triggers for publicly traded 

institutions: 

(1) The institution is in default on an obligation to 

make payments under a credit facility, or other debt 

instrument, and the default involves an amount in excess of 

10 percent of the institution’s current assets, and the 

default is not cured within 30 days; 

(2) An event of default has been declared by the 

relevant lender or trustee under any outstanding credit 

facility or debt instrument of the institution or its 

parent, including any bond indenture, and the default is 

not cured within 30 days; or 

(3) The institution or its parent declares itself 

insolvent, files a petition for reorganization or 

bankruptcy under any Federal bankruptcy statute, or makes 

an assignment for the benefit of creditors. 

The commenters believed that adopting the recommended 

triggers would enable the Department to efficiently 

identify those cases in which a publicly traded institution 

is in financial trouble, and would avoid conflating 

investor-facing disclosures or nonmaterial administrative 

matters (e.g., failure to timely file a required report, 
415

notification of non-compliance with exchange requirements) 

with reliable indicators of financial distress.

Discussion: With regard to the suggestion that the 

Department apply these triggering events only when an SEC 

action is what the commenter describes as a final, nonappealable judgment or suspension, and not a warning or 

notification, doing so would further distance these events 

as early but significant indicators of serious financial 

distress. We understand that the warning is issued by the 

SEC only after repeated efforts have already been made to 

alert the delinquent party of the need to file, and despite 

these attempts, the registrant continues to fail to 

respond. We understand that the consequences of failure to 

file timely required reports after this warning include 

significant burdens should the institution wish to raise 

capital, and that not uncommonly, the reason a registrant 

becomes so delinquent as to be issued this warning is that 

the registrant has ceased operations. We are not 

capturing, or requiring contemporaneous reporting of, the 

actions and circumstances that give rise to an SEC or 

exchange action--information that may at an early stage 

forecast operational or financial difficulties–-because 

that would be unmanageable and could lead to erroneous 

conclusions. Instead, we are relying on the conclusions 
416

reached by the SEC and the stock exchange that the actions 

taken by the institution warrant a significant and 

corresponding reaction. 

With regard to the proposal that the Department take 

action to impose financial protection based on an SEC or 

exchange action only after providing the institution an 

opportunity for a hearing and a case-by-case evaluation of 

the significance of the particular event on which the SEC 

or exchange acted, we note that § 668.171(h)(3)(iv) 

provides the institution with an opportunity at the time it 

reports the event to demonstrate that the condition no 

longer exists, has been cured or, that it has insurance 

that will cover any and all debts and liabilities that 

arise at any time from that triggering event. The 

liabilities referred to here are those that arise from a 

precipitous closure of an institution, including, but not 

limited to losses from closed school discharges, and 

liabilities for grant and loan funds not accounted for as 

properly spent by the statutorily required compliance 

audit. If the Department takes an enforcement action based 

on this trigger, or any other automatic triggering events, 

to condition the continuing participation of the 

institution on providing the required financial protection, 

§ 668.90(a)(3)(iii)(A) provides the institution a more 
417

formal opportunity to demonstrate these defenses. The 

event itself is of such significance that the Department 

considers only these defenses, and not contentions that the 

event itself is not grounds for requiring protection. 

While we appreciate the suggestions made by the 

commenters to streamline the triggers for publicly traded 

institutions, particularly with regard to making payments 

under a credit facility, as discussed more thoroughly under 

the heading “Violation of Loan Agreement,” we have made 

these provisions discretionary and they apply to all 

institutions. While we agree that some of the situations 

described would signal serious distress, under these 

regulations we will make those determinations on a case-bycase basis. As previously noted, if the lender files suit 

as a result of the delinquency, that suit would be 

considered under the private litigation assessment in 

§ 668.171(c)(1)(ii). 

Changes: None.

Delisting

Comments: With regard to the triggers pertaining to a 

warning from the SEC that it may suspend trading and the 

involuntary delisting of an institution’s stock, some 

commenters found the correlation the Department was 

attempting to make between an institution’s failure to 
418

comply with exchange requirements and its ability to meet 

its financial obligations troublesome. 

The commenters argued that, while a delisting is 

significant, correlating an institution’s financial health 

to its delisting incorrectly assumes that the delisting is 

generated as a result of financial problems and the 

delisting will materially impact the institution’s 

financial health. Even where the delisting is itself 

related to something that is measured in dollars, like a 

minimum bid price, that measure is not necessarily 

indicative of the health of an institution, as opposed to 

the market value of a share of the institution.

Discussion: While the commenters are technically correct 

that an involuntary delisting does not necessarily mean 

that an institution has financial problems, it could 

equally or more likely mean that it does. Even worse, the 

delisting may be a prelude to bankruptcy. Generally 

speaking, financially healthy institutions are not 

involuntarily delisted. As discussed in the preceding 

comment, the regulations provide the institution ample 

informal and formal opportunities to show that the risks 

that the triggering event may cause have been removed by 

curing the event itself. These liabilities are those that 

ensue from a precipitous closure, as described above. An 
419

institution’s financial viability under the Department’s 

composite score methodology assesses, as explained earlier, 

the ability of the institution to borrow and access capital 

as needed. Delisting and SEC actions directly affect the 

ability of a publicly-traded institution to access capital. 

An institution may contend that the event on which the 

action was premised does not portend closure, but the 

action by the exchange or SEC unquestionably affects the 

ability of the institution to obtain financing, a critical 

aspect of financial viability. While the negative effect 

of that impairment may be difficult to quantify, and cannot 

immediately be assessed under the composite score 

methodology, that impairment warrants requiring financial 

protection. 

Changes: None.

SEC Filings Regarding Judicial or Administrative Proceeding

Comments: With regard to judicial or administrative 

proceedings, some commenters noted that the SEC’s 

requirements are designed to encourage disclosure of 

information to potential investors and cautioned that the 

proposed regulations may discourage those disclosures. The 

commenters believed that although the proposed reporting 

requirements under § 668.171(d)(i) would permit an 

institution to explain why a particular litigation or suit 
420

does not constitute a material adverse event that would 

pose an actual risk to its financial health, a publicly 

traded institution that elects to make broad disclosures to 

the SEC and potential investors would be dependent on the 

Department agreeing with the institution’s position. If 

the Department disagrees, the commenters opined that the 

institution would face a financial penalty (i.e., be 

required to submit a letter of credit) for a situation 

where the disclosure may not have been required by the SEC 

in the first place. Along similar lines, other commenters 

noted that the reporting provisions do not require the 

Department to act on any evidence provided by the 

institution, and do not specify what opportunity, if any, 

the institution would have to discuss these events with the 

Department. For these reasons, the commenters suggested 

that the Department should not implement regulations that 

would interfere with the primary purpose of SEC 

disclosures--to permit potential investors to make their 

own decisions about whether to invest in the institution.

Similarly, other commenters believed this triggering 

event would run counter to the long-standing practice of 

publicly traded institutions generally erring on the side 

of disclosing legal and regulatory events to the public and 

their shareholders. More specifically, the commenters 
421

asserted that publicly traded institutions tend to overdisclose these events, particularly since the materiality 

of those events often cannot be reasonably determined at 

their onset. 

Discussion: We acknowledge that a judicial or 

administrative proceeding reported by an institution to the 

SEC may or may not be material. We believe that 

proceedings reported in SEC filings that seek substantial 

recovery but may not be meritorious pose a risk similar to 

the risk posed by non-governmental actions. The 

institution may succeed in dismissing such a suit, or at 

least testing its merit by moving for summary judgment or 

disposition. The institution may also have insurance that 

fully protects the institution from loss from the suit.

Changes: We have added a new § 668.171(c)(1)(ii) to treat 

all private party litigation as a triggering event only if 

the action survives a motion for summary judgment or 

disposition, or the institution has chosen not to file for 

summary judgment, and have amended § 668.171(h) to enable 

the institution to demonstrate that all actual and 

potential losses stemming from that litigation are covered 

by insurance.

SEC Reports Filed Timely
422

Comments: With respect to the trigger for filing timely 

SEC reports under proposed § 668.171(c)(6)(iii), some 

commenters warned that the Department should not assume 

that an institution is unable to meet its financial or 

administrative obligations and impose punitive actions 

based on a failure to meet SEC filing requirements. As an 

initial matter, the commenters argued that the proposed 

trigger is more stringent than the SEC’s rules, which allow 

an institution to file a notification of late filing, that 

enables the institution to file the report by an extended 

deadline, and once filed the institution would be deemed to 

have timely filed the report. In addition, the commenters 

stated that an institution’s failure to file a report may 

not necessarily reflect that the institution is unable to 

meet its financial or administrative obligations, because 

the report could be late for many reasons outside of 

financial problems at an institution, including the 

unavailability of an individual required to sign the 

report, an unforeseen circumstance with an institution’s 

auditors, or the need to address a financial restatement 

done for technical reasons. Similarly, other commenters 

urged the Department to apply this trigger only where the 

filing would be considered late under SEC rules. The 

commenters explained that pursuant to SEC rules, an 
423

institution that fails to timely file a report must file a 

Form 12b-25, reporting the failure to file no later than 

one business day after the report was due. If the Form 

12b-25 is properly filed, the institution will have 15 

additional calendar days to file an annual report or five 

additional calendar days to file a quarterly report. If 

the institution files the late report within the extended 

deadline, the SEC considers that the report was timely 

filed. 

Discussion: A late SEC filing, or failure to file, may 

precipitate an adverse action against an institution by the 

SEC or a stock exchange. For example, an AMEX or Nasdaqlisted institution that files a late SEC report is cited 

for failing to meet exchange requirements and will be 

required by the exchange to submit a plan for regaining 

compliance with listing requirements. The exchange may 

suspend trading on the institution’s stock if it does not 

come into compliance with those requirements. Or, a late 

filing may limit the institution’s ability to conduct 

certain types of registered securities offerings. In 

addition, capital markets tend to react negatively in 

response to late filings. All told, the consequences of 

late SEC filing may impact the institution’s capital 

position or its ability to raise capital, and we believe 
424

that it remains a significant event to include as an 

automatic trigger.

Changes: None.

Discretionary Triggering Events § 668.171(g)

Comments: Under proposed § 668.171(c)(10), an institution 

is not financially responsible if 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 (1) there 

is a significant fluctuation in the amount of Direct Loan 

or Pell Grant funds received by the institution that cannot 

be accounted for by changes in those programs, (2) the 

institution is cited by a State licensing or authorizing 

agency for failing State or agency requirements, (3) the 

institution fails a financial stress test developed or 

adopted by the Secretary to evaluate whether the 

institution has sufficient capital to absorb losses that 

may be incurred as a result of adverse conditions, or (4) 

the institution or its corporate parent has a noninvestment grade bond or credit rating.

Commenters believed that the proposed discretionary 

triggers were unreasonable for several reasons. First, the 

commenters noted that the discretionary provisions do not 
425

afford institutions any opportunity to communicate with the 

Department regarding a possible materiality determination. 

Instead, it appeared to the commenters that the Department 

may determine unilaterally, and without engaging the 

school, that there is an event or condition that is 

reasonably likely to have a material adverse effect and 

proceed to demand financial protection, violating the 

school’s due process. Moreover, the commenters argued that 

any standard of financial responsibility that does not 

permit the receipt and review of information from the 

school cannot produce consistent and accurate results and, 

as such, fails to satisfy the reasonability standard put 

into place by Congress.

Second, the commenters noted that the Department did 

not define the term “material adverse effect” and made no 

mention of the concept in the preamble to the proposed 

regulations. The commenters asserted that the Department 

must define this term to ensure that the regulations are 

consistently applied, particularly where an institution 

could be significantly penalized (required to submit a 

letter of credit) pending the result of the determination.

Third, the commenters argued that by requiring under 

proposed § 668.171(d) that an institution must report any 

automatic or discretionary trigger within 10 days, the 
426

proposed regulations are unworkable--because the 

discretionary triggers are not exhaustive, an institution 

would have an obligation to speculate as to the types of 

events the Department might determine would have a material 

adverse effect and report those events. Conversely, the 

commenters were concerned that the Department could argue 

that an institution’s failure to report an event, that the 

Department might deem likely to have material adverse 

effect, is a failure to provide timely notice under 

§ 668.171(d), and grounds to initiate a proceeding. 

Fourth, the commenters argued that the six examples of 

events that the Department might consider “reasonably 

likely” to have a material adverse effect on an institution 

are vague, and asserted that the Department offered no 

factual support in the preamble for the notion that these 

events regularly, or even more often than not, lead to 

financial instability at an institution. The commenters 

stated that the only rationale the Department offers for 

including these six events is that each could, in theory, 

signal financial stress. For example, they noted that a 

citation from a State-authorizing agency for failing a 

State requirement could concern almost any aspect of an 

institution's operations. The commenters contended that 

routine citations occur with great frequency in annual 
427

visit reports and routine audits. Therefore, under the 

proposed regulations, an institution would be required to 

report every citation, without regard to materiality, 

frequency, or the relationship to the institution's 

financial health. According to the commenters, events such 

as “high annual dropout rates,” a “significant fluctuation” 

in the amount of Federal financial aid funds received by an 

institution, an undisclosed stress test, and an adverse 

event reported on a Form 8-K with the SEC are equally 

problematic and vague. Commenters stated that it was 

unclear what these thresholds or events represent, how they 

would be evaluated, or how an institution would know that 

one has occurred and report it to the Department.

Other commenters believed that the Secretary should 

not have open-ended discretion to determine which 

categories of events or conditions would be financial 

responsibility triggers. Like other commenters, these 

commenters argued that as a practical matter it would 

likely be impossible for an institution to comply with the 

reporting requirements in proposed § 668.171(d) for any 

event or condition that is not specifically identified by 

the Secretary because the institution would have to guess 

which additional events or conditions might be of interest. 

Similarly, some commenters believed the discretionary 
428

triggers should be exhaustive with established parameters 

so that institutions know the events they must comply with 

and report to the Department.

Some commenters believed that the discretionary 

triggers constitute an open invitation for litigation by 

anyone with an “axe to grind” with any school. The 

commenters were concerned that the Secretary could use the 

expanded authority under the discretionary triggers to take 

actions against institutions for any reason. 

Discussion: As a general matter, the discretionary 

triggers are intended to identify factors or events that 

are reasonably likely to, but would not in every case, have 

an adverse financial impact on an institution. Compared to 

the automatic triggers, where the impact of an action or 

event can be reasonably and readily assessed (e.g., claims, 

liabilities, and potential losses are reflected in the 

recalculated composite score), the materiality or impact of 

the discretionary triggers is not as apparent. The 

Department will have to conduct a case-by-case review and 

analysis of the factors or events applicable to an 

institution to determine whether one or more of those 

factors or events has an adverse financial impact. In so 

doing, the Department may request additional information or 

clarification from the institution about the circumstances 
429

surrounding the factors or events under review. If the 

Department determines that the factors or events have a 

material adverse effect on the institution’s financial 

condition or operations, the Department notifies the 

institution of the reasons for, and consequences of, that 

determination. As for the comment that we should define 

“material adverse effect,” we do not intend to adopt a 

specific measure here, because identification of those 

events that cause such an effect is a particularized 

judgment.59 We disagree with the notion that it is 

inappropriate for the Department to determine which factors 

or events may be used as discretionary triggers, or that 

the list of factors and events in the regulations should be 

exhaustive. Each discretionary trigger rests on a 

particularized judgment that a factor or event has or 

 

59 Accounting rules do not set a specific figure for such effects. However, SEC regulations require the 

registrant to disclose resources the loss of which would have a material adverse effect on the 

registrant, and in that rule explicitly require the registrant to disclose an investment of 10 percent or 

more of company resources in an entity, 17 CFR 210.1-02(w), and identify any customer or revenue 

source that accounts for 10 percent or more of the registrant’s consolidated revenues, if the loss of 

that revenue would constitute a material adverse effect. 17 CFR 229.101(c)(1)(i), (vii). While not 

defining material adverse effect, the selection of this threshold supports an inference that loss of this 

magnitude can be expected to constitute a material adverse effect. A popular characterization of the 

significance of such a loss states that material adverse effect is a term that commonly denotes an 

effect that 

. . . usually signals a severe decline in profitability and/or the possibility that the company's 

operations and/or financial position may be seriously compromised.. This is a clear signal to 

investors that there is something wrong. . . Material adverse effect is not an early warning 

signal, but rather a sign that a situation has already deteriorated to a very bad stage. 

Investopedia www.investopedia.com/articles/analyst/112702.asp#ixzz4JKIpsbwk
430

demonstrates such a substantial negative condition or 

impact on the institution as to place continued operations 

in jeopardy.60 In this regard, as explained more fully 

under the heading “Reporting Requirements,” an institution 

is responsible for reporting only the actions and events 

specified in these regulations. 

We address specific concerns and suggestions about the 

discretionary triggers in the following discussion for each 

factor or event. In addition, we have added pending 

 

60 The assessment would look to the factors identified in recent revisions to Financial Accounting 

Standards Board rules regarding the expectations regarding whether the entity’s ability to continue 

as a going concern. FASB Standards Update, No. 2014-15, Presentation of Financial Statements –

Going Concern (Subtopic 205-40): 

205-40-55-2 The following are examples of adverse conditions and events that may raise 

substantial doubt about an entity’s ability to continue as a going concern. The examples are 

not all-inclusive. The existence of one or more of these conditions or events does not 

determine that there is substantial doubt about an entity’s ability to continue as a going 

concern. Similarly, the absence of those conditions or events does not determine that there 

is no substantial doubt about an entity’s ability to continue as a going concern. 

Determining whether there is substantial doubt depends on an assessment of relevant 

conditions and events, in the aggregate, that are known and reasonably knowable at the 

date that the financial statements are issued (or at the date the financial statements are 

available to be issued when applicable). An entity should weigh the likelihood and 

magnitude of the potential effects of the relevant conditions and events, and consider their 

anticipated timing. a. Negative financial trends, for example, recurring operating losses, 

working capital deficiencies, negative cash flows from operating activities, and other 

adverse key financial ratios b. Other indications of possible financial difficulties, for 

example, default on loans or similar agreements, arrearages in dividends, denial of usual 

trade credit from suppliers, a need to restructure debt to avoid default, noncompliance 

with statutory capital requirements, and a need to seek new sources or methods of 

financing or to dispose of substantial assets c. Internal matters, for example, work 

stoppages or other labor difficulties, substantial dependence on the success of a particular 

project, uneconomic long-term commitments, and a need to significantly revise operations 

d. External matters, for example, legal proceedings, legislation, or similar matters that 

might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; 

loss of a principal customer or supplier; and an uninsured or underinsured catastrophe 

such as a hurricane, tornado, earthquake, or flood.
431

borrower defense claims as a discretionary trigger because 

it is possible that an administrative action could cause an 

influx of borrower defense claims that we can expect to be

successful, though that will vary on a case-by-case basis. 

Changes: None. 

Discretionary Triggering Events

Bond or Credit Rating, proposed § 668.171(c)(11)

Comments: Commenters argued that a non-investment grade 

bond or credit rating is not a reliable indicator of 

financial problems. The commenters stated that, because 

the rating assigned by a rating agency is a measure 

designed for the benefit of creditors concerned solely with 

pricing the institution’s debt, a rating below investment 

grade does not necessarily mean that an institution cannot 

meet its financial obligations. Moreover, the commenters 

questioned how the Department would determine that an 

institution or its corporate parent had a non-investment 

grade rating, since there are multiple rating agencies and 

the agencies may not necessarily assign the same rating to 

a particular institution or in the case where the 

institution or its corporate parent have multiple ratings, 

some of which are investment grade. The commenters stated 

that this financial structuring is not unusual and has no 

impact on the ability of the institution to meet its 
432

obligations. For these reasons, the commenters suggested 

that, if the Department retains bond or credit ratings as a 

triggering event, it should specify how those ratings are 

determined. In addition, the commenters were concerned 

that applying this trigger could potentially increase costs 

to institutions because, in an effort to avoid this risk of 

a non-investment grade rating, an institution may seek not 

to have a credit rating in the first place, so obtaining 

alternate financing could increase its costs of capital.

Other commenters argued that assuming that schools 

with noninvestment grade bond ratings are somehow deficient 

is unwarranted. The commenters noted that the majority of 

nonprofit colleges and universities do not have a bond 

rating at all, since they have not issued public debt, 

citing the data provided by the Department in the NPRM that 

shows that only 275 private institutions have been rated by 

Moody’s (some others likely have used other rating agencies 

like Fitch or Standards & Poor). The commenters contended 

that institutions that have a rating are arguably in better 

financial condition than those that do not, so rather than 

being a trigger for additional scrutiny, the existence of a 

credit rating and outstanding public debt would, in itself, 

be an indication of financial responsibility. Further, the 

commenters noted that a bond rating seeks to assess the 
433

creditworthiness and risk of nonpayment over an extended 

time period--typically 20 to 30 years--that is well beyond 

the much shorter timeframe contemplated by the financial 

responsibility regulations.

Discussion: In considering the complexities and 

difficulties noted by the commenters in using and relying 

on bond or credit ratings, we are removing this triggering 

event.

Changes: We have removed bond or credit ratings as a 

discretionary trigger.

Adverse Events Reported on Form 8-K, proposed § 

668.171(c)(11)

Comments: Commenters believed that the trigger regarding 

the reporting of adverse events on the SEC’s Form 8-K is 

too narrow since it is not used to identify adverse events 

at non-publicly traded institutions and too broad since it 

would capture events reported on Form 8-K that are not 

indicative of an institution’s financial health. Although 

the commenters acknowledged that it may be efficient to use 

existing disclosure channels to identify potential issues 

of concern, they nevertheless believed that it was unfair 

for the Department to impose burdens on publicly traded 

institutions, but not on other institutions that may be 

experiencing adverse events. In addition, the commenters 
434

stated that many events listed on Form 8-K have no bearing 

on an institution’s ability to meet its financial 

obligations, so the Department should identify the events 

it considers to be adverse. Once identified, the 

commenters suggested that the Department could develop a 

broader list of adverse events that would be applicable to 

all institutions.

Also, the commenters believed that, because of the 

proposed trigger, publicly traded institutions would have 

an incentive not to report events on Form 8-K that could 

potentially be adverse events, but in the ordinary course 

would have provided useful information to investors. In 

conclusion, the commenters feared that, without clear 

guidelines from the Department about what constitutes an 

adverse event, publicly traded institutions would have to 

make their own decisions as to whether to treat something 

as an adverse event. Commenters were concerned that, even 

where institutions make that decision in good faith, they 

could potentially be exposing themselves later to an action 

by the Department if the Department exercises its own 

judgment in hindsight. 

Similarly, other commenters believed that a number of 

events on Form 8-K have little or no relationship to the 

institution’s continued capacity to operate or to 
435

administer the title IV, HEA programs. Instead of using a 

trigger based on Form 8-K reporting, the commenters 

suggested that the financial responsibility regulations 

should be focused on potential risks to the title IV, HEA 

programs and, as a related matter, institutional outcomes 

that are indicative of that risk.

Discussion: While we are not convinced that some of the

reportable items on Form 8-K will not have an adverse 

financial impact on an institution, we will not require an 

institution to report any Form-8K event because that 

information is otherwise publicly available to the 

Department. We may, however, evaluate the effect of an 

event reported in a Form 8-K as if it were a discretionary 

triggering event, on a case by case basis, or in light of 

the effect on an institution’s composite score as applied 

under these regulations. 

Changes: We have removed the discretionary trigger 

regarding an adverse event reported by an institution on a 

Form 8-K under proposed § 668.171(c)(10)(vii).

High Drop-out Rates and Fluctuations in Title IV, HEA 

Funding 

Drop-out Rates § 668.171(g)(4) 

Comments: Some commenters urged the Department to define 

how it will calculate high annual dropout rates and provide 
436

an opportunity for the pubic to comment on the methodology 

employed. The commenters noted that in the preamble to the 

NPRM, the Department stated that it uses high dropout rates 

to select institutions for program reviews, as described in 

20 U.S.C. § 1099c-1(a), and that “high dropout rates may 

signal that an 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” (81 FR 39366 

(emphasis added)). Although the commenters agreed that 

those statements may be true, they argued that when the 

Department conducts a program review, it investigates 

whether high dropout rates are in fact signs of financial 

difficulties. Under the NPRM, the commenters surmised that 

the Department would have the discretion to impose a 

requirement to provide a letter of credit or other 

financial protection without any review of institutional 

practice or other investigation to find a causal connection 

between high dropout rates and financial difficulties, thus 

depriving the institution of fair process.

Other commenters were concerned that this trigger is 

arbitrary because it is unlikely that a high dropout rate 
437

is related to a school's financial stability. The 

commenters pointed to a study published in December 2009 by 

Public Agenda showing that the most common reason students 

dropped out of school is because they needed to work. 

Other reasons cited in the study include: needing a break 

from school, inability to afford the tuition and fees, and 

finding the classes boring or not useful. Based on this 

study and survey results from the Pew Research Center, the 

commenters concluded that the reasons students drop out of 

school typically have very little to do with school itself, 

and therefore suggested that the Department remove this 

triggering event. 

Some commenters argued that the use of the dropout 

rate as a trigger fails to account for the various missions 

that title IV institutions represent, or the extended time 

to graduation that many contemporary students face as they 

balance career, family and higher education. The 

commenters believed that establishing a dropout rate as a 

trigger for a letter of credit creates a perverse incentive 

for institutions to enroll and educate only those students 

who are most likely to succeed, instead of continuing to 

extend access to higher education to the broader 

population. In addition, the commenters believed that 

measures of academic quality are best left to accreditors, 
438

but if the Department chooses to take on this role, it 

should consider instead triggering a letter of credit if an 

institution’s persistence rate decreases significantly 

between consecutive award years, or over a period of award 

years. The commenters believed this approach would account 

for the significant variances in mission and student body 

across higher education without potentially limiting 

access.

Fluctuations in Funding § 668.171(g)(1)

Commenters believed the proposed trigger for a significant 

fluctuation between consecutive award years, or a period of 

award years, in the amount of Pell Grant and Direct Loan 

funds received by an institution, is overly vague. The 

commenters noted that year-over-year fluctuations can occur 

when an institution decides to discontinue individual 

programs or close campus locations, often because those 

campuses or programs are under-performing financially even 

where the overall institution is financially strong and 

argued that because these are sound business decisions made 

in the long-term interests of the institution, they should 

not give rise to a letter of credit requirement. 

Some commenters believed that a decrease in total 

title IV expenditures should not trigger a letter of credit 

requirement because the decreases in the amount of title 
439

IV, HEA funds disbursed puts the Department at less risk of 

financial loss. In addition, the commenters stated that a 

decrease in title IV, HEA funding to a school is largely 

out of the school's control–-it is usually a result of 

decreased enrollments or the Department's rulemaking 

actions.

Other commenters agreed that big changes in the amount 

of financial aid received by an institution could be a sign 

that growth that is too fast, or an enrollment decline may 

signal a school is in serious trouble. The commenters 

argued, however, that at small schools, big percentage 

changes could simply be the result of small changes in the 

number of students. While the commenters were confident 

that the actual implementation of this rule would not 

result in the Department holding a small school accountable 

for what is a minor change, they believed the Department 

should clarify that the change in Federal aid would need to 

be large both in percentage and dollar terms as a way of 

proactively assuaging this concern.

One commenter noted that the phrase “significant 

fluctuation” was not defined, but that the Department 

implied on page 39393 of its NPRM that it believes a 

reasonable standard would be a 25 percent or greater change 

in the amount of title IV, HEA funds a school receives from 
440

year to year, after accounting for changes in the title IV, 

HEA programs. The commenter urged the Department to 

clarify in the final regulations precisely what this phrase 

means so that institutions would know how to comply. 

Moreover, the commenter argued that the Department may be 

evaluating institutions by the wrong metric, stating that 

the for-profit sector has seen six-fold enrollment growth 

over the past 25 years where significant fluctuations in 

title IV, HEA program volume may be a reflection of that 

expansion. Said another way, a significant fluctuation in 

title IV, HEA program volume, without looking at important 

contextual clues, is insufficient to determine whether 

there is questionable conduct at the institution. In 

addition, the commenter warned that including significant 

fluctuation as a trigger may serve to deter institutional 

growth, since a large increase in enrollment would trigger 

the financial protection requirement even if that increase 

was perfectly legitimate. 

In addition, the commenter believed that, while the 

Department has a compelling interest in ensuring that 

institutions do not raise tuition unnecessarily to take 

advantage of title IV, HEA aid, the Department should try 

to address this problem in a way that does not discourage 

institutions from expanding their enrollment. 
441

For these reasons, the commenter suggested revising 

the trigger so it refers to a significant fluctuation in 

title IV, HEA program volume per aid recipient, not program 

volume overall. The commenters believed this approach 

would guard against increases in tuition designed to take 

advantage of the title IV, HEA programs while not 

penalizing institutions with rapid enrollment growth. 

Discussion: We intend to use the high drop-out rate and 

fluctuations in funding triggers only when we make a 

careful, reasoned analysis of the effect of any of these 

events or conditions on a particular institution, and 

conclude that the condition or event is likely to have a 

material adverse effect on the institution. An 

institution that challenges this determination may present 

an argument disputing this determination. If we are not 

persuaded, we will take enforcement action under 34 CFR 

part 668, subpart G to limit the institution’s 

participation to condition further participation on 

supplying the financial protection demanded. The 

institution may obtain an administrative hearing to dispute 

the determination, and unlike with the automatic triggers, 

the institution may present and have considered both 

evidence and argument in opposition to the determination 

that the condition may constitute a material adverse 
442

effect, but also whether the amount of financial protection 

demanded is warranted. 

As noted in the introductory discussion of this 

section and noted by some commenters, the materiality or 

relevance of factors like dropout rates and fluctuations in 

funding must be evaluated on a case-by-case basis in view 

of the circumstances surrounding or causes giving rise to 

what may appear to be excessive or alarming outcomes. In 

other words, what may be a high dropout rate or significant 

fluctuation in funding at one institution may not be 

relevant at another institution. In this regard, we 

appreciate the suggestions made by the commenters for how 

the Department could view or determine whether or the 

extent to which these factors are significant. 

While a case-by-case approach argues against setting 

bright-line thresholds, to mitigate some of the anxiety 

expressed by the commenters as to what may be a high 

dropout rate or fluctuation in funding, we may consider 

issuing guidance or providing examples of actual cases 

where the Department made an affirmative determination.

Changes: None.

State or Agency Citations § 668.171(g)(2)

Comments: With respect to the discretionary trigger under 

proposed § 668.171(c)(10)(ii), some commenters noted that 
443

because State agencies may issue citations for minor 

violations of State requirements and not subject an 

institution to any penalties, the Department should remove 

this triggering event. The commenters believed this 

triggering event would unnecessarily capture citations for 

minor violations, such as failure to update the 

institution’s contact information. It would also capture 

violations for which the State agency has decided no 

penalty is necessary. The commenters questioned why the 

Department should substitute its judgment for that of the 

State agency and determine that an otherwise non-punitive 

citation is indicative of financial problems. In the 

alternative, the commenters suggested that the final 

regulations should provide that this trigger would only be 

invoked if an institution’s failure to comply with State or 

agency requirements was material. In addition, the 

commenters suggested that the final regulations should 

define “State licensing or authorizing” agency in this 

context to mean only the primary State agency responsible 

for State authorization, not specialized State agencies, 

such as boards of nursing, that have responsibility for 

professional licensure and other matters that would not 

have a material impact on the overall financial condition 

of the institution.
444

Other commenters recommend that the Department apply 

the State agency-based trigger only if the citation by the 

State authorizing agency is final and relates to the same 

bases that can support a borrower defense claim. Or, 

because State agencies frequently cite institutions for 

findings of noncompliance that are remedied appropriately 

and timely, the commenters supported applying the trigger 

only if the State agency has initiated an action to suspend 

or terminate its authorization of the institution.

Some commenters were concerned that the Department did 

not provide any evidence that would support that an 

institution that chooses to discontinue State approval for 

a single program at a single location would implicate the 

financial stability of an entire institution, much less a 

large institution with a wide range of programming and 

multi-million dollar endowment.

Discussion: The State agency-based trigger and other 

discretionary triggers are intentionally broad to capture 

events that may have an adverse financial impact on an 

institution. With regard to the comments that the 

Department should not require an institution to report 

State agency actions for events or violations (1) that the 

institution considers minor, (2) for which the agency did 

not penalize the institution, or (3) that are remedied 
445

timely, we believe that doing so under any of these 

circumstances defeats the purpose of the trigger. There is 

little or no reporting burden on an institution that is 

sporadically cited for a violation by a State agency, but 

where the institution is cited repeatedly the reporting 

burden is warranted because even if individual violations 

are minor, collectively those violations may signal a 

serious issue at the institution. 

A State licensing or authorizing agency, for the 

purpose of this trigger, includes any agency or entity in 

the State that regulates or governs (1) whether an 

institution may operate or offer postsecondary educational 

programs in the State, (2) the nature or delivery of those 

educational programs, or (3) the certification or licensure 

of students who complete those programs. In this regard, 

we disagree with the assertion that actions by a State 

agency responsible for professional licensure would never 

have a material impact on the financial condition of the 

institution. To the contrary, because the State agency 

enforces standards that restrict professional practice to 

individuals who, in part, satisfy rigorous educational 

qualifications, a citation or finding by the agency could 

impact how an institution offers or delivers an educational 

program.
446

Finally, with regard to the comment about an 

institution voluntarily discontinuing State approval for a 

program at a particular location, we note that, unless the 

State cited the institution for discontinuing the program, 

this is not a reportable event.

Changes: None.

Comments: Some commenters believed that considering 

“claims of any kind” against an institution, in proposed § 

668.171(c)(1)(ii), would invite a broad set of claims that 

may not cause financial damages. Others objected to the 

apparent ability under proposed § 668.171(c)(10) to add 

other events or conditions as it wished without public 

comment. Commenters believed that proposed triggers do not 

focus just on fiscal solvency; rather, they assert, the 

proposed triggers include events not related to financial 

solvency: accrediting agency actions, cohort default rates, 

and dropout rates. The commenters opined that the 

Department was inappropriately attempting to shift the 

emphasis of these regulations from financial oversight into 

much broader accountability measures and to insert the 

Federal government into institutional decision-making.

Discussion: To the extent that the proposed regulations 

would have included events other than explicit claims, we 

are revising the regulations to include only events that 
447

pose an imminent risk of very serious financial impact. An 

institution that could lose institutional eligibility in 

the next year is indeed at serious risk of severe financial 

distress. Other events cited here we agree pose a risk 

only under particular circumstances, and should not be 

viewed as per se risks. 

Changes: Section 668.171 has been revised to make clear 

that accreditor sanctions and government citations, are 

considered, like high dropout rates, as triggering events 

only on a reasoned, case-by-case basis under 

§ 668.171(g)(2) and (5).

Stress Test § 668.171(g)(3)

Comments: Commenters believed that a trigger based on the 

proposed stress test is redundant because the Department 

uses the existing composite score methodology as the 

primary means of evaluating the financial health of an 

institution. In addition, the commenters were concerned 

that the Department did not provide schools with enough 

information regarding what the financial stress test will 

be and if it will be developed through negotiated 

rulemaking. The commenters suggested removing the stress 

test as a trigger, but if the Department does implement a 

stress test, it should first be developed through 

negotiated rulemaking. 
448

Other commenters echoed the suggestion to develop the 

stress test though negotiated rulemaking, arguing that 

developing a test would not only be time consuming and 

complex, but have serious implications for institutions-–

all the reasons why institutions and other stakeholders 

should have an opportunity to provide their views and 

analyses. 

Some commenters argued that it was premature and 

unreasonable to include reference to a stress test, which 

has yet to be developed, and which schools have not had a 

chance to review and offer comment on.

Discussion: We do not intend to replace the composite 

score methodology with a financial stress test. The stress 

test could be used to assess an institution’s ability to 

deal with an economic crisis or adverse event under a 

scenario-based model, whereas the composite score 

methodology focuses primarily on actual financial 

performance over a fiscal year operating cycle. 

We certainly understand the community’s desire to 

participate in any process the Department undertakes to 

develop a stress test, or evaluate adopting an existing 

stress test, but cannot at this time commit to a particular 

process. However, we wish to assure institutions and other 
449

affected parties that we will seek their input in whatever 

process is used.

Changes: None.

Violation of Loan Agreement § 668.171(g)(6)

Comments: Under proposed § 668.171(c)(4), an institution 

is not financially responsible if it violated a provision 

or requirement in a loan agreement with the creditor with 

the largest secured extension of credit to the institution, 

failed to make a payment for more than 120 days with that 

creditor, or that creditor imposes more stringent loan 

terms or sanctions as a result of a default or delinquency 

event.

Some commenters noted that because the largest secured 

extension of credit may be for a very small dollar amount, 

the Department should specify a minimum threshold below 

which a violation of a loan agreement is not a triggering 

event.

Other commenters believed that a school that satisfies 

the composite score requirements should not be required to 

post a letter of credit relating to violations of loan 

agreements. The commenters cautioned that this provision 

could have the unintended impact of altering the 

relationship between schools and their creditors because 
450

creditors would have additional leverage in negotiations 

regarding violations of loan agreements. The commenters 

believed that, because this additional leverage could

potentially place a school's financial stability at risk 

where it otherwise was not, this triggering event should be 

deleted.

Along the same lines, other commenters warned that the 

proposed loan agreement triggers would create significant 

leverage for banks that does not presently exist. The 

commenters opined that a bank potentially could threaten to 

trigger a violation of a loan agreement or obligation, 

thereby exercising inappropriate leverage over the 

institution and its operations to the detriment of its 

educational mission, students, and employees. The 

commenters believed this outcome would be a significant 

threat that the Department must consider this 

“countervailing evidence” in rationalizing the 

reasonableness of this proposed trigger. See Am. Fed'n of 

Labor & Cong. of Indus. Organizations v. Occupational 

Safety & Health Admin., U.S. Dep't of Labor, 965 F.2d 962, 

970 (11th Cir. 1992) (quoting AFL-CIO v. Marshall, 617 F.2d 

636, 649 n. 44 (D.C. Cir. 1979)).

Other commenters agreed that, in certain 

circumstances, the violation of a loan agreement or other 
451

financial obligation may signal the need for financial 

protection. However, the commenters believed the proposed 

triggering events were overly broad and could result in 

financially sound institutions being regularly penalized. 

The commenters recommended that the Department revise the 

triggering events in two ways. 

First, the Department should include a materiality 

threshold in proposed § 668.171(c)(4)(i) so that this 

provision is only triggered when a default is material and 

adverse to the institution. In addition, the commenters 

suggested that this provision should apply only to any 

undisputed amounts and issues that are determined by a 

final order after all applicable cure periods and remedies 

have expired. With regard to proposed § 668.171(c)(4)(ii), 

because cross-defaults are prevalent in most material loan 

agreements, commenters suggested that the Department should 

focus on defaults that are material and adverse to the 

institution as a going concern, as opposed to narrowing the 

trigger to the institution’s largest secured creditor.

Second, commenters suggested that the language in 

proposed § 668.171(c)(4)(iii) should be revised to exclude 

events where the institution it permitted to cure the 

violation in a timely manner in accordance with the loan 

agreement. They noted that this type of “curing” is a 
452

common occurrence and specifically contemplated in the 

agreements between the parties.

Other commenters believed that the Department should 

include allowances for instances in which the creditor 

waives any action regarding a violation of a provision in a 

loan agreement, or the creditor does not consider the 

violation to be material. The commenters note that 

although the reporting requirements under proposed 

§ 668.171(d)(3) permit an institution to notify the 

Department that a loan violation was waived by the 

creditor, it does not explicitly state that such a waiver 

would make the institution financially responsible. The 

commenters urged the Department to revise this provision to 

clearly state that a waiver of a term or condition granted 

by a creditor cures the triggering event so that financial 

protection is not required. According to the commenters, 

certified public accountants use this standard when 

assessing a school’s ability to continue as a going 

concern--if a waiver is issued or granted by the creditor 

the certified public accountant does not mention this event 

in the school’s audited financial statements because it is 

no longer an issue for the debtor.

Some commenters believed that the proposed loan 

agreement provisions were too broad and would unnecessarily 
453

impact institutions that pose no risk. The commenters 

stated that loan agreements may include a number of events 

that are not related to the failure of the institution to 

make payments that trigger changes to the terms of the 

agreement, and in that case the proposed provisions would 

seem to capture the change in terms as a reportable event. 

The commenters noted that nonprofit institutions have 

access to and use variable rate loans, and that some 

nonprofit institutions have synthetically converted their 

variable rate interest borrowings into fixed rate debt by 

entering into an interest rate swap agreement. The 

commenters believed that, under these circumstances, it 

would be incorrect to assume that changes to the interest 

rates negatively impact the institution. Further, while 

the loan provision in the proposed regulations is narrower 

than the current one since it only applies to an 

institution’s largest secured creditor, rather than all 

creditors, the commenters believed the Department should 

establish a materiality threshold and/or make a 

determination that any changes to the interest rate or 

other terms would have a material impact on the 

institution. In addition, the commenters noted that the 

exception provided under § 668.171(d)(3), allowing the 

institution to show that penalties or constraints imposed 
454

by a creditor will not impact the institution’s ability to 

meet its financial obligations, only applies if the 

creditor waived a violation and questioned whether the end 

result would be the same if the creditor did not waive the 

violation, but the penalties or changes to the loan 

nevertheless would not have an adverse impact.

Discussion: In considering the comments regarding the 

materiality of loan violations, and whether the sanctions 

or terms imposed by a creditor as a result of a default or 

delinquency event are relevant or adverse, we are making 

the provisions in proposed § 668.171(c)(4) discretionary 

triggers under § 668.171(g)(6). We believe that evaluating 

a delinquency or default on a loan obligation under the 

discretionary triggers addresses the commenters’ concerns 

that the Department should review or assess a loan 

violation on a case-by-case basis to determine whether that 

violation is material and sufficiently adverse to warrant 

financial protection. This case-by-case review eliminates 

the need to qualify or limit the scope of loan violations 

to the largest secured creditor. Moreover, making these 

discretionary triggers maintains the Department’s objective 

of identifying and acting on early warning signs of 

financial distress. We expect that making the proposed 

provisions discretionary will abate the concerns raised by 
455

the commenters that an automatic action by the Department 

in response to a loan violation would prompt or create an 

unfair advantage for creditors, because that action is no 

longer certain. In addition, we note that if a creditor 

files suit in response to a loan violation, that suit is 

covered under the provisions in § 668.171(c)(1)(ii) as an 

automatic triggering event.

Changes: We have relocated the proposed loan agreement 

provision to § 668.171(g)(6), reclassified those provisions 

as discretionary events, and removed the qualifier that the 

loan violation is for the largest secured creditor. 

Borrower Defense Claims § 668.171(g)(7)

Comments: None.

Discussion: After further consideration, the Department 

concluded that, in instances in which the Department can

expect an influx of successful borrower defense claims as a 

result of a lawsuit, settlement, judgment, or finding from 

a State or Federal administrative proceeding, we may wish 

to require additional protection. However, since such 

instances are fact-specific, we have decided to make such a 

trigger discretionary. 

Changes: We have added a new discretionary trigger in § 

668.171(g)(8) relating to claims for borrower relief as a 
456

result of a lawsuit, settlement, judgment, or finding from 

a State or Federal administrative proceeding.

Reporting Requirements § 668.171(h)

Comments: Some commenters believed that the proposed 

mandatory reporting requirements under § 668.171(d) are 

outside the scope of the Department’s authority. The 

commenters argued that statutory provisions cited by the 

Department, that the Secretary has authority “to make, 

promulgate, issue, rescind, and amend rules and regulations 

governing the manner of operation of, and governing the 

applicable programs administered by, the Department,” and 

that the Secretary is authorized “to prescribe such rules 

and regulations as the Secretary determines necessary or 

appropriate to administer and manage the functions of the 

Secretary or the Department” (20 U.S.C. § 1221e–3), are 

“implementary rather than substantive,” meaning that they 

“can only be implemented consistently with the provisions 

and purposes of the legislation.” New England Power Co. v. 

Fed. Power Comm’n., 467 F.2d 425, 430 (D.C. Cir. 1972), 

aff’d, 415 U.S. 345 (1974) (citation omitted).

Discussion: The Secretary cited 20 U.S.C. 1221e–3 as 

authority for revisions to 34 CFR 30.70, 81 FR 39407, and 

the repayment rate disclosures proposed as new § 668.41(h). 

81 FR 39371. As pertinent here, the Department cited as 
457

authority for the proposed changes to § 668.171, which 

includes the new reporting requirements under § 668.171(h), 

sections 487 and 498(c) of the HEA, 20 U.S.C. 1094 and 

1099c. Section 487 states that the Secretary 

“notwithstanding any other provision of this title (title 

IV of the HEA), shall prescribe such regulations as may be 

necessary to provide . . . in matters not governed by 

specific program regulations, the establishment of 

reasonable standards of financial responsibility . . . 

including any matter the Secretary deems necessary to the 

sound administration of the financial aid programs, such as 

the pertinent actions of any owner, shareholder, or person 

exercising control over an eligible institution.” 20 

U.S.C. 1094(c)(1)(B). Section 498 states that the 

Secretary is to determine whether an institution is able to 

meet its financial obligations to all parties, including 

students and the Secretary, including adopting financial 

criteria ratios. 20 U.S.C. 1099c(c). These provisions 

give the Secretary ample substantive authority to adopt 

regulations that require the institution to provide audited 

financial statements and other records needed to evaluate 

the financial capability of the institution. This 

authority is direct and specifically authorizes the 

required reporting by participating institutions, unlike 
458

the charge imposed by the Federal Power Commission in New 

England Power Co. v. Fed. Power Comm’n, cited by the 

commenter to support its view. The court there concluded 

that the Commission lacked authority to impose that charge

on the industry member for costs incurred not for the 

benefit of the member but for the general public. New 

England Power Co. v. Fed. Power Comm'n, 467 F.2d 425, 427 

(D.C. Cir. 1972), aff'd, 415 U.S. 345 (1974). Here, the 

HEA expressly authorizes the Secretary to adopt regulations 

governing the conditions for participation in the title IV, 

HEA programs, and in particular, the assessment of the 

institution’s financial capability.

Changes: None. 

Comments: Under the reporting requirements in proposed 

§ 668.171(d), an institution must report any action or 

event identified as a trigger under § 668.171(c) no later 

than 10 days after the action or event occurs. For three 

of the reportable actions or events--disclosure of a 

judicial or administrative proceeding, withdrawal of 

owner’s equity, and violations of loan agreements--the 

institution may show that those actions or events are not 

material or relevant.

Commenters were concerned that the Department would 

not be bound to act or consider any evidence an institution 
459

would provide under proposed § 668.171(d)(2) regarding the 

waiver of a violation of a loan agreement, or provide any 

opportunity to the institution to discuss the waiver. 

Moreover, the commenters were concerned that the waiver 

reporting provisions would permit the Department to 

disregard any such evidence if the creditor imposes 

additional constraints or requirements as a condition of 

waiving the violation, or imposes penalties or 

requirements. Absent a materiality modifier, the 

commenters believed that the waiver “carve out” would 

become meaningless. Ostensibly, the commenters feared that 

the Department could proceed to demand financial protection 

even if a creditor waived the underlying violation and the 

institution effectively demonstrated that the additional 

requirements imposed would only have a negligible impact on 

the institution’s ability to meet current and future 

financial obligations. The commenters recommended that at 

a minimum, proposed § 668.171(d)(2) should be modified to 

require a material adverse effect on the institution’s 

financial condition.

Other commenters believed that requiring institutions 

to report the widely disparate events reflected in the 

proposed triggering events within 10 days is unreasonable, 

particularly for large, decentralized organizations. The 
460

commenters believed that it was one thing to demand that 

type of prompt reporting on a limited number of items from 

institutions that already have been placed on heightened 

monitoring but quite different to require hyper-vigilance 

from all institutions. The commenters argued that various 

offices across the institution might be involved and have 

contemporaneous knowledge of the triggering events, but the 

individuals dealing with an unrelated agency action, a 

lawsuit, or a renegotiation of debt are unlikely to have a 

Department reporting deadline on the top of minds. 

Moreover, the commenters believed that individuals at an 

institution who are charged with maintaining compliance 

with Department regulations are unlikely to learn about 

some of these events within such a short period of time.

Discussion: In view of these comments and other comments 

discussing the triggering events, we clarify in these final 

regulations the reporting requirement that applies to each 

triggering event. As shown below, an institution must 

notify the Department no later than:

1. For the lawsuits and other actions or events in 

§ 668.171(c)(1)(i), 10 days after a payment was required, a 

liability was incurred, or a suit was filed, and for suits, 

10 days after the suit has been pending for 120 days;
461

2. For lawsuits in § 668.171(c)(1)(ii), 10 days after 

the suit was filed and the deadlines for filing summary 

judgment motions established, and 10 days after the 

earliest of the events for the summary judgments described 

in that paragraph;

3. For accrediting agency actions under 

§ 668.171(c)(1)(iii), 10 days after the institution is 

notified by its accrediting agency that it must submit a 

teach-out plan.

4. For the withdrawal of owner’s equity in

§ 668.171(c)(1)(v), 10 days after the withdrawal is made.

5. For the non-title IV revenue provision in 

§ 668.171(d), 45 days after the end of the institution’s 

fiscal year, as provided in § 668.28(c)(3).

6. For the SEC and exchange provisions for publicly 

traded institutions under § 668.171(e), 10 days after the 

SEC or stock exchange notifies or takes action against the 

institution, or 10 days after any extension granted by SEC.

7. For State or agency actions in paragraph (g)(2), 

10 days after the institution is cited for violating a 

State or agency requirement; 

8. For probation or show cause actions under 

paragraph (g)(5), 10 days after the institution’s 
462

accrediting agency places the institution on that status; 

or 

9. For the loan agreement provisions in paragraph 

(g)(6), 10 days after a loan violation occurs, the creditor 

waives the violation, or imposes sanctions or penalties in 

exchange or as a result of the waiver. We note that the 

proposed loan agreement provisions are discretionary 

triggers in these final regulations, and as such facilitate 

a more thorough dialogue with the institution about waivers 

of loan violations and creditor actions tied to those 

waivers.

We also are providing that an institution may show 

that a reportable event no longer applies or is resolved or 

that it has insurance that will cover the debts and 

liabilities that arise at any time from that triggering 

event.

In addition, we are providing that an institution may 

demonstrate at the time it reports a State or Federal 

lawsuit under § 668.171(c)(1)(i)(B) that the amount claimed 

under that lawsuit exceeds the potential recovery. We 

stress that this option does not include any consideration 

of the merit of the government suit. It addresses only the 

situation in which the government agency asserts a claim 

that the facts alleged, if accepted as true, and the legal 
463

claims asserted, if fully accepted, could still not produce 

a recovery of the deemed or claimed amount for reasons 

totally distinct from the merit of the government suit. 

Thus, the regulations in some instances deem a suit to seek 

recovery of all tuition received by an institution, but the 

allegations of the complaint describe only a limited 

period, or a given location, or specific programs, and the 

institution can prove that the total amount of tuition 

received for that identified program, location, or period 

is smaller than the amount claimed or the amount of recover 

deemed to be sought. 

Changes: We have revised § 668.171(h)(1) to specify the 

reporting requirements that apply to a triggering event, as 

described above. We have also provided in revised 

paragraph (g)(3) that an institution may show (1) that a 

reportable event no longer exists, has been resolved, or 

that it has insurance that will cover debts and liabilities 

that arise at any time from that triggering event; or (2) 

that the amount claimed in a lawsuit under § 

668.171(c)(1)(i)(B) exceeds the potential recovery the 

claimant may receive._ 

Public Domestic and Foreign Institutions § 668.171(i)

Domestic Public Institutions
464

Comments: Commenters were concerned that the proposed 

regulations would unfairly target private institutions, 

noting that public institutions would be exempt from the 

triggering events requiring letters of credit, even as 

recent events have shown that public institutions are not 

necessarily more financially stable than other 

institutions. 

Other commenters believed that the Department intended 

to exempt public institutions, as it currently does, from 

the financial responsibility standards, including the 

proposed triggering events, but the Department did not 

explicitly do so in the NPRM.

Discussion: We rely, and have for nearly 20 years relied, 

on the full-faith and credit of the State to cover any 

debts and liabilities that a public institution may incur 

in participating in the title IV, HEA programs. Under the 

current regulations in §§ 668.171(b) and (c), a public 

institution is not subject to the general standards of 

financial responsibility and is considered financially 

responsible as long as it does not violate any past 

performance provision in § 668.174. The Department has on 

occasion placed public institutions on heightened cash 

monitoring for failing to file required audits in a timely 

manner, but even then has never required a public 
465

institution to provide financial protection of any type 

because we already have it in the form of full-faith and 

credit. We would like to clarify that we are not changing 

long-standing policy for public institutions with these 

final regulations. In other words, the triggering events 

in § 668.171(c) through (g) of these regulations do not 

apply to public institutions.

Changes: None.

Foreign Institutions

Comments: Commenters believed that the actions and events 

that could trigger a letter of credit under § 668.171(c) 

are not applicable to foreign institutions, and requested 

that foreign institutions be exempted from these 

regulations, at least until the composite score methodology 

is revised. In addition, the commenters reasoned that a 

foreign institution with thousands of students from the 

institution’s home country and perhaps a few dozen U.S. 

students should not be required to post warnings for all of 

its students based on this U.S. regulatory compliance 

issue.

Discussion: While we agree that some triggering events in 

§§ 668.171(c) through (g) may not apply to foreign 

institutions, that circumstance does not justify exempting 

those institutions from the triggering events that do 
466

apply. In addition, we see no reason to grant a temporary 

exemption until the composite score methodology is revised 

because it is unlikely that accounting-based revisions to a 

financial statement-centered methodology will affect 

triggering events like lawsuits that are applied 

contemporaneously, or title IV, HEA program compliance 

requirements like cohort default rate and gainful 

employment. We note that foreign public institutions, like 

U.S.-based public institutions, are currently exempt, and 

continue to be exempt in these final regulations, from most 

of the general standards of financial responsibility, 

including the composite score.

Changes: None.

Alternative Standards and Requirements § 668.175

Provisional Certification Alternative § 668.175(f)

Amount of Financial Protection § 668.175(f)(4)

Cost of Letter of Credit 

Comments: One commenter stated that, years ago, letters of 

credit were both widely available and very inexpensive; it 

was not unusual for a bank to issue a small letter of 

credit on behalf of a client for no charge and without any 

collateral. However, the commenter stated that the 

bursting of the stock bubble in the late 1990s and the new 

rules regulating banks after the financial crisis has had a 
467

tremendous effect on the ability of banks to issue letters 

of credit, the price charged for them, and the amount of 

collateral required to issue one. 

According to the commenter, a $1,000,000 letter of 

credit that might have cost $5,000 to issue with no 

collateral 30 years ago now costs $10,000-$20,000 and 

requires $500,000 to $1,000,000 of cash to collateralize 

it. The commenter opined that while this is still 

relatively easy for the wealthiest schools with the largest 

endowments to meet, it would place a tremendous burden on 

smaller schools, vocational schools, and schools that serve 

the poorest students in the poorest areas because it will 

tie up a significant portion of their cash as collateral. 

For these reasons the commenter urged the Department to 

accept alternatives to bank-issued letters of credit, 

noting that performance bonds are used widely in business

to guarantee satisfactory performance of construction, 

services, and delivery of goods. The commenter stated that 

most States that have regulations to protect students from 

poorly run schools allow performance bonds already. 

According to the commenter, a performance bond 

guarantees the performance of a task on behalf of the 

client. In the case of a borrower defense, the Department 

is using the letter of credit to guarantee to successful 
468

completion of the education for which the Department issued 

title IV loans. By allowing performance bonds, according 

to the commenter, the Department could protect itself from 

poorly run schools that harm students without harming 

thinly capitalized schools by forcing them to purchase more 

expensive products. The commenter stated that a typical 

surety bond for $1,000,000 might cost $5,000-$15,000 and 

only require 25 percent collateral or less. This means 

that the schools get to keep more of their cash to better 

deliver education to students and the Department is still 

adequately protected against a claim from a closed school. 

Some commenters noted that the Department has the 

statutory authority under section 498(c)(3)(A) of the HEA 

to accept performance bonds and should use that authority 

because surety bonds cost far less than letters of credit 

and are equally secure.

Other commenters were concerned that the cost of 

securing required letters of credit could be prohibitive 

and cause some schools to close. These and other 

commenters believed that schools are finding that it is 

increasingly more difficult to secure letters of credit 

because of high cost and the regulatory uncertainties 

facing the higher education sector. The commenters noted 

that these costs include fees to the lenders and attorneys 
469

each time the underlying credit facility is negotiated to 

expand the letters of credit (schools are required to pay 

their attorney's fees as well as lender attorney fees for 

these transactions). Moreover, the commenters stated that 

because of the Department's compliance actions against 

proprietary schools, many lenders will no longer lend to 

proprietary institutions. Therefore, if schools are forced 

to obtain large letters of credit they will need to turn to 

second or third tier lenders, or lenders who offer crisis 

loans, who will charge significant fees for these letters 

of credit.

In view of the cost and financial resources needed to 

secure a letter of credit, some commenters believed that 

the Department should apply a cap of 25 percent on the 

amount of the cumulative letters of credit that a 

provisionally certified institution could be required to 

post under the revised regulations. 

Other commenters suggested that if a letter of credit 

is imposed for an accrediting agency trigger relating to 

closing a location, the letter of credit should be based on 

a percentage of the amount of title IV, HEA funds the 

closing location received, not a percentage of title IV, 

HEA funds received by the entire institution. The 

commenters reasoned that if the financial impact of the 
470

closing of the branch or additional location will have a 

material negative impact on the school, then the Department 

should set the letter of credit amount based on 10 percent 

of the branch or additional location’s title IV, HEA funds, 

arguing that this approach is straight-forward: any 

liabilities that the school may incur resulting from the 

closure of a branch or additional location would relate 

only to the students attending the closing location. In 

contrast, the commenter believed that imposing the letter 

of credit based on the total title IV, HEA funds received 

by the school would be disproportionate to the financial 

impact of the potential student issues to which a letter of 

credit may relate. The commenters noted that the NPRM 

expressly recognized the cost of securing letters of credit 

and the difficulties a school may have in obtaining a 

letter of credit within 30 days. 81 FR 39368. If a school 

cannot secure a letter of credit within that timeframe, the 

Department would set aside title IV, HEA funds, which 

according to the commenters would almost assuredly have a 

catastrophic financial impact on the institution. 

Therefore, the commenters concluded that imposing a larger 

letter of credit on the school than is necessary will 

impose cost and financial burden on the school far greater 

than any possible benefits that the Department could obtain 
471

from the larger letter of credit, and will negatively 

impact students in the process.

Discussion: With regard to the comment that the Department 

cap any cumulative letters of credit to 25 percent of 

amount that would otherwise be required, we believe setting 

an inflexible cap would defeat the purpose of requiring 

financial protection that is commensurate with the risks 

posed by one or more of the triggering events. The 

Secretary currently has the discretion to establish the 

amount of financial protection required for a particular 

institution, starting at 10 percent of the amount the title 

IV, HEA program funds the institution received in the prior 

award year, and that discretion is not limited by these 

regulations. As noted previously in this preamble under 

the heading “Composite Score and Triggering Events,” the 

amount of the financial protection required is based on a 

recalculated composite score of less than 1.0-–the total 

amount of financial protection required is, at a minimum, 

10 percent of the title IV, HEA funds the institution 

received during its most recently completed fiscal year, 

and such added amount as the Secretary demonstrates is 

warranted by the risk of liabilities with regard to that 

institution. 
472

We do not disagree with the general notion that the 

costs associated with a letter of credit have increased 

over time and that some institutions may not be able to 

secure, or may have difficulty securing, a letter of 

credit. We acknowledged this in the preamble to the NPRM 

and offered the set-aside as an alternative to the letter 

of credit. With regard to other alternatives, we are not 

aware of any surety instruments that are as secure as bankissued letters of credit and that can be negotiated easily 

by the Department to meet the demands of protecting the 

Federal interests in a dependable and efficient manner. 

However, if surety instruments come to light, or are 

developed, that are more affordable to institutions than 

letters of credit but that offer the same benefits to the 

Department, we will consider accepting those instruments. 

To leave open this possibility, we are amending the 

financial protection requirements in § 668.175(f)(2)(i) to 

provide that the Department may, in a notice published in 

the Federal Register, identify acceptable surety 

alternatives or other forms of financial protection. We 

wish to make clear that the Department will not accept, or 

entertain in any way, surety instruments or other forms of 

financial protection that are not specified in these final 

regulations or that are not subsequently identified in the 
473

Federal Register. In this vein, the Department is 

continuing to examine generally the alternatives to a 

letter of credit to ensure that such alternatives strike a 

reasonable balance between protecting the interests of the 

taxpayers and the Federal Government and providing 

flexibility to institutions, and is revising the 

regulations to provide that all alternatives to a letter of 

credit or a set-aside arrangement, including cash, will be 

permitted only in the Secretary’s discretion.

Lastly, as discussed previously throughout this 

preamble, an institution that can prove that it has 

sufficient insurance to cover immediate and potential 

debts, liabilities, claims, or financial obligations 

stemming from each triggering event, will not be required 

to provide financial protection of any kind.

With regard to the amount of financial protection 

stemming from the teach-out trigger for closed locations 

under § 668.171(c)(iv), by considering only closures of 

locations that cause the composite score to fall below a 

1.0, we identify those events that pose a significant risk 

to the continued viability of the institution as a whole, 

and the financial protection needed should be based on the 

risk of closure and attendant costs to the taxpayer, not 
474

merely the expected costs of closed school discharges to 

students enrolled at the closed location.

Finally, the Department has long had discretion, under 

current regulations, in setting the amount of the required 

financial protection, and we are revising § 668.175(f)(4) 

to memorialize our existing discretion to require financial 

protection in amounts beyond the minimum 10 percent where 

appropriate. 

Changes: We have revised § 668.175(f)(2)(i) to provide 

that the Secretary may identify acceptable surety 

instruments or other forms of financial protection in a 

notice published in the Federal Register. In each place in 

the regulations where we address acceptable forms of 

financial protection, we have revised the regulations to 

provide that alternatives to letters of credit and setaside arrangements will be permitted in the Secretary’s 

discretion. In addition, we have revised § 668.175(f)(4) 

to provide the minimum amount of financial protection 

required, specifically to set 10 percent of prior year 

title IV, HEA funding as the minimum required protection 

amount, with a minor exception for institutions that do not 

participate in the loan program, and to authorize the 

setting of such larger added amount as the Secretary 

determines is needed to ensure that the total amount of 
475

financial protection provided is sufficient to fully cover 

any estimated losses, provided that the Secretary may 

reduce this added amount only if an institution 

demonstrates that this added amount is unnecessary to 

protect, or is contrary to, the Federal interest. We made a 

conforming change to §668.90(a)(3)(iii)(D). 

Set-aside § 668.175(h)

Comments: Commenters believed that the set-aside under

proposed § 668.175(h) as an alternative a letter of credit 

or cash would not be a viable option. The commenters 

argued that most schools rely on title IV, HEA funds for 

cash flow purposes, so administratively offsetting a 

portion of those funds would likely force many schools to 

close. Similarly, if a school is placed on Heightened Cash 

Monitoring 2 (HCM2) or reimbursement because it cannot 

secure a letter of credit, the commenters asserted that the 

school would likely close because historically the 

Department and institutions have not been able to timely 

process funds under HCM2. Other commenters acknowledged 

the Department’s concern about getting financial protection 

into place quickly, but believed that 90 days would be a 

more reasonable timeframe. The commenters stated that 

under current conditions in the financial markets, even 

with the best efforts it is almost impossible to get a 
476

letter of credit approved within the proposed 30-day 

timeframe. Also, the commenters suggested that if the 

Department implements the set-aside because of a school’s 

delay in providing the letter of credit, this section needs 

to allow for the set-aside agreement to be terminated once 

the school is able to provide the letter of credit.

Other commenters agreed that the Department needs some 

way to obtain funds from institutions that fail to provide 

a letter of credit. The commenters believed, however, that 

the proposed set-aside provisions are overly generous in 

terms of time and amount. In particular, the commenters 

suggested the following changes: 

(1) Make set-aside amounts larger than letter of 

credit requests. An institution’s inability to obtain a 

letter of credit may in and of itself be a warning sign 

that private investors do not trust the institution enough 

to be involved with it. Therefore, the commenters 

suggested that any amounts covered by the set-aside 

provision should be set at 1.5 times the size of a letter 

of credit. This would both encourage colleges to obtain 

letters of credit and also send a strong message that the 

set-aside is a last resort action. 

(2) Implement other limitations on colleges that 

cover letters of credit through set asides. According to 
477

the commenters, the set-aside is not the ideal way to get 

institutions to provide their financial commitments. 

Accordingly, they proposed that this provision should come 

with greater protections for students and taxpayers or, at 

the very least, include some sort of limitation on Federal 

financial aid that prevents the institution from increasing 

the number of Federal aid recipients at the school and 

potentially even considers not allowing for new enrollment 

of federally aided students. Absent such protections, 

commenters noted that schools may face perverse incentives 

where they are encouraged to grow enrollment as a way of 

meeting the set-aside conditions. 

(3) Lessen the time period for collecting set-aside 

amounts. Commenters noted that nine months is a long 

period of time for collecting amounts that an institution 

would otherwise be expected to provide in 30 days through a 

letter of credit. Nine months is also a long time in 

general--almost an entire academic year. Commenters stated 

that collecting the funds in this amount of time makes it 

possible for institutions to still enroll a large number of 

students and then run the risk of shutting down, and 

suggested that the Department shorten this time period to 

no more than half an academic year.
478

Discussion: While a set-aside may not be an option for an 

institution that is unable to compensate for a temporary 

loss of a percentage of its title IV, HEA funding, either 

by using its own resources or obtaining some form of 

financing, it is unlikely that the institution has any 

other options. For other institutions with at least some 

resources, we believe the set-aside is a viable 

alternative.

We disagree with the assertion that an institution is 

likely to close if it is placed on HCM2. Based on data 

available on the Department’s Web site at 

https://studentaid.ed.gov/sa/about/data-center/school/hcm, 

approximately 60 percent of the institutions on HCM2 as of 

March 2015 were still on that status as of June 2016.

With regard to extending the time within which an 

institution must submit a letter of credit, we adopt in 

these regulations the Department’s current practice of 

allowing an institution 45 days. 

In addition, we are providing in the final regulations 

that when an institution submits a letter of credit, the 

Department will terminate the corresponding set-aside 

agreement and return any funds held under that agreement.

With regard to the comments that the Department should 

increase the amount of the set-aside or shorten the time 
479

within which the set-aside must be fully funded, we see no 

justification for either action. The Department proposed 

the set-aside as an alternative for an institution that is 

unable to timely secure a letter of credit, so that 

inability cannot be used as a reason to increase the amount 

of financial protection under the set-aside arrangement. 

For the funding timeframe, the Department proposed nine 

months, roughly the length of an academic year, as a 

reasonable compromise between having financial protection 

fully in place in the short term and minimizing the 

consequences of reducing an institution’s cash flow. We 

believe that shortening the funding timeframe may put 

unnecessary financial stress on an institution that would 

otherwise fulfill its obligations to students and the 

Department. We continue to analyze, and will publish in 

the Federal Register, the terms on which an institution may 

provide financial protection other than a letter of credit

or set-aside arrangement. 

Changes: We have revised § 668.175(h) to increase from 30 

to 45 days the time within which an institution must 

provide a letter of credit to the Department and provide 

that the Secretary will release any funds held under a setaside if the institution subsequently provides the letter 

of credit or other financial protection required under the 
480

zone or provisional certification alternatives in § 

668.175(d) or (f). 

Provisional Certification (Section 668.175(f)(1)(i))

Comments: Some commenters were concerned that the 

Department would place a school on provisional 

certification simply because of a triggering event in 

§ 668.171(c), such as the school’s cohort default rate, 

90/10 ratio, or D/E rates under the GE regulations. The 

commenters argued that the regulations covering these 

measures did not intend or contemplate their use as reasons 

for placing an institution on provisional certification, so 

schools should not be subject to additional penalties. 

Other commenters questioned whether the Department 

made a change in the applicability of the provisional 

certification alternative in § 668.175(f) that was not 

discussed in the NPRM. The commenters stated that it was 

unclear whether excluding the measures in § 668.171(b)(2) 

and (b)(3) from either zone alternative or the provisional 

certification alternatives in proposed § 668.175(d) and (f) 

was intentional or if the reference to § 668.171(b)(1) 

should just be § 668.171(b). In addition, the commenters 

noted that only the provisional certification alternative 

in proposed § 668.175(f) refers to the proposed substitutes 

for a letter of credit (cash and the set-aside), whereas 
481

both the NPRM and proposed § 668.175(h), by cross-reference 

to § 668.175(d), refer to the substitutes as applicable to 

the zone alternative.

One commenter noted that the current regulations 

create multiple options for institutions with a failing 

financial responsibility score, but the terms between the 

zone and provisional certification alternatives are not 

sufficiently equal. The commenter also contended that the 

time limits associated with the alternatives are unclear. 

To address this, the commenter recommended the following 

changes to the current regulations. 

(1) Increase the minimum size of the initial letter 

of credit for institutions on provisional status. 

Currently, an institution choosing this option only 

has to provide a letter of credit for an amount that in 

general is, at a minimum, 10 percent of the amount of title 

IV, HEA funds received by the institution during its most 

recently completed fiscal year, while an institution that 

chooses to avoid provisional certification must submit a 50 

percent letter of credit. The commenter recognized that 

part of this difference reflects the bigger risks to an 

institution that come with being provisionally certified 

but believed the current gap in letters of credit is too 

large. The commenter recommended that the Department 
482

increase the minimum letter of credit required from 

provisionally certified institutions that enter this status 

after the final regulations take effect to 25 percent. 

(2) Automatically increase the letter of credit for 

institutions that renew their provisional status. 

The commenter stated that § 668.175(f)(1) of the 

current regulations suggests that an institution may 

participate under the provisional certification alternative 

for no more than three consecutive years, whereas § 

668.175(f)(3) suggests that the Secretary may allow the 

institution to renew this provisional certification and may 

require additional financial protection. 

The commenter requested that the Department clarify 

the terms on which it will renew a provisional status. In 

particular, the commenter recommended that we require the 

institution, as part of any renewal, to increase the size 

of the letter of credit to 50 percent of the institution’s 

Federal financial aid. This amount would align with the 

current requirements for an institution with a failing 

composite score that does not choose the provisional 

certification alternative and, according to the commenter, 

would reflect that an institution has already spent a great 

deal of time in a status that suggests financial concerns. 
483

(3) Limit how long an institution may renew its 

provisional status. 

The commenter stated that § 668.175(f)(3) of the 

current regulations suggests an institution could 

potentially stay in provisional status forever. The 

commenter asked the Department to place a time limit on 

these renewals that would ideally be no longer than the 

period during which institutions can continue to 

participate in the title IV, HEA programs while subject to 

other conditions under the Department’s regulations, which 

tends to be three years. However, the commenter believed 

that even six years in provisional status may be an 

unacceptably long amount of time.

Discussion: Contrary to the comments that the current 

cohort default rate, 90/10, and GE regulations do not 

contemplate provisional certification, we note the 90/10 

and cohort default rate provisions do just that after a 

one- or two-year violation of those standards. 

In addition, we clarify that an institution under 

either the zone or provisional certification alternative 

may provide a letter of credit or, in the Secretary’s 

discretion, provide another form of financial protection in 

a form or under terms or arrangements that will be 

specified by the Secretary or enter into a set-aside 
484

arrangement. The set-aside arrangement is not available to 

an institution that seeks to participate for the first time 

in the title IV, HEA programs or that failed the financial 

responsibility standards but seeks to participate as a 

financially responsible institution, because in either case 

the institution must show that it is financially 

responsible. That is, the institution must show that it 

has the financial resources to secure, or a bank is willing 

to commit the necessary resources on behalf of the 

institution to provide, a letter of credit. For the 

references to the general standards and triggering events, 

an institution that fails the general standards under § 

668.171(b)(1) or (3), as reflected in the composite score 

or the triggering events under § 668.171(c), or no longer 

qualifies under the zone alternative, is subject to the 

minimum financial protection required under § 668.175(f). 

With respect to the numerous changes the commenter 

proposed for how the Department should treat institutions 

on provisional certification, since we did not propose any 

changes to the provisional certification requirements under 

§ 668.175(f) or § 668.13(c), or to the long-standing 

minimum letter of credit requirements, the suggested 

changes are beyond the scope of these regulations.

Changes: None.
485

Financial Protection Disclosure 

General

Comments: One commenter asserted that the proposed 

financial protection disclosure requirements exceed the 

Department’s statutory authority because the financial 

responsibility provisions in the HEA, unlike other 

provisions of the Act, do not mention disclosures. The 

commenter maintained that such omissions must be presumed 

to be intentional, since Congress generally acts 

intentionally when it uses particular language in one 

section of the statute but omits it from another.

Discussion: We do not agree with the commenter. The 

financial protection disclosure requirements do not 

conflict with the financial responsibility provisions in 

the HEA. Furthermore, the lack of specific mention of such 

disclosures in the provisions of the HEA related to 

financial responsibility does not preclude the Department’s 

regulating in this area. Courts have recognized that the 

Department under its general rulemaking authority may 

require disclosures of information reasonably considered 

useful for student consumers.61

 

61 See, e.g., Ass'n of Private Colleges & Universities v. Duncan, 870 F. Supp. 2d 133 (D.D.C. 

2012)(Department has broad authority “to make, promulgate, issue, rescind, and amend rules and 

regulations governing the manner of operation of, and governing the applicable programs 

administered by, the Department.” 20 U.S.C. § 1221e–3 (2006); see also id. § 3474 (“The Secretary is 

authorized to prescribe such rules and regulations as the Secretary determines necessary or 
486

As noted above, the Department continues to assert 

both its authority to require disclosures related to 

financial responsibility and the usefulness of those 

disclosures for student consumers. However, in the 

interest of clarity and ensuring that disclosures are as 

meaningful as possible, we have made several changes to 

proposed § 668.41(i). Under the proposed regulations, 

institutions required to provide financial protection to 

the Secretary must disclose information about that 

financial protection to enrolled and prospective students. 

These final regulations state that the Department will rely 

on consumer testing to inform the identification of events 

for which a disclosure is required. Specifically, the 

Secretary will consumer test each of the events identified 

in § 668.171(c)-(g), as well as other events that result in 

an institution being required to provide financial 

protection to the Department, to determine which of these 

events are most meaningful to students in their educational 

decision-making. The Department expects that not all 

events will be demonstrated to be critical to students; 

however, events like lawsuits or settlements that require 

financial protection under § 668.171(c)(1)(i) and (ii); 

 

appropriate to administer and manage the functions of the Secretary or the Department.”). The 

financial protection disclosures fall comfortably within that regulatory power.
487

borrower defense claims that require financial protection 

under § 668.171(g)(7); and two consecutive years of cohort 

default rates of at least 30 percent, requiring financial 

protection under § 668.171(f) are likely to be of more 

relevance to students. Findings resulting from the 

Department’s administrative proceedings are included among 

these triggering events. The issue of students being illinformed about ongoing lawsuits or settlements with their 

institutions was raised by students, particularly 

Corinthian students, during negotiated rulemaking, as well 

as by commenters during the public comment period. We also 

believe that students will have a particular interest in, 

and deserve to be made aware of, instances in which an 

institution has a large volume of borrower defense claims; 

this may inform their future enrollment decisions, as well 

as notify them of a potential claim to borrower defense 

they themselves may have. Finally, we believe that cohort 

default rate is an important accountability metric 

established in the HEA, and that ability to repay student 

loans is of personal importance to many students. Any or 

all of these items may be identified through consumer 

testing as important disclosures.

Changes: We have revised §668.41(i) to clarify that all 

actions and triggering events that require an institution 
488

to provide financial protection to the Department will be 

subject to consumer testing before being required for 

institutional disclosures to prospective and enrolled 

students. 

Comments: A few commenters expressed strong overall 

support for requiring disclosures to prospective and 

enrolled students of any financial protection an 

institution must provide under proposed § 668.175(d), (f), 

or (h). The commenters cited the significant financial 

stake an institution’s students have in its continued 

viability, and a resulting right to be apprised of 

financially related actions that might affect that 

viability. 

However, some commenters who supported the proposed 

requirements raised the concern that unscrupulous 

institutions might intentionally attempt to undermine the 

disclosures by burying or disguising them. Accordingly, 

those commenters suggested that the Department should 

prescribe the wording, format, and labeling of the 

disclosures. Other commenters expressed disappointment 

that the proposed regulations do not require institutions 

to deliver financial protection disclosures to prospective 

students at the first contact with those students, and 

strongly supported including such a requirement in the 
489

final regulations. Though acknowledging several 

negotiators’ objections that establishing a point of first 

contact would prove too difficult, one commenter was 

unconvinced, and asserted the importance of requiring 

delivery of critical student warnings at a point when they 

matter most. The same commenter found the proposed 

regulatory language on financial protection disclosures to 

be vague, and requested clarification as to whether 

proposed § 668.41(h)(7) (requiring institutions to deliver 

loan repayment warnings in a form and manner prescribed by 

the Secretary) applies to financial protection disclosures 

as well. The commenter further asserted that information 

regarding financial protection is even more important to 

consumers than repayment rates, and therefore institutions’ 

promotional materials should be required to contain 

financial protection disclosures in the same way that the 

proposed regulations require such material to contain 

repayment rate warnings. 

Finally, some commenters urged that, notwithstanding 

the proposed financial protection disclosures required of 

institutions, the Department should itself commit to 

disclosing certain information about institutions that are 

subject to enhanced financial responsibility requirements. 

Specifically, the commenters suggested that the Department 
490

disclose the amount of any letter of credit submitted and 

the circumstances that triggered the enhanced financial 

responsibility requirement.

For several reasons described in this section, many 

commenters opposed either the concept of requiring 

institutions to make financial protection disclosures, or 

the way in which such disclosures are prescribed under the 

proposed regulations. One commenter suggested removing 

financial protection disclosure requirements solely on the 

grounds that students will neither take notice of nor care 

about this information. The commenter expressed the belief 

that most people do not really know what a letter of credit 

is, and that therefore informing them of an institution’s 

obligation to secure such an instrument would only cause 

confusion.

Discussion: We thank those commenters who wrote in support 

of the proposed financial protection disclosures. In 

response to the commenter who raised concerns about 

unscrupulous institutions attempting to undermine the 

proposed disclosures and warnings, including by burying or 

disguising them, we share those concerns and drafted the 

applicable regulatory language accordingly. Section 

668.41(i)(1) of the final regulations requires that an 

institution disclose information about certain actions and 
491

triggering events (subject to and identified through 

consumer testing) it has experienced to enrolled and 

prospective students in the manner described in paragraphs 

(i)(4) and (5) of that section, and that the form of the 

disclosure will be prescribed by the Secretary in a notice 

published in the Federal Register. Before publishing that 

notice, the Secretary will also conduct consumer testing to 

help ensure the warning is meaningful and helpful to 

students. This approach both holds institutions 

accountable and creates flexibility for the Department to 

update warning requirements, including specific language 

and labels, as appropriate in the future. Based on these 

comments, and the comment expressing confusion as to which 

of the delivery requirements in this section apply to 

financial protection disclosures, we have revised § 

668.41(i) to make the requirements that apply to the 

actions and triggering events disclosure and the process by 

which the language of the disclosure will be developed and 

disseminated more explicit.

While mindful of the potential benefit to prospective 

students of receiving disclosures early, we are not 

convinced that requiring institutions to deliver such 

disclosures at first contact with a student is necessary or 

efficacious. In many cases and at certain types of 
492

institutions, it is impractical if not impossible to 

isolate the initial point of contact between a student and 

an institutional representative. Such a requirement would 

place a significant burden on compliance officials and 

auditors as well as on institutions. Section 668.41(i)(5) 

of the final regulations requires institutions to provide 

disclosures to prospective students before they enroll, 

register, or enter into a financial obligation with the 

institution. We believe this provides prospective students 

with adequate advance notice. 

Regarding whether requirements in the proposed 

regulations pertaining to the delivery of loan repayment 

warnings to prospective and enrolled students apply to 

financial protection disclosures as well, we are revising 

the regulations to separately state the requirements for 

loan repayment warnings and financial protection 

disclosures. Section § 668.41(i) states that, subject to 

consumer testing as to which events are most relevant to 

students, an institution subject to one or more of the 

actions or triggering events identified in § 668.171(c)-(g) 

must disclose information about that action or triggering 

event to enrolled and prospective students in the manner 

prescribed in paragraphs (i)(4) and (5).
493

However, the actions and triggering events disclosures 

are not required to be included in an institution’s 

advertising and promotional materials. We concur with the 

commenter that such financial protection disclosures will 

provide critical information to students, but maintain that 

delivery of those disclosures to students through the means 

prescribed in revised § 668.41(i)(4) and (5), and posting 

of the disclosures to the institution’s Web site as 

included in revised § 668.41(i)(6), are most appropriate 

for this purpose. The loan repayment warning provides 

information on the outcomes of all borrowers at the 

institution, whereas the financial protection disclosure 

pertains directly to the institution’s compliance and other 

matters of financial risk. We believe this type of 

disclosure is better provided on an individual basis, 

directly to students, and that it may require a longer-form 

disclosure than is practicable in advertising and 

promotional materials.

Regarding the commenters’ suggestion that the 

Department itself disclose certain information about 

institutions subject to enhanced financial responsibility 

requirements, we understand the value of this approach, 

especially with respect to uniformity and limiting the 

opportunity for unscrupulous institutions to circumvent the 
494

regulations. However, we remain convinced 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 notify them of the potential risks 

of attending that institution. We do not believe there are 

any practical means through which the Department might 

similarly convey to individual students the volume of 

information suggested by commenters. Nevertheless, we 

intend to closely monitor the way in which institutions 

comply with the actions and triggering events disclosure 

requirements, and may consider at some point in the future 

whether the Department should assume responsibility for 

making some or all of the required disclosures. 

Additionally, the Department may, in the future, consider 

requiring these disclosures to be placed on the Disclosure 

Template under the Gainful Employment regulations, to 

streamline the information flow to those prospective and 

enrolled students.

We respectfully disagree with the commenter who 

suggested removing the financial protection disclosure 

requirements on the grounds that students will neither take 

notice of nor care about this information. Some of the 

information conveyed in the disclosures would undoubtedly 
495

be of a complex nature. We also recognize that many people 

have limited familiarity with financial instruments such as 

letters of credit. For that reason, and to minimize 

confusion, we proposed consumer testing of the disclosure 

language itself, in addition to consumer testing of the 

actions and triggering events that require financial 

protection, to ensure that the disclosures are meaningful 

and helpful to students. As discussed above, in the final 

regulations we are revising proposed § 668.41(i) to require 

consumer testing prior to identifying the actions and/or 

triggering events for financial protection that require 

disclosures. We believe this change will result in 

disclosures that are more relevant to students, and that 

relate directly to actions and/or events that potentially 

affect the viability of institutions they attend or are 

planning to attend. In keeping with the intent of the 

proposed regulations to ensure that disclosures are 

meaningful and helpful to students, the final regulations 

retain the use of consumer testing, not only in determining 

the language to be used in such disclosures but also the 

specific actions and triggering events to be disclosed. 

Changes: We have revised § 668.41(i) to require consumer 

testing of disclosures of the actions and triggering events 

that require financial protection under § 668.171(c)-(g). 
496

Comments: Several commenters contended that the proposed 

regulations inappropriately equate financial weakness with 

lack of viability, and would require institutions to make 

disclosures that are misleading or untrue. For example, an 

institution that is financially responsible may experience 

a triggering event that nevertheless requires the 

institution to disclose to students that it is financially 

at risk. In the opinion of one commenter, this constitutes 

compelling untrue speech and violates the First Amendment. 

Echoing this overall concern, one commenter expressed 

the belief that warnings based on triggering events that 

have not been rigorously proven to demonstrate serious 

financial danger would destroy an institution’s reputation 

based on insinuation, not fact. The commenter proposed 

that an institution should have the opportunity to 

demonstrate that it is not in danger of closing before 

requiring disclosures.

Strenuously objecting to financial protection 

disclosures, one commenter described the relationship 

between some of the triggering events listed in § 

668.171(c) and the institution’s value to students or its 

financial standing as tenuous. The commenter further 

argued that the “zone alternative” found in current § 

668.175(d) recognizes the potential for an institution to 
497

be viable in spite of financial weakness; and that the 

proposed regulations weaken the zone alternative. 

A commenter, although acknowledging that students 

should be made aware of some triggering events, took 

particular exception to the Department’s assertion that 

students are entitled to know about any event significant 

enough to warrant disclosures to investors, suggesting that 

SEC-related disclosures are not a reliable basis on which 

to require disclosures to students. In support of this 

position, the commenter noted that SEC disclosure 

requirements may or may not indicate that a publicly traded 

institution will have difficulty meeting its financial 

obligations to the Department, because such disclosures 

serve a different purpose, namely to assist potential 

investors in pricing the publicly traded institution’s 

securities. The commenter stated that linking financial 

protection disclosures to SEC reporting may create false 

alarms for students and cause them to react impulsively.

Discussion: We do not agree that the proposed regulations 

either inappropriately equate financial weakness with lack 

of viability, or require institutions to issue misleading 

or untrue disclosures. 

Under the regulations, an institution is required to 

provide financial protection, such as an irrevocable letter 
498

of credit, only if that institution is deemed to be not 

financially responsible because of an action or event 

described in § 668.171(b). As described in the NPRM, we 

believe that the factors necessitating an institution to 

provide financial protection could have a significant 

impact on a student's ability to complete his or her 

education at an institution. 

However, we recognize that not all of the actions and 

triggering events for financial protection will be relevant 

to students. Therefore, we have revised the requirement to 

clarify that the Secretary will select particular actions 

and events from the new triggers specified in § 668.171(c)-

(g), as well as other events that result in an institution 

being required to provide financial protection to the 

Department, based on consumer testing. The events that are 

demonstrated to be most relevant to students will be 

published by the Secretary, and schools subject to 

financial protection requirements for those events will be 

required to make a disclosure, with language to be 

determined by the Secretary, to prospective and enrolled 

students about the event. In addition to making required 

disclosures more useful and understandable to students, 

while accurately reflecting concerns about the 

institution’s financial viability, this change will ensure 
499

that the action or triggering events behind the disclosure 

are relevant to students. 

As the actions and triggering events identified in 

proposed § 668.171(c) may affect an institution’s ability 

to exist as a going concern or continue to deliver 

educational services, we continue to believe that, having 

made a substantial investment in their collective 

educations, students have an absolute interest in being 

apprised of at least several of these actions and events. 

This is not, as the commenter suggests, destruction of an 

institution’s reputation by insinuation in place of facts, 

but rather the providing of factual information to students 

on which they can make a considered decision whether to 

attend or continue to attend that institution. 

We agree with the commenter that noted that the 

purposes of disclosures to investors required by the SEC 

and these proposed disclosures are different in some 

respects. As discussed under “Automatic Triggering 

Events,” we are revising the triggers in § 668.171(c) to 

ensure that the triggers, including the proposed triggers 

that were drawn from SEC disclosure requirements, are 

tailored to capture events that are most relevant to an 

institution’s ability to provide educational services to 

its students. With these changes, we believe that each of 
500

these triggers and the related disclosure will serve the 

Department’s stated purpose. 

We understand the commenters’ concern that some 

students may draw undesirable or even erroneous conclusions 

from the disclosures or act impulsively as a result of the 

disclosures. As students must decide for themselves the 

value of any institution and the extent to which that value 

is affected by the event or condition that triggered the 

disclosure, there might always be some subjectivity 

inherent to an individual’s reading of the required 

disclosure. However, we believe the benefit to those 

students in being apprised of actions or events that might 

affect an institution’s viability outweighs this potential 

concern. Moreover, as previously discussed, the Department 

will conduct consumer testing to ensure that both the 

events that result in institutions being required to 

provide financial protection to the Department, as well as 

the language itself, is meaningful and helpful to students 

before requiring disclosures of those events. Our intent 

is for the required disclosures to convey accurate, 

important information. 

Finally, with regard to the suggestion made by one 

commenter that institutions be afforded the opportunity to 

demonstrate that they are not in imminent danger of closing 
501

before having to provide financial protection and the 

accompanying financial protection disclosures, as discussed 

above under “Reporting Requirements,” we are revising § 

668.171(h) to permit an institution to demonstrate, at the 

time it reports a triggering event, that the event or 

condition no longer exists, has been resolved or that it 

has insurance that will cover any and all debts and 

liabilities that arise at any time from that triggering 

event. If such a demonstration is successfully made, the 

institution will not be required to provide financial 

protection, and will not be subject to the financial 

protection disclosure requirement.

We agree with the commenter who pointed out that the 

“zone alternative” in current § 668.175(d) recognizes the 

potential for an institution to be viable in spite of 

financial weakness, but we do not concur with the assertion 

that the regulations would weaken the zone alternative. 

The zone alternative is specific to an institution that is 

not financially responsible solely because the Secretary 

determines its composite score is less than 1.5 but at 

least 1.0. Such an institution may nevertheless 

participate in the title IV, HEA programs as a financially 

responsible institution under the provisions of the zone. 

We are not proposing to change current regulations related 
502

to the zone alternative. Participation under the zone 

alternative is not an action or triggering event and would, 

therefore, not result in an institution having to make a 

disclosure.

Changes: We have revised § 668.41(i) to require consumer 

testing of disclosures of the actions and triggering events 

that require financial protection under § 668.171(c)-(g).

Scope of the Disclosure Requirement

Comments: Several commenters requested clarification as to 

the scope of the financial protection disclosure 

requirements. One commenter expressed concern about 

proposed § 668.41(i), which stated that an institution 

required to provide financial protection to the Secretary 

such as an irrevocable letter of credit under § 668.175(d, 

or to establish a set-aside under § 668.175(h), must 

provide the disclosures described in § 668.41(i)(1)-(3). 

The commenter contended that it is not clear whether the 

disclosure requirement pertains only to financial 

protections resulting from the new triggers in the proposed 

regulations, or whether the disclosures would be required 

for any financial protections, including those required 

under existing financial responsibility standards, such as 

the 50 percent letter of credit provided under current § 

668.175(c). The commenter added that when an institution 
503

provides a letter of credit pursuant to current § 

668.175(b) and (c), it qualifies as a financially 

responsible institution, and thus there should be no need 

for disclosures in these situations. However, the 

commenter asserted that the Department’s frequent use of 

the undefined phrase “financial protection,” throughout § 

668.175, has resulted in a lack of clarity. The commenter 

asked that the Department limit financial protection 

disclosures to the new triggers in § 668.171.

Another commenter noted that the zone alternative 

under § 668.175(d) does not include a requirement to 

provide financial protection to the Department and 

therefore should not be referenced in the disclosure 

requirement. 

Discussion: We thank the commenter who brought to our 

attention the unintentional reference in § 668.41(i) to 

financial protection provided to the Secretary under § 

668.175(d). As the commenter pointed out, § 668.175(d) 

relates to the zone alternative and does not include a 

requirement to provide financial protection. Proposed § 

668.41(i) is intended to reference only financial 

protection provided to the Secretary under § 668.175(f), or 

the set-aside under § 668.175(h). 
504

To clarify the scope of proposed § 668.41(i), that 

section would have required disclosures for any financial 

protection an institution is required to provide under § 

668.175(f) or for any set-aside under § 668.175(h), not 

just financial protection provided as a result of the new 

triggering actions and events established in these 

regulations. 

However, as described above, we are revising the 

financial protection disclosures so that the Secretary will 

conduct consumer testing to identify which actions and 

triggering events should be disclosed. Institutions will 

be required to disclose information about those events only 

if it is found to be relevant to students. 

Changes: As described above, we have revised § 668.41(i) 

to require consumer testing of disclosures of the actions 

and triggering events that require financial protection 

under § 668.171(c)-(g).

Harm to Institutions 

Comments: Several commenters addressed the potential harm 

to institutions they believe will result from the proposed 

financial protection disclosures. These commenters warned 

of irreparable damage to an institution’s reputation that 

could drive away students, alarm potential donors, diminish 

access to capital, and unfairly brand an unknown number of 
505

institutions as untrustworthy. One commenter envisioned a 

cascading series of events in which declining enrollment 

and alumni and donor support forces tuition hikes, which in 

turn lead to further declines in enrollment and the 

institution’s eventual closure.

Underlying the commenters’ concern over potential 

negative outcomes was the opinion that the required 

disclosures are based on flawed financial standards that 

are not truly indicative of whether an institution is 

carrying out its educational mission. One commenter 

suggested that the Department might cause lasting and 

perhaps grave harm to institutions not currently at risk of 

failure, turning disagreements about accounting issues into 

existential enrollment threats. Another commenter pointed 

out that some nonprofit institutions operate close to the 

margin of sustainability because of their mission, or a 

charitable commitment to supporting needy students. The 

proposed financial protection disclosures would, in the 

opinion of the commenter, thrust such institutions into a 

cycle of failure.

Discussion: We understand the concern regarding the 

potential for the financial protection disclosures that 

were initially proposed, as well as the financial 

protection disclosures in these final regulations, to 
506

damage an institution’s reputation. However, we do not 

believe that the possibility of harm to an institution’s 

reputation is reason enough to withhold from students, who 

in many cases have borrowed heavily to finance their 

educations, information on the financial viability of the 

institutions they attend. Regarding the catastrophic 

series of events predicted by some commenters, we believe 

such occurrences are unlikely. However, in the event that 

some institutions do fall into what one commenter termed a 

cycle of failure, we believe that is more appropriately 

attributable to the actions or failures of the institutions 

themselves than to the financial protection disclosures.

We address earlier in this section the commenters’ 

contention that the financial responsibility standards on 

which the actions and triggering events disclosure 

requirements are based are flawed and not indicative of 

institutions’ actual financial positions. We do not agree 

with the observation of one commenter that the proposed 

regulations require financial protection disclosures for 

what are essentially disagreements about accounting issues. 

As discussed under “Triggering Events,” our analysis and 

assessment of the triggering actions and events which 

necessitate providing financial protection indicates they 
507

would have a demonstrable effect on an institution’s 

financial position. 

Lastly, with regard to the point made by one commenter 

that some nonprofit institutions operate close to the 

margin in adherence to a mission or particular commitment 

to funding needy students, the Department commends the 

efforts of such institutions. We do not believe that for 

the most part, such institutions have a heightened risk of 

experiencing a triggering action or event. The financial 

stress on institutions operating close to the margin of 

sustainability for the reasons noted above is most likely 

to reflect in a lower composite score than might otherwise 

be the case. Those institutions are frequently able to 

operate as financially responsible institutions under the 

zone alternative, and would not be subject to financial 

protection disclosures. 

Changes: None.

Warnings to Students--General

Comments: Some commenters contended that the proposed 

provisions related to mandatory warnings to students are 

not consistent with the provisions and purposes of the HEA. 

They noted that the HEA enumerates an extensive list of 

information that institutions must “produce...and [make] 

readily available upon request” to current and prospective 
508

students (20 U.S.C. 1092(a)(1)), which includes, among 

other things, graduation rates and crime statistics, but 

makes no reference to any requirement to disclose 

information that bears on the institution’s financial 

viability or its need to provide financial protection. See

id. §§ 1092(a)-(m). Moreover, the commenters opined that 

the mandatory warning requirements run afoul of the First 

Amendment, arguing that compelled speech, as included in 

the proposed regulation’s required warnings, is subject to 

strict scrutiny and permissible only if “reasonably related 

to the State’s interest in preventing deception of 

consumers.” R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 

1205, 1212 (D.C. Cir. 2012).

Discussion: Section 668.41(h)(3) and (i)(4) and (5) 

requires the institution to provide what are described as 

“warnings” to students, regarding the repayment rate of its 

alumni, through advertising and promotional materials, and 

“disclosures” regarding the actions and triggering events 

for any financial protection, identified pursuant to 

consumer testing, directly to prospective and enrolled 

students. The repayment rate provision requires the 

institution to state in its disclosure that: “A majority 

of recent student loan borrowers at this school are not 

paying down their loans”--a statement that will rest 
509

squarely on factual determinations of repayment patterns 

demonstrated by a recent cohort of student borrowers from 

that institution, derived from data validated through a 

challenge process in which the institution may contest the 

accuracy of the data elements. The statement does not, 

unlike the warning criticized in a prior court ruling, 

state that the prospective student should expect difficulty 

in repayment.62 It merely provides a factually accurate 

statement that ascribes no adverse quality to the 

institution itself as the cause of this pattern.63 The 

regulation does not compel the institution to articulate a 

government position on the cause of that pattern, or to 

engage in or disseminate as true what is “uncertain, 

speculative estimates.” Association of Private Sector 

Colleges & Universities v. Duncan, 110 F.Supp.3d 176, 199 

(D.D.C. 2015), aff'd 640 Fed.Appx. 5 (D.C. Cir. 2016). 

Rather, the repayment rate provision simply requires 

disclosure of a factual statement that the Department 

considers valuable information to the consumer. The 

 

62 “[A] student who enrolls or continues to enroll in the program should expect to have difficulty 

repaying his or her student loans.” Debt Measure Rule, 76 Fed.Reg. at 34,432. . . . the court doubts 

that the statement that every student in a program “should expect to have difficulty repaying his or 

her student loans” is a purely factual one. Association of Private Colleges and Universities v. Duncan,

870 F.Supp.2d 133, 155 (D.D.C. 2012).

63 Similarly, the statement simply describes whether borrowers are paying “down” their loans, a readily 

understood term meaning that the payments made are not reducing the loan amount--not whether they 

are repaying under whichever repayment plan they chose, or are in default.
510

institution is free to explain, if it wishes, why it 

believes that pattern exists, or why it believes that the 

pattern does not indicate that it is unable to deliver a 

quality education. The statement falls well within the 

grounds upheld for other required disclosures. 

Furthermore, the form, place, and even the actual 

language of this warning may change based on consumer 

testing or other factors to help ensure that the warning is 

meaningful and helpful to students, and if so, the 

Department will publish those matters in a notice in the 

Federal Register. § 668.41(h)(3). For the financial 

protection disclosures, the Secretary will also conduct 

consumer testing to determine precisely which actions and 

triggering events that require financial protection would 

be most relevant and important for prospective and enrolled 

students to know, and to determine the appropriate language 

for a disclosure. § 668.41(i). 

We note first that the governmental interest in 

compelling speech is not limited to “preventing deception,” 

as the commenter appears to suggest.64 This follows from 

the nature of the test applied to First Amendment 

 

64 Am. Meat Inst. v. U.S. Dep't of Agric., 760 F.3d 18, 22 (D.C. Cir. 2014)(upholding country of origin 

labelling requirements; overruling prior opinions of that court that limited requirements to those 

aimed at preventing deception). 
511

challenges to compelled speech, as demonstrated in recent 

litigation challenging disclosures mandated by the 

Department’s GE regulations. Because the required 

disclosures/warnings are commercial speech, the government 

may require the commercial disclosure of ‘purely factual 

and uncontroversial information’ as long as there is a 

rational justification for the means of disclosure and it 

is intended to prevent consumer confusion.” Ass'n of 

Private Colleges & Universities v. Duncan, 870 F. Supp. 2d 

133, 155 (D.D.C. 2012). As that court noted in upholding a 

requirement that an institution offering GE programs make 

disclosures about its programs, costs, and student 

outcomes: 

...the Department has broad authority “to make, 

promulgate, issue, rescind, and amend rules and 

regulations governing the manner of operation of, and 

governing the applicable programs administered by, the 

Department.” 20 U.S.C. § 1221e–3 (2006); see also id.

§ 3474 (“The Secretary is authorized to prescribe such 

rules and regulations as the Secretary determines 

necessary or appropriate to administer and manage the 

functions of the Secretary or the Department.”). The 

disclosures mandated here fall comfortably within that 

regulatory power, and are therefore within the 

Department's authority under the Higher Education Act.

Ass'n of Private Colleges & Universities v. Duncan, 870 

156.65 The regulations accord the institution a challenge 

 

65 In contrast, the court there doubted that the language of the warning also required under those 

regulations (that every student in a program “should expect to have difficulty repaying his or her 
512

process regarding the calculation of the repayment rate 

itself, as well as an opportunity for a hearing to consider 

challenges to a requirement to provide financial 

protection. These procedures will produce a factual 

outcome; the factual outcome–-like the disclosures about 

costs, placements, completion rate and repayment rate 

mandated in the GE regulations already upheld-–may 

themselves also be “vanilla” disclosures of unpleasant, but 

factually accurate determinations. How alumni are repaying 

their loans, and whether the school has experienced actions 

or triggering events that pose financial risk to the 

government (and students), are of direct interest to 

consumers. We believe disclosures–-and warnings--that 

convey determinations on those matters fall well with the 

kind of disclosures the courts have upheld.

Changes: None.

 

student loans”) would have been “purely factual and uncontroversial information.” Ass'n of Private 

Colleges & Universities v. Duncan, 870 F. Supp. 2d 155. When that regulation was reissued and later 

challenged on First Amendment grounds, this same court upheld the disclosures required in the new 

rule, and in doing so contrasted the “graphic, compelled speech” challenged by tobacco advertisers in 

R.J. Reynolds, on which the commenters relay, with “the vanilla, estimated-cost disclosures at issue” 

in the Department regulation. Id. Moreover, the court further noted that even “R.J. Reynolds

acknowledged that the Zauderer standard applies not just to purely factual and uncontroversial 

information, but also to ‘accurate statement[s].’ . . . The ‘total cost’ estimates contemplated here 

certainly meet that description.” Ass'n of Private Sector Colleges & Universities v. Duncan, 110 F. 

Supp. 3d 176, 200 n.12 (D.D.C. 2015), aff'd sub nom. Ass'n of Private Sector Colleges & Universities v. 

Duncan, 640 F. App'x 5 (D.C. Cir. 2016).
513

Proprietary Institution Loan Repayment Warning

General: Repayment Rate

Comments: A number of commenters supported requiring 

warnings for prospective and enrolled students at 

proprietary institutions with poor repayment rates. They 

argued that the warnings will provide useful information 

for students as they make educational and borrowing 

decisions. One group of commenters urged the Department to 

release all loan repayment rates publicly, including for 

institutions that are not required to deliver loan 

repayment warnings under § 668.41(h). 

However, several commenters argued that, because 

repayment behavior is not controllable by the institution, 

the repayment rate is not an appropriate institutional 

performance measure. Another argued that loan repayment 

rate reflects financial circumstances, but not educational 

quality, so it is not appropriate to require institutions 

to issue warnings based on their loan repayment rate.

Several commenters also raised concerns that § 

668.41(h) would place an undue burden on institutions and 

duplicates other established disclosure requirements. They 

contended that the requirement is unnecessary, particularly 

because the proprietary institutions required to comply 

with § 668.41(h) are already subject to the GE reporting 
514

and disclosure requirements, including a repayment rate 

disclosure if specified by the Secretary; and because the 

Department already publishes both cohort default rates and 

institutional repayment rates on the College Scorecard. 

Other commenters suggested that the measure would increase 

costs of higher education due to higher administrative 

burden, and contended that the disclosures were not likely 

to make much impact, given the large number of mandated 

disclosures already in place.

Discussion: We appreciate the comments supporting the 

repayment rate warning provision. We agree that this 

provision will provide critical information for students 

that will help them to make well-informed decisions about 

where to go to college and their financial aid use. 

Repayment rates provide a key indicator of students’ postcollege repayment outcomes, which are of vital interest to 

students considering their families’ personal financial 

circumstances, as well as to taxpayers and policymakers. 

The Department has already worked to promote greater access 

to such information through the GE regulations and the 

College Scorecard; we believe that the repayment rate 

warning requirement in these regulations will provide an 

important complement to those other efforts. 
515

We do not agree with the commenters who stated that 

repayment does not constitute a measure of educational 

quality, or the commenter who argued that repayment rate is 

a measure of students’ financial backgrounds and not 

academic quality. We believe that all students deserve to 

have information about their prospective outcomes after 

leaving the institution. Particularly for students who 

expect to borrow Federal loans to attend college, it is 

critical to know whether other students have been able to 

repay their debts incurred at the institution. 

However, while we believe that this information is 

very important for prospective students to be aware of and 

to consider, we agree with the concerns that creating a new 

rate could confuse the borrowers who will also receive the 

GE program-level repayment rate disclosures using a 

different calculation and different cohorts for measuring 

borrower outcomes. While not decisive, we also recognize 

and understand the comments from those who raised concerns 

that the requirement may be overly burdensome because of 

the differences with the data used in the GE calculation. 

Requiring a separate data corrections process for 

proprietary institutions, which are already subject to 

reporting requirements for repayment rate under GE for 

virtually all of their borrowers, may be needlessly 
516

burdensome given the virtually complete overlap in students 

covered. 

To avoid any confusion resulting from a new repayment 

rate calculation, as well as to limit burden on 

institutions, we are revising the repayment rate provision. 

Under this revised provision, the repayment rate data that 

proprietary institutions report at the program level will 

be used to calculate a comparable repayment rate at the 

institution level. Specifically, the Department will 

calculate, for those borrowers who entered repayment during 

a particular two-year cohort period, the repayment rate as 

follows: the number of borrowers in GE programs who are 

paid in full or who are in active repayment (defined as the 

number of borrowers who entered repayment and, during the 

most recently completed award year, made loan payments 

sufficient to reduce the outstanding balance of loans 

received for enrollment in the program by at least one 

dollar), divided by the number of borrowers reported in GE 

programs who entered repayment. Institutions with a 

repayment rate showing that the median borrower has not 

either fully repaid the borrower’s loans by the end of the 

third year after entering repayment, or reduced their 

outstanding balance by at least one dollar, over the third 

year of repayment (which, under the calculation 
517

methodology, is equivalent to a loan repayment rate of less 

than 0.5) will be subject to a requirement that they 

include a warning, to be prescribed in a later Federal 

Register notice by the Secretary, in advertising and 

promotional materials. We are also removing the proposed 

requirement for direct delivery of repayment rate warnings 

to prospective and enrolled students, recognizing that the 

GE regulations already require those proprietary 

institutions to deliver a program-level disclosure template 

that includes repayment rate to those students. We believe 

that these changes will reduce administrative burden on 

institutions considerably, and help to ensure that 

increased administrative burden is not passed on by 

institutions in greater costs to students.

We disagree with the commenters who argued that the 

disclosures would not make much impact. A large and 

growing body of research suggests that in many cases, 

students and families react to information about the costs 

and especially the value of higher education, including by 

making different decisions.66 To maximize the potential for 

 

66 Wiswall, M., and Zafar, B. (2015). How Do College Students Respond to Public Information about 

Earnings? Journal of Human Capital, 9(2), 117-169. DOI: 10.1086/681542. Retrieved from ; Hastings, J., 

Neilson, C.A., and Zimmerman, S.D. (June 2015). The Effects of Earnings Disclosure on College Enrollment 

Decisions. Cambridge, MA: National Bureau of Economic Research. NBER Working Papers 21300. 

Retrieved from www.nber.org/papers/w21300; and Hoxby, C. and Turner, S. (2015). What High-Achieving 
518

effective warnings to students, the Department has revised 

the regulatory language about the warnings that must be 

included in advertising and promotional materials to 

maximize the likelihood that such information will be well 

presented in a timely manner. We believe that this 

information will build upon, and not conflict with, other 

disclosures that institutions currently make. In 

particular, we believe that the institutional warning 

requirement in advertising and promotional materials will 

provide a valuable caution to students in their early 

stages of considering which colleges to attend. We also 

believe that the institutional warning requirement will act 

as a complement to other disclosure requirements, including 

the disclosure template required to be provided under the 

GE regulations and the Department’s own efforts to promote 

greater transparency and better-informed decision-making 

through the College Scorecard and the Financial Aid 

Shopping Sheet. The Department will also promote this 

information through its own channels to reach students, 

including through the College Scorecard or the FAFSA, after 

consideration of the most effective and efficient ways to 

do so.

 

Low-Income Students Know About College. Cambridge, MA: National Bureau of Economic Research. NBER 

Working Paper No. 20861. Retrieved from www.nber.org/papers/w20861.pdf.
519

Changes: We have revised the loan repayment rate 

calculation in § 668.41(h), altered the loan repayment rate 

issuing process to reflect that any corrections will occur 

under the GE regulations, and provided that proprietary 

institutions with a sufficiently large number of borrowers 

who are not covered under GE reporting may be exempt from 

the warning requirement (as described in more detail later 

in this section). We have made conforming changes to 

separate the loan repayment warning delivery provisions, 

which require a warning to be included in advertising and 

promotional materials but no individual disclosure to 

students, from the delivery provisions for the financial 

protection disclosure required under § 668.41(i) of the 

final regulations, which require delivery of the disclosure 

to prospective and enrolled students.

Legal/Process Concerns

Comments: Noting that the proposed loan repayment warning 

was not included in the Department’s notice announcing its 

intent to establish a negotiated rulemaking committee 

published in the Federal Register on August 20, 2015 (80 FR 

50588), one commenter contended that the requirement falls 

outside the scope of the rulemaking process. 

Discussion: The first session of negotiated rulemaking, 

held January 12-14, 2016, included a discussion of the 
520

potential consequences for “conditions that may be 

detrimental to students,” including the possibility of 

disclosure requirements and student warnings. The 

Department proposed regulatory text concerning a repayment 

rate warning at the second negotiated rulemaking session 

(February 17-19, 2016), and the committee discussed the 

proposal during the second and third sessions. Moreover, 

the negotiated rulemaking process ensures that a broad 

range of interests and qualifications are considered in the 

development of regulations. We believe that sufficient 

notice was provided about the potential for inclusion of 

the repayment rate warning, and that the negotiators 

involved in developing these regulations were wellqualified to explore the option.

Changes: None.

Comments: One commenter argued that the loan repayment 

rate provision does not constitute “reasoned decisionmaking,” because the Department did not explain the 

evaluation of repayment on an individualized basis; the use 

of a median, rather than an average, borrower to determine 

the school’s rate; the zero percent threshold; the length 

of the measurement window; and the exemption of in-school 

and military deferments only in the final year. Another 

commenter asserted that the requirement is arbitrary and 
521

capricious because several points in the preamble (such as 

the level of the calculation and the data challenge 

process) were unclear. 

Discussion: We disagree with the commenters who stated 

that the repayment rate warning provision is arbitrary and 

capricious, and that it does not constitute reasoned 

decision-making. The repayment rate measure identified in 

the proposed regulations, while different from other 

repayment rate measures the Department has used in other 

contexts, was designed to measure repayment outcomes in 

greater detail than existing measures do (for instance, by 

looking at the percentage of the balance repaid rather than 

the share of borrowers who met a binary threshold of paying 

down at least one dollar in principal). 

However, as described earlier, the Department has 

revised the repayment rate provision in the final 

regulations to mirror the program-level rates used under 

the GE regulations. Those rates calculate the share of 

borrowers who have made progress in repaying their loans, 

and will rely exclusively on data reported already under 

the GE regulations. We believe that these changes address 

the concerns of the commenters. 

Changes: We have revised the calculation of the loan 

repayment rate in § 668.41(h), as previously described. 
522

Proprietary Sector Requirement

Comments: Several commenters wrote that limiting the 

repayment rate provision to proprietary institutions is 

reasonable, given the differences in structure between 

those institutions and other sectors and the data that 

indicate poor repayment outcomes are widespread in the forprofit sector. 

However, many commenters disagreed with the 

Department’s proposal to limit the requirement to 

proprietary institutions. One commenter questioned the 

validity of the Department’s argument that limiting the 

applicability of § 668.41(h) to proprietary institutions 

reduces the burden on institutions because only certain 

institutions benefit from the reduced burden. Noting that 

there is no similar limitation applicable to financial 

protection disclosures, one commenter suggested that the 

Department’s limitation of the repayment rate provision to 

proprietary institutions was inconsistent. Some commenters 

argued that the Department was ignoring the needs of 

students at the estimated 30 percent of public and private 

nonprofit institutions with similarly low repayment rates 

that are not subject to the warning requirement, 

particularly because a majority of Federal student loan 

borrowers attend public institutions. Others stated that a 
523

repayment rate warning requirement for public and private 

nonprofit institutions is necessary to help students 

understand their choices and contextualize the information 

available to them. Several of these commenters proposed 

that public and private nonprofit institutions be required 

to disclose that the Department had not calculated a loan 

repayment rate for the institution and that it is therefore 

not possible to know whether the institution’s repayment 

rate is acceptable. 

Some commenters contended that there is no rationale 

for limiting the warning requirement to the proprietary 

sector. Other commenters stated that the Department lacked

sufficient research to support the proposed regulations. 

Several commenters argued that the information cited as 

justification for limiting the repayment rate warning 

requirement to the proprietary sector was overstated or 

invalid. One commenter suggested that the Department cited 

inaccurate data from the College Scorecard. Several 

commenters noted that they could not replicate their 

Scorecard repayment rates due to inconsistencies in the 

National Student Loan Data System (NSLDS) data underlying 

the measure. Another commenter suggested that the cohort 

used to support the analysis did not reflect typical 

cohorts, since those students entered repayment during a 
524

recession. Several other commenters contended that the 

decision to limit the warning requirement to proprietary 

institutions violates GEPA and has no basis in the HEA. 

A number of commenters suggested removing the loan 

repayment warning provision entirely, while several 

proposed expanding its application to all institutions with 

low repayment rates, regardless of sector. Several 

commenters suggested limiting the repayment rate warning 

requirement to institutions at which a majority of students 

are enrolled in programs subject to the Department’s GE 

regulations, because, according to the commenters, students 

at career-oriented institutions frequently have 

misconceptions about their likely earnings. Alternatively, 

commenters suggested limiting the requirement to schools 

with “financially interested boards” to include proprietary 

institutions that have converted to nonprofit status.

Discussion: We appreciate the comments supporting the 

limitation of the repayment rate warning to proprietary 

institutions in light of the concentration of poor 

repayment outcomes in the proprietary sector and the risk 

of excessive and unnecessary burden to institutions with a 

far lower likelihood of poor repayment rates. As discussed 
525

in both the NPRM67 and in the Gainful Employment final 

regulations68, a wide body of evidence demonstrates that 

student debt and loan repayment outcomes are worse for 

students in the proprietary sector than students in other 

sectors. 

Most students in the proprietary sector borrow Federal 

loans, while borrowing rates among public and private 

nonprofit institutions are far lower; and debt levels are 

often higher. For instance, as also noted in the final 

Gainful Employment regulations, in 2011-2012, 60 percent of 

certificate students who were enrolled at for-profit twoyear institutions took out Federal student loans during 

that year, compared with 10 percent at public two-year 

institutions. Of those who borrowed, the median amount 

borrowed by students enrolled in certificate programs at 

two-year for-profit institutions was $6,629, as opposed to 

$4,000 at public two-year institutions. Additionally, in 

2011-12, 66 percent of associate degree students who were 

enrolled at for-profit institutions took out student loans, 

while only 20 percent of associate degree students who were 

enrolled at public two-year institutions did so. Of those 

who borrowed in that year, for-profit two-year associate 

 

67 www.regulations.gov/document?D=ED-2015-OPE-0103-0221.

68 www.regulations.gov/document?D=ED-2014-OPE-0039-2390.
526

degree enrollees had a median amount borrowed during that 

year of $7,583, compared with $4,467 for students at public 

two-year institutions.69

In addition to higher rates of borrowing, students at 

proprietary schools also default at higher rates than 

borrowers who attend schools in other sectors. Proprietary 

institutions have higher three-year cohort default rates 

than other sectors (15.0 percent, compared with 7.0 percent 

at private nonprofit institutions and 11.3 percent at 

public institutions in fiscal year 2013), and enroll a 

disproportionate share of students who default relative to 

all borrowers in the repayment cohort.70

In the final regulations, the Department seeks to 

reduce confusion among students and families by using rates 

that parallel the Gainful Employment program-level 

repayment rate, including using the same cohorts of 

students as the GE rates do. As a result of these changes, 

the repayment rate will be calculated using data that 

institutions already report to the Department through the 

GE regulations, rather than through a distinct data 

reporting and corrections process. This eliminates many of 

 

69 National Postsecondary Student Aid Study (NPSAS) 2012. Unpublished analysis of restricted-use 

data using the NCES PowerStats tool.

70 “Comparison of FY 2013 Official National Cohort Default Rates to Prior Two Official Cohort Default 

Rates.” U.S. Department of Education. Calculated August 6, 2016: 

http://www2.ed.gov/offices/OSFAP/defaultmanagement/schooltyperates.pdf.
527

the concerns raised by commenters and discussed in the NPRM 

about the burden to institutions of complying with the 

repayment rate calculation provision. 

However, the Department believes that, because of the 

changes, it would be inappropriate to apply an 

institutional warning to sectors other than the proprietary 

sector, because public and private nonprofit institutions 

are not typically comprised solely of GE programs and the 

repayment rate warning may not be representative of all 

borrowers at the school. Federal student loan borrowers 

also typically represent a relatively small proportion of 

the student population in the public sector, whereas 

borrowing rates are much higher, on average, at proprietary 

institutions (for instance, among full-time undergraduates 

enrolled in 2011-12, 19.7 percent borrowed Stafford loans 

at public less-than-two-year institutions, compared with 

82.9 percent at for-profit less-than-two-year institutions 

and 83.3 percent at for-profit two-year-and-above 

institutions).71 Moreover, the mix of programs at public 

and private nonprofit institutions may shift from year to 

year, changing the share of GE borrowers at the institution 

 

71 U.S. Department of Education, National Center for Education Statistics, 2007-08 and 2011-12 

National Postsecondary Student Aid Study (NPSAS:08 and NPSAS:12). (This table was prepared July 

2014.) https://nces.ed.gov/programs/digest/d15/tables/dt15_331.90.asp?current=yes.
528

on an annual basis; including such institutions in the 

repayment rate requirement would require the Department to 

expend annual efforts to identify schools that are 

comprised entirely of GE programs for a relatively small 

number of schools. Therefore, this requirement is limited 

only to proprietary institutions. We recognize that some 

proprietary institutions may have Federal student loan 

borrowers in non-GE programs under section 102(b)(1)(ii) of 

the HEA. Accordingly, the final regulations specify that 

proprietary institutions with a failing repayment rate may 

appeal to the Secretary for an exemption from the warning 

requirement if they can demonstrate that including non-GE 

borrowers in the rate would increase the rate to passing. 

With these changes, we believe that the Department’s 

decision to limit the repayment rate warning to proprietary 

institutions is well-founded and does not raise concerns 

about excessive burden or inaccurate representation of 

student outcomes, and we disagree with the commenters who 

stated that the limitation to proprietary schools is not 

appropriate. 

In response to the commenter who asserted that 

requiring only proprietary institutions to disclose 

repayment rates is inconsistent, as noted earlier, we 

decided to limit the repayment rate warning requirement to 
529

the sector of institutions where the frequency of poor 

repayment outcomes is greatest. Also as described earlier, 

the Department’s analysis of data shows the financial risk 

to students to be far more severe in the proprietary 

sector; and data suggest that an institution-wide warning 

about borrower outcomes is more appropriate in the 

proprietary sector, given higher rates of borrowing among 

students (particularly in GE programs). 

While we recognize some users’ concerns with specific 

elements of the data cited in the NPRM, we believe that the 

data corrections process that will be established through 

the GE regulations will ensure the accuracy of the 

information on which the warning in advertisements and 

promotional materials is based. We recognize the concerns 

of the commenter who stated that the data cited in the NPRM 

reflect a cohort that entered repayment during the 

recession, but believe that this regulation will 

appropriately capture the actual outcomes of students, 

given that even students who enter repayment during a 

recession will be required to repay their loans in 

accordance with the terms and conditions of the Federal

student loan programs. The provision of GEPA to which the 

commenter refers requires uniform application of 

regulations throughout the United States. 20 U.S.C 
530

1232(a). The HEA authorizes the Department to adopt 

disclosure regulations as does the general authority of the 

Secretary in 20 U.S.C. 1221e-3 and 20 U.S.C. 3474. Assn. 

of Private Coll. and Univs. v. Duncan, 870 F.Supp.2d at 

156. We believe that our analysis of the outcomes provides 

a reasonable basis on which to focus this requirement on 

for-profit schools.

We disagree with the commenters who propose to remove 

the repayment rate warning provision from the regulations. 

The Department believes that this information is critical 

to ensure students and families have the information they 

need to make well-informed decisions about where to go to 

college. Given the concerns discussed earlier about the 

inaccuracy of applying a warning to an entire institution 

based on data that do not necessarily represent all 

borrowers at the school, and the added burden both on 

public and private nonprofit institutions and on the 

Department to identify the relatively few institutions that 

might be accurately represented by such a rate, we believe 

it is appropriate to maintain the repayment rate warning 

provision only for proprietary schools. We appreciate the 

comments from those who suggested tying the repayment rate 

warning requirement to those institutions with a 

significant proportion of students in GE programs, and have 
531

adopted a version of that requirement (i.e., the warning 

requirement applies only to those institutions at which a 

majority of GE borrowers are not in active repayment or 

repaid in full; and only at proprietary institutions, where 

effectively all programs are subject to the GE 

requirements). While we appreciate the comments from those 

who proposed instead limiting the requirement to 

“financially interested boards” to prevent certain 

institutions from avoiding the requirements, we believe 

that the requirements as stated in the final regulations 

will cover the vast majority of students at institutions 

with such boards, and that the added burden of identifying 

those institutions in another way would not yield much 

additional coverage for the requirement. 

Changes: We have revised § 668.41(h) to provide that, if a 

proprietary institution has a repayment rate that shows 

that the median borrower has not either fully repaid, or 

made loan payments sufficient to reduce by at least one 

dollar, the outstanding balance of the borrower’s loans, it 

may seek to demonstrate to the Secretary’s satisfaction 

that it has borrowers in non-GE programs who would increase 

the school’s repayment rate above the threshold for the 

warning requirement if they were included in the 

calculation. If an institution demonstrates this to the 
532

Secretary’s satisfaction, it will receive an exemption from 

the warning requirement.

Income-Driven Repayment (IDR) Enrollment

Comments: A number of commenters asserted that § 668.41(h) 

conflicts with the Administration’s income-based repayment 

plan enrollment campaigns. One commenter pointed to a 

Council of Economic Advisers report that states that 

borrowers on IDR plans are from more disadvantaged 

backgrounds than those on the standard repayment plans, 

suggesting that borrowers’ investments in higher education 

pay off over time. That commenter contended that measuring 

borrowers’ repayment behavior in the first five years is 

not appropriate because of the long-term payoff of 

postsecondary education. Other commenters argued that 

institutions would be unfairly--and retroactively--

penalized for encouraging students to sign up for IDR 

plans. 

Several commenters proposed to remove from the 

repayment rate calculation any borrower making payments 

under any Federal repayment plan, including IDR plans. 

Alternatively, one of the commenters proposed that the 

Department should allow institutions to include in the 

warning to students that the negative amortization of its 
533

borrowers occurred because of federally authorized 

repayment plans where that is the case.

Discussion: We disagree with the commenters’ statements 

that income-driven repayment plans conflict with the loan 

repayment warning provision. The IDR plans that Congress 

and the Department provide to borrowers were created to act 

as a safety net for struggling borrowers--those whose debts 

are sufficiently high, or incomes are sufficiently low, to 

make repaying them on the expected timeline exceedingly 

difficult. However, a post-college safety net program for 

borrowers does not eliminate the responsibility the 

institution has to provide a high-quality education that 

ensures borrowers are able to, at a minimum, afford to pay 

down their loans, even in the first years after entering 

repayment. Moreover, the Department agrees with the 

commenter who noted that many of the borrowers currently 

enrolled in income-driven repayment (IDR) plans would 

otherwise be in distress on their loans, and may thus be in 

negative amortization regardless of whether they were on an 

IDR plan or may have defaulted. For instance, a recent 

report from the Council of Economic Advisers found that 

over 40 percent of borrowers who entered repayment in 

fiscal year 2011 and later enrolled in income-driven 

repayment had defaulted, had an unemployment or economic 
534

hardship deferment, or had a single forbearance of more 

than two months in length before entering their first 

income-driven repayment plan.72 While the report shows that 

measurements of short-term distress were mitigated for the 

borrowers who enrolled in income-driven repayment plans, 

the Department believes that the fact that such borrowers 

experienced types of financial distress--whether failure to 

pay down the outstanding balance of the loans or 

deferments, forbearances, and defaults that suggest acute 

problems in repaying in the initial several years after 

leaving school--constitute critical information that 

prospective students and potential borrowers should be 

aware of prior to making enrollment or financial aid 

decisions. To that point, we do not agree with the 

commenters who stated that enrollment in IDR plans among 

students would unfairly penalize institutions; on the 

contrary, borrowers who enroll in IDR plans and still do 

not have sufficiently high incomes or low debts to pay down 

the balance on their loans are experiencing precisely the 

negative post-college outcomes about which students, 

taxpayers, and the Department should have concerns. This 

 

72 “Investing in Higher Education: Benefits, Challenges, and the State of Student Debt.” Council of 

Economic Advisers. July 2016: 

www.whitehouse.gov/sites/default/files/page/files/20160718_cea_student_debt.pdf.
535

argument is especially relevant for institutions that are 

eligible for title IV, HEA aid on the basis of providing 

educational programs that prepare students for gainful 

employment in a recognized occupation. Students 

considering such programs should be warned if the majority 

of borrowers do not have sufficient income to pay down 

their Federal student debt, even if those borrowers are 

protected from default by enrolling in IDR plans.

Changes: None.

Inconsistency of Rates

Comments: Several commenters noted that the Department has 

considered many variations of a repayment rate calculation 

in recent years. They stated that none of these rates has 

been subject to peer-review research and that the 

Department has not sufficiently supported its proposal with 

research. Several commenters raised concerns that the use 

of multiple repayment rates would lead to significant 

confusion. These commenters urged the Department to use an 

existing definition of repayment rate, or to remove the 

provision entirely.

Discussion: We appreciate the commenters’ concerns that 

multiple repayment rates, particularly where provided to 

the same students, may lead to confusion. While we believe 

that this is important information for students and 
536

families to consider while deciding where to apply and 

enroll in college, we do not wish to create confusion for 

borrowers. 

To that end, as described earlier, the Department has 

revised the repayment rate provision in the final 

regulations to mirror the program-level rates used under 

the GE regulations. Those rates calculate the share of 

borrowers who have made progress in repaying their loans; 

and will rely exclusively on data already reported under 

the GE regulations. We believe that these changes address 

the commenters’ concerns. Moreover, the GE definition of 

“repayment rate” has been subjected to research, analysis, 

and consumer testing by the field. 

Changes: We have revised the calculation of the loan 

repayment rate in § 668.41(h), as described in more detail 

earlier in this section.

Technical Comments About the Calculation

Comments: A number of commenters suggested specific 

changes to the repayment rate. One commenter disagreed 

with the Department’s proposed use of a median repayment 

rate, rather than a mean. Several others argued that an 

institutional median is not appropriate because postcollege repayment outcomes may vary significantly by 

program. One commenter was confused as to whether the loan 
537

repayment rate would be calculated on a per-borrower or a 

per-loan basis. Another commenter proposed to separate 

out, and create distinct loan repayment rates and warnings 

for graduate, undergraduate, and Parent PLUS Loan debts. 

Several commenters stated that the treatment of 

consolidation loans was unclear. One commenter suggested 

changing treatment of payments on consolidation loans by 

attributing the same payments to loans at multiple 

institutions, rather than attributing payments based on the 

share of debt from each institution. 

One commenter expressed confusion over the use of 

“accrued interest” in the definition of “original 

outstanding balance,” and the use of “capitalized interest” 

in the definition of current outstanding balance for the 

repayment measure. Another commenter proposed that, for 

graduate programs that prepare students for medical 

residencies, the original outstanding balance should be 

defined as the principal balance after the medical 

residency forbearance period. 

Other commenters suggested minor changes to the 

proposed calculation. One commenter argued that the 

Department proposed inconsistent treatment of borrowers who 

default on their loans. This commenter urged the 

Department to ensure that all defaulters appear as a zero 
538

percent repayment rate, or that defaulters are given no 

distinct treatment. Another commenter proposed that, under 

§ 668.41(h)(6)(i), there should be a minimum of 30 students 

in the cohort, rather than 10, before requiring a loan 

repayment warning. 

As noted earlier, several commenters argued that the 

zero percent repayment rate threshold was not supported by 

any evidence or analysis, and one contended that it is 

legally unsupportable.

Several commenters raised concerns about the five-year 

window for measuring borrowers’ repayment. Some argued 

that the five-year measurement period is not predictable 

because of insufficient data. Some commenters argued that 

a two- or three-year measurement period would be better 

supported; or alternatively, proposed to use a 10-year 

window. Another commenter stated that analysis of data 

from the College Scorecard found that three- or seven-year 

repayment rates would be more reliable. One commenter 

argued that the repayment rate window for medical schools 

should be seven years, as in the Gainful Employment 

regulations; while another commenter proposed that 

repayment rates for graduate programs that prepare students 

for medical residencies should be measured five years from 

the end of their medical residency forbearance period. 
539

Several commenters raised concerns about excluding 

from the measurement only those students who are in certain 

deferments during the measurement year. One commenter 

proposed to extend the measurement window of borrowers who 

spend several years in in-school deferments, while others 

proposed to exclude any borrower who entered an in-school 

or military deferment at any point during the measurement 

period. 

Several commenters argued that borrowers’ backgrounds 

affect their repayment rates; one commenter asserted that 

when borrowers’ backgrounds are taken into consideration, 

repayment rates of low-income students and students 

enrolled at proprietary institutions are similar to those 

of their higher-income peers. One commenter suggested that 

the Department should revise the loan repayment rate 

methodology to exclude all borrowers with an Expected 

Family Contribution of zero dollars in any year of 

attendance. Another proposed to disclose the percentage of 

Pell Grant recipients or adjust the threshold at 

institutions with a high enrollment of Pell Grant 

recipients. 

Discussion: We appreciate the commenters’ concerns about 

the specific calculation of the repayment rate. We have 

made changes to the calculation of the repayment rate, as 
540

described earlier, that address or eliminate many of the 

concerns raised, including clarifying that the median rate 

over a mean is comparable to a proportion of borrowers; the 

use of program-level data to calculate an institution-level 

rate, ensuring that borrowers in GE programs receive 

warnings if either or both rates raise cause for concern; 

and whether the rate would be calculated on a per-borrower 

or per-loan basis (because the rate was replaced by a 

proportion of borrowers who have not repaid at least one 

dollar in outstanding balance). We disagree with the 

commenter who suggested that creating distinct repayment 

rates and warning requirements for particular programs is 

necessary, because such rates will already be made 

available at the educational program level through the GE 

regulations; this warning requirement is designed to 

complement and supplement that rate with a broader measure 

of the entire institution. 

We believe that we have clarified the treatment of 

consolidation loans, which will mirror the treatment of 

such loans in the GE regulations. We also believe that 

additional clarification of the definitions of “accrued” 

and “capitalized” interest, and one commenter’s proposed 

change to the definition for graduate programs that prepare 

students for medical residencies, is not necessary because 
541

the repayment rate will instead rely on data already 

reported under the GE regulations. Similarly, the 

treatment of defaulted student loans will mirror the GE 

data that are already reported to the Department. We will 

continue to use a minimum cohort size of 10, rather than 30 

as one commenter proposed, because 10 is a sufficiently 

large size to meet both minimum requirements and best 

practices for the protection of student privacy; a minimum 

count of 10 borrowers is also the standard already used in 

the GE regulations for repayment rate and other metrics.

With respect to concerns from several commenters about the 

use of negative amortization as a threshold for requiring 

warnings, we disagree that there is no support in research 

for doing so. 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 in the 

third year after entering repayment--experienced long-term 

repayment hardship such as default. Those borrowers are 

especially unlikely to satisfy their loan debt in the long 

term.73 Additionally, several public comments received and 

 

73 Analysis of NSLDS data was based on a statistical sample of two cohorts of borrowers with FFEL 

Loans and Direct Loans entering repayment in 1999 and 2004, respectively. The repayment statuses 

of the loans were tracked at 10 and 15 years after entry into repayment, depending on the age of the 

cohort.
542

papers published during the negotiations for the 

Department’s GE regulations include reference to negativeamortization thresholds for student loan repayment rates.74 

Moreover, we believe this will be an understandable measure 

to help inform consumer choice.

We agree with commenters who stated that a measurement 

three years after entering repayment (e.g., examining 

borrowers’ outcomes three years after they enter repayment) 

is well supported. Given the other changes to the 

repayment rate calculation made to mirror the GE repayment 

rate metric, we will use this period, rather than the fiveyear period included in the proposed regulations, to 

calculate the institutions’ rate. We believe that a 10-

year window, as some commenters proposed, would be too long 

to provide relevant and timely data; such long-term 

outcomes would fail to incorporate improvement in quality 

or other changes at the institution since those borrowers 

entered repayment, and would likely fail to capture many of 

the signs of short-term financial distress that some 

borrowers experience. We agree with the commenter who 

stated that the repayment rate window should be lengthened 

 

74 For instance, “TICAS Detailed Comments on Proposed Gainful Employment Rule,” The Institute for 

College Access and Success. May 27, 2014. http://ticas.org/content/pub/ticas-detailed-commentsproposed-gainful-employment-rule; and Miller, Ben. “Improving Gainful Employment: Suggestions 

for Better Accountability.” New America. www.newamerica.org/education-policy/policypapers/improving-gainful-employment/.
543

for medical schools; we are revising the provision to 

provide that the same period will be used for this 

requirement as is used in the GE regulations.

With respect to comments raised about students who use 

in-school or military deferments, we will again mirror the 

provisions outlined in the GE regulations. Because that 

calculation measures active repayment during the most 

recently completed award year, we believe that we have 

addressed concerns about borrowers who may have used 

deferments in the interim. For the purposes of this 

calculation, the Department plans to rely on the data 

reporting and data corrections under the GE regulations for 

the purposes of calculating repayment rates.

We disagree with the commenters who stated that 

borrowers’ backgrounds drive their ability to repay, and 

that institutions should therefore not be held accountable 

for their repayment rates. One of the central missions of 

institutions of higher education is to ensure low-income 

students receive an education that will help them to earn a 

living and successfully repay their loans. At institutions 

where more than half of borrowers do not successfully pay 

down the balance on their loans, the Department believes 

that students have the right to know--before they enroll or 

borrow financial aid--that the majority of borrowers have 
544

not repaid even one dollar in outstanding balance three 

years out of school. 

Changes: We have revised § 668.41(h) as described earlier 

in this section.

Challenge Process

Comments: One commenter asked the Department to clarify 

whether institutions will have an opportunity to challenge 

the Department’s student-level data. Another commenter 

recommended that the Department use a 20.8 percent 

borrowing rate in place of the proposed two-step borrowing 

rate calculation in order to simplify the calculation and 

reduce the associated burden.

Discussion: We appreciate the commenter’s concern for the 

accuracy of the data. Given the changes to the rate 

described earlier, there will be no additional data 

corrections process beyond the one already provided for in 

the GE regulations. Institutions will already be 

responsible for reporting accurate data under the GE 

regulations, and for making any necessary corrections to 

the data. The Department will use those already-corrected 

data to derive the institution-level repayment rate. 

However, a proprietary institution at which the median 

borrower has not repaid in full, or paid down the 

outstanding balance of, the borrower’s loans may receive an 
545

exemption from the warning requirement if the institution 

demonstrates that not all of its programs constitute GE 

programs and that if the borrowers in the non-GE programs 

were included in the calculation of the loan repayment 

rate, the loan repayment rate would be equal to or greater 

than 0.5, meaning that the median borrower had paid down 

the outstanding balance of the borrower’s loans by at least 

one dollar.

Additionally, we do not believe the participation rate 

index (i.e., the index comparable to the 20.8 percent 

borrowing rate percentage) appeal is still necessary under 

this revised version of the repayment rate. The GE 

repayment rate calculation does not include such an 

exception, and limiting the warning requirement only to 

proprietary institutions means that the rates will cover 

all borrowers at the institution, accurately representing 

the universe of students with Federal loan debt. In the 

interest of ensuring consistency between the GE repayment 

rates and this one, and of reducing burden on both 

institutions and the Department, we have removed the 

participation rate index appeal.

Changes: We have revised § 668.41(h) to remove the data 

corrections process and the participation rate index 

appeal. We have also added § 668.41(h)(4)(ii), which 
546

creates an exemption to the warning requirement for 

institutions that demonstrate that they have borrowers in 

non-GE programs and that, if those borrowers were included 

in the loan repayment rate calculation, the loan repayment 

rate would meet the threshold. 

Warnings

Comments: Several commenters supported using a plainlanguage warning that has been tested with consumers, and 

that is timely for students. One commenter supported 

incorporating those warnings into institutional promotional 

materials, and suggested expanding the definition of 

“promotional materials” to include all materials and 

services for which an institution has paid or contracted. 

Several commenters requested that we further clarify how 

the warning must be presented, so that it is not difficult 

for the public to see. Other commenters expressed 

disappointment that the proposed regulations do not require 

institutions to deliver repayment rate warnings to 

prospective students at the first contact with those 

students, when the information may be most valuable to 

students, and strongly supported including such a 

requirement in the final regulations. 

However, several commenters suggested that the loan 

repayment warning raises First Amendment concerns. Some 
547

commenters believed that the requirement would both target 

institutions at which borrowers are appropriately using IDR 

plans and excuse private nonprofit and public institutions 

with similarly poor loan repayment rates. One commenter 

raised concerns that the specific language provided for 

illustrative purposes in the NPRM did not accurately 

describe the loan repayment rate. 

One commenter believed that the warning would be most 

effective if it were included within other loan and 

borrowing information, rather than delivered separately 

along with other disclosures. The commenter also stated 

that institutions should not be required to provide the 

warning to students who do not intend to borrow Federal 

student loans. 

Several commenters argued that requiring institutions 

to include the entire content of the warning in advertising 

and promotional materials would be cost-prohibitive. 

Instead, commenters proposed that institutions provide a 

briefer statement, similar to the requirements in the 

Gainful Employment regulations. 

Discussion: We appreciate the support of commenters who 

stated that they agreed with the Department’s proposed use 

of a plain-language, consumer-tested warning. We also 

agree with commenters who supported incorporating warnings 
548

into a wider range of promotional materials, and have 

strengthened the definitions for warnings and promotional 

materials accordingly. We recognize and agree with the 

concerns of commenters who suggested additional clarity 

around the presentation of the warning to prevent 

obfuscation. To that end, we have clarified the 

requirements for promotional materials to ensure the 

warning will be prominent, clear, and conspicuous, 

including a variety of conditions both for advertising and 

promotional materials. The Secretary may require the 

institution to modify its materials if the Department 

determines that the warning is not sufficiently prominent 

or conspicuous. The Secretary may also issue guidance 

describing form, place, and manner criteria that would make 

the warning sufficiently prominent, clear, and conspicuous.

We also appreciate the perspective of commenters who 

supported hand-delivered warnings at early stages in a 

student’s college search. However, we recognize that many 

of these goals will be accomplished under the GE 

regulations, which require that program-level data be 

provided on a GE disclosure template to students. To that 

end, we have removed the requirement that an institutionlevel warning also be provided directly to prospective and 
549

enrolled students, and instead will require that the 

warnings be provided through advertising and promotional 

materials. This also resolves the concerns of the 

commenter who believed that the warning would be most 

effective if accompanied by other loan and borrowing 

information; and the commenter who argued that institutions 

should be required to provide the warning directly to only 

those students who intend to borrow Federal student loans.

While we recognize that some institutions believe 

providing these warnings in advertising and promotional 

materials would be cost-prohibitive, we believe that this 

is important information to help students themselves make 

critical cost-benefit analyses prior to investing their 

time and money in an institution. 

We address the First Amendment concerns above in the 

section “Warnings” and do not repeat them here. We also 

remind commenters that the warning language included in the 

final regulations may be subject to consumer testing and 

may change in accordance with the results of that testing. 

The precise warning language, if revised, will be published 

in the Federal Register by the Secretary. 

Changes: We have revised § 668.41(h) to remove the 

delivery of a repayment rate warning to prospective and 

enrolled students. Instead, we have strengthened the 
550

requirements under § 668.41(h)(3) to ensure the materials 

are appropriately provided in advertising and promotional 

materials.

Agreements Between an Eligible School and the Secretary for

Participation in the Direct Loan Program (Section 685.300)

Legal Authority and Basis for Regulating Class Action 

Waivers and Arbitration Agreements 

Comments: Several commenters objected that the Department 

lacks the legal authority to ban either mandatory 

predispute arbitration agreements or class action waivers. 

These commenters strongly believed that by this regulation, 

the Department would be inappropriately interfering with 

institutional operations, violating established Federal 

law, and interfering with parties’ freedom to contract. 

Commenters suggested that the Department has ignored clear 

messages from both Congress and the Supreme Court 

indicating Federal policy favoring arbitration. 

Many commenters argued that the Federal Arbitration 

Act (FAA) precludes the Department from restricting the use 

of arbitration agreements. Commenters noted that the FAA 

makes arbitration agreements “valid, irrevocable, and 

enforceable as written,” reflecting a national preference 

for resolving disputes by arbitration. These commenters 

believed that the proposed regulations run counter to 
551

public policy and violate the FAA. According to 

commenters, the prohibition on arbitration in the proposed 

regulations is precisely the type of agency action that

Congress sought to curtail with the FAA. 

The commenters asserted that the Supreme Court has 

repeatedly demonstrated its support for the FAA and for 

arbitration as an effective method of dispute resolution. 

Commenters cited cases in which they view the Supreme Court 

as having struck down regulations and statutes that are 

inconsistent with the pro-arbitration policy established by 

the FAA, such as DirecTV v. Imburgia, 136 S.Ct. 463 (2015). 

Commenters further cited to a line of Supreme Court 

precedent favoring arbitration, including Hall St. Assocs., 

L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), and Moses H. 

Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1 

(1983). According to these commenters, the Department’s 

proposed regulations are contrary to well-established law. 

Commenters contended that, under the FAA, the 

Department may not issue the proposed regulations absent a 

clear congressional command, which they argued the 

Department lacks. According to commenters, when Federal 

law is silent as to whether Congress intended to override 

the FAA for a claim, the FAA requires that an arbitration 

agreement be enforced according to its terms. Here, in the 
552

absence of explicit congressional command, commenters 

believed that the Department is not authorized to restrict 

arbitration. To support this position, commenters noted 

that Congress has granted the necessary authority to other 

agencies in other circumstances. Commenters suggested that 

because Congress has granted agencies this authority in the 

past, but has not granted this authority to the Department, 

this silence means that Congress did not intend for the 

Department to exercise such authority. 

Specifically, commenters stated that the HEA does not 

authorize the Department to supersede the FAA. As a 

result, commenters contended that the proposed ban on 

arbitration must yield to the FAA. Specifically, 

commenters noted that sections 454(a)(6) and 455(h) of the 

HEA, which the Department cites in the proposed 

regulations, provide no indication that the Department is 

authorized to override the FAA. One commenter contended 

that the Department has misinterpreted its statutory 

mandate by relying on these provisions to justify the 

proposed arbitration ban. Specifically, this commenter 

asserted that, unlike other sections of the HEA, section 

454(a)(6) does not contain a provision that expressly makes 

the FAA inapplicable. According to the commenter, the 

Department should interpret this distinction to mean that 
553

the Department may not disregard the FAA in its actions 

pursuant to this provision. 

Further, another commenter stated that section 454(a) 

of the HEA does not relate to contracts between students 

and schools and that none of the current regulatory 

requirements governing PPAs regulate contracts between 

students and the institution. These commenters objected 

that the Department is acting outside the scope of its 

statutory authority by attempting to become involved in 

contractual relationships between students and 

institutions. 

Other commenters, in contrast, asserted that the 

Department has authority to regulate the use of 

arbitration. One commenter stated that the FAA does not 

limit the Department’s ability to require schools to remove 

forced arbitration clauses and class action waivers from 

enrollment contracts. The commenter noted that the FAA 

legal analysis is not triggered in the absence of an 

arbitration clause and that the FAA does not preclude laws 

or regulations preventing parties from placing arbitration 

provisions in their contracts. This commenter asserted 

that the history of the FAA and judicial treatment of 

arbitration provisions does not suggest an absolute right 

to impose an arbitration agreement.
554

Another commenter strongly asserted that the 

Department may condition Federal funding on a school’s 

agreement not to use forced arbitration clauses without 

violating the FAA. This commenter cited to section 2 of 

the FAA, stating that agreements to arbitrate are “valid, 

irrevocable, and enforceable,” except where grounds “exist 

at law or in equity for the revocation of any contract.” 

This commenter suggested that the proposed regulations 

would not interfere with existing arbitration agreements 

and that students would still have the ability to arbitrate 

if they chose to do so. One commenter noted that the 

Department’s authority to adopt stand-alone conditions on 

funding as part of its PPAs is broad with respect to the 

Direct Loan Program, and stated that barring predispute 

arbitration agreements is within the scope of this 

authority. The commenter noted that including this 

restriction in PPAs would force schools to internalize the 

cost of their misconduct and minimize costs imposed on the 

public. 

Another commenter cited the Spending Clause of the 

Constitution in support of its position that the Department 

is authorized to impose conditions of this nature on 

Federal funding recipients. The commenter stated that the 

Supreme Court has recognized the constitutionality of such 
555

conditional funding in South Dakota v. Dole, 483 U.S. 203 

(1987). In addition to citing this holding, the commenter 

noted that other agencies, such as the U.S. Commodity 

Futures Trading Commission (CFTC) and the U.S. Department 

of Defense (DoD) place similar conditions on recipients of 

their funding. 

Discussion: Addressing the comment that the Department 

lacks legal authority to ban either class action waivers or 

predispute arbitration agreements regarding borrowerdefense type claims, we repeat the position and rationale 

for each as stated in the NPRM. As we stressed there, the 

HEA gives the Department the authority to impose conditions 

on schools that wish to participate in a Federal benefit 

program. In this regulation, the Department is exercising 

its broad authority, as provided under the HEA, to impose 

conditions on schools that wish to participate in the 

Federal Direct Loan Program. 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 (PPA). 20 

U.S.C. 1087d. Section 454(a)(6) of the HEA authorizes the 
556

Department to include in that PPA “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); 81 FR 39385.

This regulation addresses class action waivers and 

predispute arbitration agreements separately, because the 

proscriptions adopted here are distinct and apply to each 

separately. As we explained in the NPRM, recent experience 

with class action waivers demonstrates that some 

institutions, notably Corinthian, aggressively used class 

action waivers to thwart actions by students for the very 

same abusive conduct that government agencies, including 

this Department, eventually pursued. Corinthian used these 

waivers to avoid the publicity that might have triggered 

more timely enforcement agency action, which came too late 

for Corinthian to provide relief to affected students. 81 

FR 39383.75 Corinthian’s widespread use of these waivers 

and mandatory arbitration agreements resulted in grievances 

against Corinthian being asserted not against the nowdefunct Corinthian, but as defenses to repayment of 

 

75 As one commenter noted, during the period in question--2011 to 2015--very few Corinthian 

students pursued arbitration, according to records maintained by the American Arbitration 

Association, and even fewer received any award. www.regulations.gov/document?D=ED-2015-OPE0103-10723, citing Consumer Arbitration Statistics, Provider Organization Report, available at 

www.adr.org. This data supports our conclusion that widespread use of mandatory arbitration 

agreements effectively masked serious misconduct later uncovered in government enforcement 

actions, while providing minimal relief for students. 
557

taxpayer-financed Direct Loans, with no other party from 

which the Federal government may recover any losses. As 

noted, Corinthian was not alone in this practice. The 

absence of class action risk coincided with the use of 

deceptive practices in the industry during this same 

period, as recounted in the NPRM and in the earlier NPRM 

for Program Integrity: Gainful Employment. 79 FR 16426 

(March 24, 2014). We infer that from the continued 

misconduct and from the extensive use of class action 

waivers that the waivers effectively removed any deterrent 

effect that the risk of such lawsuits would have provided. 

These claims, thus, ended up as defenses to repayment of 

Direct Loans. This experience demonstrates that class 

action waivers for these claims substantially harm the 

financial interest of the United States and thwart 

achievement of the purpose of the Direct Loan Program. 

Accordingly, section 454(a)(6) of the HEA authorizes the 

Department to ban Direct Loan participant institutions from 

securing class action waivers of borrower-defense type 

claims. 

Separately, we considered the effect of predispute 

arbitration agreements on the achievement of Direct Loan 

Program objectives and the Federal interest, as evidenced 

during the same period. A major objective of the program 
558

is protecting the taxpayer investment in Direct Loans. 

That objective includes preventing the institutions 

empowered to arrange Direct Loans for their students from 

insulating themselves from direct and effective 

accountability for their misconduct, from deterring 

publicity that would prompt government oversight agencies 

to react, and from shifting the risk of loss for that 

misconduct to the taxpayer. Predispute arbitration 

agreements, like class action waivers, do each of these, 

and thus jeopardize the taxpayer investment in Direct 

Loans. Aligned with these steps to protect the taxpayer 

investment in Direct Loans, we note that these regulations 

replace, for new loans, the State law cause of action 

standard with a new Federal standard. Negotiators had 

objected to that change, and we retained the State law 

option for those State law claims reduced to judgment. 

Mandatory predispute arbitration agreements would have made 

this standard a null option. 

For all these reasons, as explained in the NPRM, we 

concluded that agreements barring individual or joint 

actions by students frustrate Federal interests and Direct 

Loan Program objectives for the same reasons as did class 

action waivers. Therefore, we concluded that section 
559

454(a)(6) of the HEA authorizes the Department to regulate 

the use of predispute arbitration agreements. 

As explained in the NPRM, we acknowledge that the FAA 

assures that agreements to arbitrate shall be valid, and 

may not be invalidated “save upon such grounds as exist at 

law or in equity for the revocation of any contract.” 9 

U.S.C. 2. Contrary to the commenters’ assertion, none of 

the case authority to which the commenters cite addresses 

Federal regulations that may affect arbitration, and the 

disputes addressed in that case authority appear to involve 

litigation between private parties regarding rights arising 

under Federal, State, or local law or contracts between 

those parties. 

As we also stated in the NPRM, the Department does not 

have the authority, and does not propose, to displace or 

diminish the effect of the FAA. 81 FR 39385. These 

regulations do not invalidate any arbitration agreement, 

whether already in existence or obtained in the future. 

Moreover, the Department does not have the authority to 

invalidate any arbitration agreement, did not propose to 

do, and does not in this final rule attempt to do so. 

However, as we explained in the NPRM, and repeat under 

“Class Action Waivers” here, the Department considers the 

regulation of class action waivers and predispute 
560

arbitration agreements to be justified because they affect 

Direct Loan borrowing.76 The arguments that, by these 

regulations, the Department attempts to override, displace, 

or disregard the FAA mischaracterize the regulations. The 

regulations do not control the conduct of purely private 

transactions between private parties, transactions 

unrelated to the Direct Loan Program.77 Direct Loans are 

not purely private transactions; but for the Direct Loan, 

the student may very likely not have enrolled at all in a 

chosen school. The terms of enrollment agreements between 

the institution and the student loan recipient, and the 

school’s performance with respect to the education financed 

by that loan, directly affect the Direct Loan program. 

These regulations impose a condition on the participation 

by a school in this specific Federal program, a Federal 

program in which Congress explicitly stated that “no 

institution shall have a right to participate. . .” 20 

U.S.C. 1087b(b). The final regulations do not bar schools 

from using any kind of predispute arbitration agreements, 

or class action waivers, so long as they pertain only to 

grievances unrelated to the Direct Loan Program. The 

 

76 81 FR 39382-39383.

77 Purely private transactions are the kinds of relationships that the CFPB may regulate under section 

1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5518(b) 

(authority to regulate the use of agreements between covered persons and consumers).
561

regulations merely require that a school that participates 

in the Direct Loan program cannot enter into a predispute 

arbitration agreement regarding borrower defense-type 

claims with a student who benefits from aid under that 

program. 

These requirements are well within the kind of 

regulation upheld by courts that address the authority of 

the government to impose conditions that limit the exercise 

of constitutional rights by beneficiaries. That case law 

gives strong support for the position that the Department 

has authority to impose limits of the kind adopted here on 

the use of class action waivers and predispute arbitration 

agreements. For example, the government may impose a 

restriction on the exercise of a recipient’s First 

Amendment rights so long as that restriction does not 

extend beyond the recipient’s participation in the Federal 

program:

“Our ‘unconstitutional conditions’ cases involve 

situations in which the Government has placed a 

condition on the recipient of the subsidy rather than 

on a particular program or service, thus effectively 

prohibiting the recipient from engaging in the 

protected conduct outside the scope of the federally 

funded program.”
562

Agency for Int'l Dev. v. All. for Open Soc'y Int'l, Inc., 

133 S. Ct. 2321, 2330–31 (2013), quoting Rust v. Sullivan, 

500 U.S. 173, 197 (1991).78 Here, the scope of the 

federally funded program–-the Direct Loan Program–-extends 

far beyond the simple act of originating the loan on behalf 

of the Department; the HEA itself regulates a broad range 

of school actions as they relate to Direct Loan 

participation, from advertising and recruiting practices 

that lead to enrollment to refunding tuition payments after 

a student drops out. See, e.g., 20 U.S.C. 1094(a)(20) 

(incentive compensation); 20 U.S.C. 1094(a)(22)(refund 

requirements). Section 454 of the HEA provides that under 

the Direct Loan program, the school acts as the 

Department’s loan originator, and accepts responsibility 

and financial liability for failure to perform its 

functions pursuant to the Direct Loan PPA. 20 U.S.C. 

1087d(a)(3). The HEA gives the Secretary the authority to 

modify the terms of the PPA as needed to protect Federal 

interests and promote the objectives of the program. 20 

 

78 The Spending Clause of the Federal Constitution grants Congress the power “[t]o lay and collect 

Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and 

general Welfare of the United States.” U.S. Const. art. I, § 8, cl. 1. The clause provides Congress broad 

discretion to tax and spend for the “general Welfare,” including by funding particular State or private 

programs or activities. That power includes the authority to impose limits on the use of such funds 

to ensure they are used in the manner Congress intends. Rust v. Sullivan, 500 U.S. 173, 195, n. 4, 111 

S.Ct. 1759, 114 L.Ed.2d 233 (1991) (“Congress' power to allocate funds for public purposes includes 

an ancillary power to ensure that those funds are properly applied to the prescribed use.”). Agency 

for Int'l Dev. v. All. for Open Soc'y Int'l, Inc., 133 S. Ct. 2321, 2327–28, (2013).
563

U.S.C. 1087d(a)(6). The Department issues these 

regulations pursuant to that authority, to regulate conduct 

well within the “scope of the federally funded program” at 

issue here. As we explained in the NPRM and earlier in 

this discussion, the restrictions involve terms, 

conditions, and practices that directly and closely affect 

the objectives of the Federal Direct Loan Program.79

For several reasons, the fact that Congress gave 

certain agencies power to regulate arbitration, or outright 

banned mandatory arbitration, supports no inference that 

Congress considered other agencies, such as the Department, 

to lack the power to regulate.80 First, these enactments 

regulate purely private transactions between private 

parties. As such, transactions in these contexts fall 

squarely within the terms of the FAA, a Federal statute, 

and arbitration clauses in these transactions would be 

deemed valid and enforceable if Congress had not, by 

Federal legislation, barred or nullified their use, or 

explicitly authorized a Federal agency to do so by 

 

79 See 81 FR 39383-84.

80 See, e.g., 10 U.S.C. 987(f)(4), (h) (authorizing the DoD to regulate use of mandatory arbitration in 

extensions of credit to servicemembers); 12 U.S.C. 5518 (authorizing the CFPB to regulate use of 

arbitration in consumer financial services); 15 U.S.C. 78o (authorizing the SEC to regulate use of 

mandatory arbitration in certain investment relationships); 15 U.S.C. 1639c(e) (barring mandatory 

arbitration in extensions of credit secured on the principal dwelling of a consumer); and 18 U.S.C. 

1514A(e) (prohibiting use of arbitration in regard to certain whistleblower proceedings regarding 

securities). 
564

regulation. Federal legislation was therefore essential to 

achieve the intended restriction of arbitration in that 

context. None of the situations cited involve the terms 

and conditions of participation in a Federal benefit 

program.81 Second, these latter enactments offer no 

legislative interpretation of the 1993 amendment to the 

1965 Higher Education Act, which enacted section 454, 

because they deal with different subject matters. Thus, 

courts interpret statutes with similar language, and which 

address the same general subject matter, “as if they were 

one law.” See Erlenbaugh v. United States, 409 U.S. 239, 

243–44 (1972). In such a case, a “later act can . . . be 

regarded as a legislative interpretation of (an) earlier 

act. . .” United States v. Stewart, 311 U.S. 60, 64—65 

(1940) (construing two statutes that both address the scope 

of the tax exemption afforded farm loan bonds). 

Here, newer enactments addressing arbitration provide 

no “legislative interpretation” of the HEA, because they 

share neither language nor subject matter with the 1965 

Higher Education Act in general or the 1993 Direct Loan 

Program statute in particular. To the contrary, Congress 

has generally rejected any inference that other Federal law 

 

81 Congress’s power to regulate in these matters rests, thus, on the Commerce Clause, not the 

Spending Clause.
565

regulating consumer lending, most prominently, the Truth in 

Lending Act (TILA), operates on “the same general subject 

matter” as Federal education loans financed under the HEA. 

See, e.g., 15 U.S.C. 1603(7) (exempting from TILA those 

loans made, insured, or guaranteed pursuant to a program 

authorized by title IV of the Higher Education Act of 

1965). Section 454 itself – the statutory basis for 

adopting “other provisions” needed to protect Federal 

interests evidences this distinction in subject matter by 

repeatedly referencing not other Federal laws addressing 

consumer lending, but specific disclosure requirements in 

the HEA itself, as well as provisions barring the school 

from charging fees for arranging Direct Loans. 20 U.S.C. 

1087d(a)(1)(E). This context compels the conclusion that 

the scope of the power to regulate under section 454 was to 

be governed by reference to the Federal objectives stated 

in this very statute, not by inferences drawn from 

subsequent legislation addressing very different objectives 

in transactions involving different–-private–-participants.

The objection that section 454(a)(6) of the HEA does not 

authorize the Department to involve itself in the 

contractual relationships--or impair its freedom to 

contract with others and exercise rights under existing 

contracts--ignores a host of HEA provisions that regulate 
566

the “contractual relationships” between the school and 

other parties. These provisions restrict, and in some 

instances ban, the exercise of rights that the school may 

already have under existing contracts or wish to include in 

future contracts. The HEA thus regulates contractual 

relationships with students: the qualifications for 

enrollment of students who may become borrowers, 20 U.S.C. 

1091(a), (d); the manner in which the school must determine 

whether the student borrower is making academic progress 

while enrolled, 20 U.S.C. 1091(c); banning the school from 

imposing penalties and late fees on students whose tuition 

payments may be delayed for various reasons, 20 U.S.C. 

1094(a)(19); and determining when that student has ceased 

enrollment and whether and how much the school must refund 

to the student and the Department of tuition payments the 

school has already received for that student, 20 U.S.C. 

1091b. The HEA, moreover, imposes significant prohibitions 

that ban the institution from the exercise of rights it may 

have under its existing contracts with its employees and 

third parties, or may wish to include in future contracts 

with those employees and with third parties. Thus, an 

institution cannot compensate its employees on the basis of 

success in securing enrollments (“incentive compensation”). 

20 U.S.C. 1094(a)(20). More recently, section 487 of the 
567

HEA was amended by Pub. L. 110-315, the Higher Education 

Opportunity Act of 2008, to impose significant new 

restrictions on the exercise by institutions and affiliated 

entities of rights under existing contracts with lenders 

that provided financing for their students. That act 

mandated adoption and compliance by institutions with a 

code of conduct governing their relationships with lenders 

that made both Federal loans and private loans for their 

students, and banned numerous practices in widespread use 

at the time under arrangements between the institution, 

affiliated entities, its own employees and their family 

members, and lenders. 20 U.S.C. 1094(a)(25), (e). These 

amendments were effective on the date of enactment. Pub. 

L. 110-3110–315, §3, August 14, 2008, 122 Stat 3078. Thus, 

the HEA itself repeatedly conditions participation in title 

IV, HEA programs on an institution’s refraining from

exercising rights the institution may already have under 

existing contracts or may acquire under new contracts. 

These regulations similarly operate within the very scope 

of the Federal program in which these HEA provisions 

operate, to bar the institution from exercising certain 

rights it may have already acquired or wished to acquire by 

contract. In doing so, neither the HEA nor these 
568

regulations improperly infringe on the institution’s 

freedom of contract or freedom of expression. 

Changes: None.

Comments: A few commenters suggested that the proposed 

regulations may violate the rights of institutions under 

the First Amendment, by compelling speech, and under the 

Takings and Due Process Clauses of the Fifth Amendment by 

interfering with or depriving the institution of its 

contractual rights in arbitration and class action waiver 

agreements. Several commenters objected that by applying 

to existing contracts, the regulations are impermissibly 

retroactive. 

Discussion: The regulations effect neither a deprivation 

of a property right of an institution in agreements it 

already has with students, nor an impairment of those 

contracts. The regulation affects the terms on which an 

institution may continue to participate in a Federal 

program. The institution has no property right to continue 

to participate on the terms under which the institution 

previously participated. See Ass'n of Private Sector 

Colleges & Universities v. Duncan, 110 F.Supp.3d at 198. 

Rights acquired by the institution under agreements already 

executed with students remain fully enforceable on their 

own terms. 
569

Like any new regulations, these regulations impose 

requirements on the future conduct of institutions that 

intend to continue to participate in the Direct Loan 

Program. Regulations commonly change the future 

consequences of permissible acts that occurred prior to 

adoption of the regulations, and such regulations are not 

retroactive, much less impermissibly retroactive, if they 

affect only future conduct, and impose no fine or other 

liability on a school for lawful conduct that occurred 

prior to the adoption of the regulations. The regulations 

do not make an institution prospectively ineligible because 

it has already entered into contracts with arbitration 

provisions. The regulations impose no fine or liability on 

a school that has already obtained such agreements. The 

regulations address only future conduct by the institution, 

and only as that conduct is related to the institution’s 

participation in the Federal Direct Loan Program. The 

institution is not obligated to continue to participate in 

the Direct Loan program. If it chooses to continue to 

participate, it agrees to do so under rules such as these 

that change--prospectively--the conduct in which it can 

engage. These rules thereafter bar the institution that 

chooses to continue to participate from exercising rights 

acquired by the institution under agreements already 
570

executed with students. The regulations abrogate none of 

those agreements; an institution that chooses not to 

continue to participate is free to rely on those 

agreements. 

In response to the assertion that requiring the 

institution to include provisions in any arbitration 

agreement it has obtained or obtains in the future violates 

the First Amendment, we note that the regulations compel 

action, not merely speech. The requirements of 

§ 685.300(e)(1) and (2) and (f)(1) and (2) are different 

than the warnings required under § 668.41, and those 

warnings and disclosures regarding gainful employment 

programs that were challenged and upheld in Ass'n of 

Private Sector Colleges & Universities v. Duncan, 110 F. 

Supp. 3d 176, 182 (D.D.C. 2015), aff'd sub nom. Ass'n of 

Private Sector Colleges & Universities v. Duncan, 640 Fed. 

Appx 5 (D.C. Cir. 2016). Section 685.300(e) and (f)

requires an institution that has obtained a class action 

waiver or predispute arbitration agreement that included 

borrower defense-type claims to, most importantly, take no 

action to enforce that waiver or agreement and, secondly, 

to notify the affected student that it does not intend to 

enforce the agreement. The regulations further require the

institution to avoid certain actions, or to conduct those 
571

actions in a particular manner, which include adding a 

clause to new agreements to advise the student of its 

commitment. To the extent that the regulations compel 

speech, they compel commercial speech, like other 

communications with students required by Department 

regulations, and the content of the speech is limited to 

stating that the institution agrees to comply with a 

particular Federal regulation. The regulations do not 

require the institution to express the viewpoint of any 

other party on the value of arbitration, much less to 

disparage arbitration. Nor do they prevent the institution 

from advocating in its communications with students its 

opinion of the benefits of arbitration and the 

disadvantages of litigation, or from encouraging students 

who have a grievance with the institution from agreeing to 

arbitration. To the extent that the regulations compel 

speech, therefore, they compel only factual, noncontroversial speech. 

Changes: None.

Comments: Several commenters considered the Department’s 

proposed arbitration and class action waiver bans to be 

arbitrary and capricious agency actions, adopted without 

proper, reasoned decision-making. Some commenters 

contended that the Department did not gather sufficient 
572

evidence to support its positions in the NPRM. Commenters 

also believed that the Department relied too heavily on a 

CFPB study that they believed was not relevant to the 

public student loan context at issue. Additionally, 

commenters believed that the Department did not 

sufficiently consider conflicting evidence, such as the 

benefits of arbitration and the drawbacks of class actions. 

A commenter cited to literature and academic studies that 

the commenter asserts demonstrate the merits of 

arbitration. 

Discussion: As discussed elsewhere, we do not deny the 

merits of arbitration, and the regulations do not ban 

arbitration. The Department gathered substantial evidence 

to support the position taken in the regulations, as 

described in detail in the NPRM. That evidence showed that 

the widespread and aggressive use of class action waivers 

and predispute arbitration agreements coincided with 

widespread abuse by schools over recent years, and effects 

of that abuse on the Direct Loan Program. It is 

undisputable that the abuse occurred, that a great many 

students were injured by the abuse, that the abusive 

parties aggressively used waivers and arbitration 

agreements to thwart timely efforts by students to obtain 

relief from the abuse, and that the ability of the school 
573

to continue that abuse unhindered by lawsuits from 

consumers has already cost the taxpayers many millions of 

dollars in losses and can be expected to continue to do so.

Regarding the commenter that objected to our reliance 

on the CFPB study because that study may not be relevant to 

the Federal student loan market, the CFPB’s study did 

analyze the prevalence of arbitration agreements for 

private student loans as well as disputes concerning those 

loans. Schools participating in the Direct Loan Program 

not infrequently provide or arrange private student loans 

to their students; these private loan borrowers may also 

have Direct Loans, and in any case can be expected often to 

share characteristics with Direct Loan borrowers. 

Changes: None.

Comments: One commenter stated that the arbitration ban 

falls outside the scope of topics the Department announced 

that it would be addressing in development of these 

regulations and therefore the Department is not authorized 

to address the issue. 

Discussion: The proposal to include consideration of 

arbitration agreements and class action waivers was 

presented in writing by at least one negotiator during the 

negotiated rulemaking proceedings, and was the subject of 

significant discussion during the final negotiated 
574

rulemaking session. The issue was highly relevant to the 

consideration of borrower defense claims, the core of the 

rulemaking exercise, and was duly and properly considered. 

Changes: None.

Class Action Waivers

Comments: Commenters offered opposing views on the 

treatment of class action waivers under the regulations. 

Several commenters approved of the Department’s proposal to 

prohibit the use of class action waivers, noting the 

government’s obligation to protect taxpayers and students 

from misuse of funds dispensed through the Direct Loan 

Program. One commenter cited research from the CFPB 

showing that class actions are more effective at securing 

relief for consumers than individual arbitrations. This 

commenter suggested that arbitration agreements prevented 

Corinthian students from receiving relief from the 

institution, and that class actions are essential to 

safeguarding taxpayer money. This commenter asserted that 

the provisions in the proposed regulations addressing class 

action waivers are narrowly tailored, consistent with 

precedent established in Rust v. Sullivan, 500 U.S. 173 

(1991). 

Another commenter suggested that class actions are 

beneficial to students because they minimize resource 
575

obstacles often faced by students. According to this 

commenter, class actions are powerful tools that can 

rectify wrongs and create incentives for industries to 

change behavior. Further, this commenter noted that class 

actions enable students to band together to seek relief, 

rather than bringing such grievances to the Department as 

defenses to repayment of taxpayer-funded Direct Loans. 

Other commenters disapproved of the Department’s 

proposed ban on class action waivers. These commenters 

contended that class actions only benefit lawyers and are 

not helpful to students. A few commenters noted that an 

individual participant in a class action often receives 

only nominal returns for his or her claim, while attorneys 

receive disproportionately large returns. One commenter 

suggested that class actions cannot be effective because 

the needs and particular circumstances of individuals 

within the class cannot be properly considered, so students 

cannot receive the appropriate tailored relief. 

Another commenter criticized class actions as being 

incredibly time consuming and yielding minimal public 

benefit. The commenter stated that attorneys are less 

likely to represent students from small schools in class 

actions because of the lower potential rewards, leaving 
576

injured students at small schools without adequate 

recourse. 

One commenter rejected the Department’s position that 

class actions are likely to have a deterrence effect, 

contending that plaintiffs’ lawyers often pursue frivolous 

claims for which institutions could not anticipate 

liability and therefore could not effectively monitor their 

own behavior. 

One commenter stated that the ban on class action 

waivers would be harmful to schools, particularly private 

institutions that lack the legal protections afforded to 

public institutions. A commenter contended that the rule 

would expose institutions to frivolous lawsuits and thus 

would divert funds needed for educational expenses to pay 

the costs of litigation. 

Discussion: In the NPRM, we described in detail the actual 

effect that class action waivers have had in the 

postsecondary education field on students and Federal 

taxpayers. 81 FR 39382. Nothing in the comments opposing 

the regulation demonstrates that these effects are 

exaggerated or mischaracterized, that the substantial 

problems created by the use of class action waivers can be 

reduced or eliminated by more modest measures, that the 

disadvantages and burdens the regulation would place on 
577

schools outweigh the costs and harm that use of class 

action waivers has already caused, or that there is any 

reason to expect that this pattern will change so that such 

waivers will not cause these same problems in the future. 

It is possible that banning class action waivers may 

increase legal expenses and could divert funds from 

educational services, or lead to tuition increases.82 We 

expect that the potential exposure to class actions will 

motivate institutions to provide value and treat their 

student consumers fairly in order to reduce the likelihood 

of suits in the first place.83

We expect that institutions, like other parties that 

provide consumer services, already monitor, and will 

continue to monitor, court rulings to guide these efforts. 

By strengthening the incentive for all institutions to 

serve consumers fairly, and thereby reduce both grievances 

by students and attendant scrutiny by the Department (and 

other enforcement agencies), we expect that the limits we 

adopt here will tend to reduce the likelihood that an 

 

82 It is probable that institutions against whom arbitrations have been filed are already incurring 

legal costs for arbitration. The CFPB study found that on the average, over 90 percent of the 

companies involved in the arbitrations it surveyed were represented by counsel in those 

proceedings. CFPB, Arbitration Study, §5.5.3. 

83 “[C]lass actions increase negative publicity of for-profits and draw attention to deceptive recruiting 

in a much more public fashion than bilateral arbitration. “ Blake Shinoda, Enabling Class Litigation As 

an Approach to Regulating for-Profit Colleges, 87 S. Cal. L. Rev. 1085 (2014)
578

institution that neglects these efforts will enjoy a 

competitive advantage over those that engage in these 

efforts. Although it is possible that frivolous lawsuits 

may be brought, and that institutions will incur costs to 

defend such suits, institutions already face that risk and 

expense. We do not dismiss this risk, but we have no basis 

from which to speculate how much this regulation might 

increase that risk and attendant expense. We see that risk 

as outweighed by the benefits to students and the taxpayer 

in allowing those students who wish to seek relief in court 

the option to do so. 

Commenters who oppose the regulations on the ground 

that class actions benefit lawyers more than consumers, and 

may result in modest returns for an individual member of 

the class, disregard the need for this regulation in this 

field. Contrary to the assertion that class actions 

provide only modest returns, we note that the CFPB found, 

in its study, that the 419 consumer finance class actions 

during the five-year period it studied produced some $2.2 

billion in net cash or in kind relief to consumers in those 

markets.84 Whether or not consumer class actions have 

produced minimal or no actual benefit to the consumers who 

 

84 81 FR 32858. 
579

comprise the class, there is little evidence that this has 

happened in the postsecondary education industry. 85 

Rather, precisely because of schools’ widespread and 

aggressive use of class action waivers, and even opposition 

to class arbitration, as described in the NPRM, there 

appears to be no history of such minimal benefits in this 

market. 

We do not suggest that class actions are a panacea, 

and the criticisms of class actions in other markets may 

also apply to class actions in the postsecondary education 

market if such suits were available. We stress that class 

actions have significant effects beyond financial recovery 

for the particular class members, including deterring 

misconduct by the institution, deterring misconduct by 

other industry members, and publicizing claims of 

misconduct that law enforcement authorities might otherwise 

have never been aware of, or may have discovered only much 

later. The CFPB described these effects in its proposed 

rule,86 and as we demonstrated in the NPRM, recent history 

shows the significant consequences for students and 

 

85 It appears that at least in the postsecondary education market, the claim is unfounded; in one of 

the few class actions to proceed to trial, a class of students obtained two million dollars in relief from 

a for-profit school. Jamieson v. Vatterott Educational Centers, Inc., 259 F.R.D. 520 (D. Kan. 2009); 

Nick DeSantis, Missouri Court Upholds Ex-Student’s Win in Suit Against Vatterott College, Chronicle of 

Higher Education, The Ticker (Aug. 27, 2014), available at www.chronicle.com/blogs/ticker/moappeals-court-upholds-ex-students-win-in-suit-against-vatterott-college/84777.

86 See, e.g., 81 FR 32861-32865.
580

taxpayers in an industry that has effectively barred 

consumers from using the class action tool. As to the 

comment that class actions would harm private non-profit 

institutions, we note that these institutions are already 

subject to that risk, and nevertheless, only a small 

percentage of non-profit institutions currently use 

arbitration agreements with their students.87 This suggests 

that institutions in this sector have generally felt no 

need for such protection, and we see no reason to expect 

that this regulation will change the exposure of non-profit 

institutions to class actions or other suits. 

Changes: None.

Comments: A commenter objected that the proposed 

regulations would improperly restrict borrowers’ choices 

regarding how they are represented. This commenter 

expressed concern that borrowers from small schools would 

be overlooked under the proposed regulations because they 

would not be able to share the costs of litigation with a 

larger group. Another commenter objected that the

regulations would adversely affect students who could not 

successfully pursue class actions because their claims 

would not meet the commonality and predominance 

 

87 Tariq Habash and Robert Shireman, How College Enrollment Contracts Limit Students’ Rights, The 

Century Foundation, (April 28, 2016), available at https://tcf.org/content/report/how-collegeenrollment-contracts-limit-students-rights/.
581

requirements for class actions. This commenter asserted 

that alternative forms of aggregate litigation other than 

class action suits are essential to ensuring that students 

are able to obtain judicial relief, and found the 

regulations insufficient to enable those actions.

Discussion: The objective of § 685.300(e) is to ensure 

that those students who choose to pursue their claims 

against a voluntarily participating school by a class 

action are not prevented from doing so by agreements they 

are compelled to enter in order to enroll at the school. 

The Department cannot change the rules and practical

consequences of class action litigation so that groups of 

students would be spared the costs and risks incurred by 

class action litigants, and did not intend to do so in 

these regulations. Similarly, the Department has neither 

the mandate nor the authority to create alternative forms 

of aggregate litigation in other forums, but the 

regulations, by ensuring that individuals are free to 

retain the right to sue for relief, necessarily enable 

those individuals to enjoy the benefits of joinder under 

Fed. R. Civ. Proc. 20 or comparable State rules, as an 

alternative to class actions. 

Changes: None. 

Arbitration Agreements
582

Comments: Several commenters urged the Department to bar 

the use of any predispute arbitration agreements by 

schools. Commenters asserted that limiting the regulation 

to mandatory predispute agreements would prove ineffective 

for several reasons: the agreement could be presented to 

the student as part of a packet of enrollment materials, or 

included as another term in a mandatory enrollment 

agreement with merely an opportunity to agree or decline; 

the agreement could be required as a condition of other 

benefits, even if not a condition of enrollment; or the 

clause could be included, with an “opt-out” provision. The 

commenters stressed that for a student to understand the 

significance of the agreement, the school would have to 

explain its significance, a duty that the proposed rule did 

not impose. The commenters further contended that even if 

the student were to be aware of the clause, it is 

reasonable to expect that the student would not understand 

the significance of entering into such an agreement. A 

commenter stated that numerous student consumers 

represented by the commenter had agreed to arbitration, 

stating that they did so even, in some instances, where the 

agreement was labeled voluntary, because they did not 

understand the significance of the agreement itself or 

their ability to opt out, or because they relied on 
583

misstatements by recruiters.88 Other commenters stressed 

that the literature is replete with evidence that consumers 

do not understand the terms of agreements governing the 

consumer financial transactions in which they engage, 

making it unlikely that the student would fully understand 

either the significance of the agreement itself or a 

warning that the student need not agree to arbitration in 

order to enrollment. A commenter provided declarations and 

statements from students attesting to their lack of 

understanding either that they had executed agreements to 

arbitrate, or what arbitration meant, or both.89

Commenters also addressed the issue of “opt-out” 

clauses with similar concerns. A comment signed by sixteen 

attorneys general urged that the regulation ban the use of 

“opt-out” clauses, which they viewed as unfair as mandatory 

arbitration clauses. They asserted that predatory forprofit schools, in particular, have a history of using 

arbitration clauses to violate the rights of their 

students, and that in their experience, students often do 

not consider the consequences of an arbitration agreement, 

or the value of opting out, until they have a legitimate 

complaint against the school, at which point it is too late 

 

88 www.regulations.gov/document?D=ED-2015-OPE-0103-10729. 

89 www.regulations.gov/document?D=ED-2015-OPE-0103-10723.
584

to opt out of any arbitration agreement that may have 

appeared in the student’s enrollment agreement. Other 

commenters strongly believed that arbitration agreements 

containing opt-out clauses should still be considered 

mandatory, and should be prohibited under § 685.300(f). 

According to these commenters, opt-out provisions are 

highly ineffective because students misunderstand the 

provisions or choose not to accept them to avoid being 

disagreeable. Commenters also asserted that recruiters at 

proprietary institutions are trained to manipulate students 

and may be able to convince them to sign agreements even if 

students are apprehensive about the meaning and 

consequences. Some commenters noted that students are 

unable to make informed decisions about whether to accept 

these optional agreements because students must understand 

and exercise the option well before any disputes arise. 

One commenter cited to a CFPB study that found that, even 

when consumers are afforded the opportunity to opt-out of 

arbitration clauses, many are either unaware of this option 

or do not exercise this right. Another commenter cited to 

examples from court records indicating that students who 

receive an opt-out provision rarely take advantage. 

Based on these concerns, commenters recommended that 

the Department prohibit schools from entering into any 
585

predispute arbitration agreements, even those containing 

opt-out provisions. Commenters cautioned that the 

Department’s failure to explicitly prohibit these 

agreements would create an exception that swallows the 

Department’s proposed rule on forced arbitration. Some 

commenters suggested that failure to ban opt-out clauses 

would actually make students worse off than if the 

agreements had no such option. According to these 

commenters, students who unknowingly sign arbitration 

agreements containing opt-out provisions may face greater 

hurdles in any efforts to circumvent them by demonstrating 

their unconscionability, as is generally required for 

challenges to arbitration agreements. Additionally, 

commenters suggested that, as proposed, it would be more 

difficult for the Department to take enforcement actions 

against schools that take advantage of loopholes in the 

regulations. 

Another commenter believed that allowing the 

enforcement of arbitration agreements containing opt-out 

provisions would be highly beneficial to both students and 

the Department. This commenter believed that these 

provisions afford students a higher degree of choice and 

control over their situations. Additionally, this 
586

commenter believed that allowing such provisions would 

relieve the Department of a potential influx of claims. 

Discussion: The Department solicited comments on how the 

regulations should treat agreements that would mandate 

arbitration of borrower defense claims but that contain 

opt-out clauses. We have considered the comments received, 

as well as the findings of the CFPB cited by the commenter 

as relevant to this question. We have considered as well 

the comments about students’ lack of awareness either that 

they were executing an agreement to arbitrate, or that 

doing so had significant consequences that they did not 

understand, or both. The same considerations that apply to 

opt-out clauses apply as well to our proposal in the NPRM 

that would ban only mandatory predispute arbitration. 

Our proposal in the NPRM to bar only mandatory “take 

it or leave it” predispute arbitration agreements rested on 

the expectation that a student consumer could make an 

informed choice prior to a dispute to agree to arbitrate 

such a dispute, and that this objective could realistically 

be accomplished by having the agreement presented to the 

student in a manner that would separate the agreement from 

the bulk of enrollment material presented to the borrower 

on or at the beginning of class, with a clearly-worded 

notice that the student was free not to sign the agreement. 
587

These comments have persuaded us that the steps we proposed 

in the NPRM would not produce an informed decision, because 

even if the agreement were to be presented to students in 

this manner, it is unrealistic to expect the students to 

understand what arbitration is and thus what they would be 

relinquishing by agreeing to arbitrate. The submissions 

from commenters provide specific evidence of this lack of 

understanding in the postsecondary education market among 

students enrolled in the very sector of that market that

far more commonly uses predispute arbitration agreements.90 

They are not alone. The literature regarding use of 

arbitration agreements in consumer transactions provides 

repeated anecdotal and empirical evidence that consumers 

commonly lack understanding of the consequences of 

arbitration agreements.91 In its survey of credit card 

 

90 Indeed, a commenter noted testimony in one case that the school official shared her students’ lack 

of understanding:

None of [the students] knew what arbitration was or asked any questions about the 

arbitration provision. Ms. Dennison testified that, although she interviews hundreds 

of applicants each year, she has never been asked a question about the arbitration 

provision and she has not mentioned it when meeting with prospective students. In 

fact, Ms. Dennison testified that she did not understand the arbitration provision 

herself.

Rude v. NUCO Edn. Corp., 2011 WL 6931516 Ohio Ct. App. Dec. 30, 2011 

91 See: Jeff Sovern, et al., “Whimsy Little Contracts” with Unexpected Consequences, 75 Md. L. Rev. 1, at 

21 (2015):

The degree of literacy required to comprehend the average disclosure form and key contract 

terms simply is not within reach of the majority of American adults.” Judge Posner has 

explained “not all persons are capable of being careful readers.” Former Federal Reserve Chair 

Ben S. Bernanke, whose agency was responsible for administering the Truth in Lending 

disclosures, among others, has said that “not even the best disclosures are always adequate. . . . 

[S]ome aspects of increasingly complex products simply cannot be adequately understood or 
588

users, the CFPB found generally that “consumers generally 

lack awareness regarding the effects of arbitration 

agreements” and specifically that “[r]espondents were also 

generally unaware of any opt-out opportunities afforded by 

their issuer.” CFPB, Arbitration Agreements, 81 FR 32843 

(May 24, 2016).92 

We see no reason to expect that students who are now 

enrolled or will enroll in the future will be different 

than those described or included in the comments. We see 

no realistic way to improve this awareness, and thus, we do 

not believe that the use of predispute agreements to 

arbitrate will result in well-informed choices, 

particularly by students in the sector of the market in 

which such agreements are most commonly used. Based on the 

lack of understanding of the consequences of these 

agreements evidenced in the CFPB survey of credit card 

users, in the literature dealing with credit cards and 

other financial products, and in the examples of individual 

postsecondary students’ lack of awareness, we consider 

predispute arbitration agreements, whether voluntary or 

mandatory, and whether or not they contain opt-out clauses, 

 

evaluated by most consumers, no matter how clear the disclosure.” And noted scholar and 

now-Senator Elizabeth Warren . . . has been quoted as saying about a credit card contract: “I 

teach contract law at Harvard, and I can’t understand half of what it says.”

92 The CFPB stated that it focused on use of credit card users, a subset of the financial products 

included in its Study, because “credit cards offer strong market penetration across the nation.” Id. 
589

to frustrate achievement of the goal of the regulation - to 

ensure that students who choose to enter into an agreement 

to arbitrate their borrower defense type claims do so 

freely and knowingly. 

Changes: We have revised § 685.300(f)(1) to delete the 

words “will not compel a student”; we have revised § 

685.300(f)(1), (2), and (3)(i) and (ii) to remove the word 

“mandatory” each time it appears; we have revised § 

685.300(g)(1)(ii) to delete the word “predispute”; and we 

have revised § 685.300(i) to delete paragraph (i)(4). We 

also have removed the definition of a “voluntary agreement” 

from § 685.300(f)(1)(ii) and revised the definition of 

“predispute arbitration agreement” in § 685.300(i).

Comments: Several commenters believed that the proposed 

regulations would unfairly deny students the opportunity to 

seek relief through arbitration. Commenters suggested that 

if given the option, many students would choose to seek 

relief through arbitration, rather than litigation. 

Multiple commenters suggested that limiting the 

availability of arbitration would be highly burdensome for 

students, particularly those from low-income backgrounds 

who are less likely to be able to afford attorneys and fees 

associated with litigation. These commenters suggested 

that without arbitration, many low-income students may be 
590

prevented from actively pursuing relief. These commenters 

contended that arbitration is beneficial to students and 

should remain available to those students who would like to 

pursue it as a means of obtaining relief. 

Some commenters lauded arbitration as fair and legally 

sound. One commenter noted that under a particular 

arbitration agreement, students received a fair and 

impartial hearing, comprehensive review of evidence, and an 

impartial ruling by an independent arbitrator. This 

commenter also noted that the arbitration agreement in 

question is governed by State law, which the commenter 

believes provides sufficient legal oversight. 

Other commenters noted that arbitrators generally have 

more subject area expertise than judges, which makes them 

more qualified to issue an informed decision on a 

particular matter. One commenter suggested that students 

benefit from widespread arbitration because administrators 

learn to run more effective and service-oriented schools by 

participating in arbitration proceedings. One commenter 

noted that the benefits of arbitration are particularly 

profound in smaller institutions with closer relationships 

between students and administrators. 

Further, commenters suggested that arbitration is more 

efficient than litigation, and suggested that limiting the 
591

availability of arbitration would unduly delay provision of 

relief to students. Some commenters suggested that 

students benefit from the flexibility afforded by 

arbitration agreements. According to a few commenters, the 

flexibility available in arbitration proceedings allows 

participants to schedule events around their availability. 

Additionally, commenters believed that parties benefit from 

not being restricted by requirements that they adhere to 

traditional rules of evidence or civil procedure.

One commenter asserted that arbitrators are generally 

very fair to students. This commenter opined that the 

consumer arbitration rules are particularly friendly to 

plaintiffs, particularly because of lower fees associated 

with proceedings. Another commenter asserted that 

plaintiffs prevail in arbitration proceedings at least as 

frequently as they do in court. Some commenters believed 

that the arbitration process often facilitates more 

positive outcomes because both students and institutions 

participate fully in the process, and are more invested in 

the outcomes. 

Additionally, some commenters suggested that in the 

absence of widespread arbitration, legal fees associated 

with litigation would take money away from institutions 

that could be used towards resources that would improve 
592

educational outcomes for students. Several commenters 

suggested that the arbitration ban may ultimately lead to 

tuition increases as institutions are required to spend 

more money on litigation. These commenters also noted that 

the arbitration ban will be particularly harmful to smaller 

institutions that lack the resources necessary to hire 

robust legal teams. One commenter believed that some 

smaller institutions may be forced to close if responsible 

for funding costly litigation. This commenter also worried 

about “ambulance chasing” attorneys encouraging students to 

bring frivolous suits. 

On the other hand, a number of commenters supported 

the proposed ban on mandatory predispute arbitration 

agreements for various reasons. Several commenters 

suggested that arbitration systems create structures that 

the commenters view as inherently biased against students. 

Commenters noted that arbitrators are often paid on a caseby-case or hour-by-hour basis, which can create incentives 

for them to rule in favor of institutions, which are more 

likely than individuals to be able to produce repeat 

business for them. One commenter cited to empirical 

evidence that the commenter viewed as supporting its 

position that arbitration is harmful to consumers. 

Additionally, commenters noted that because arbitrators are 
593

not bound by adhering to precedent, their decisions are 

less predictable and reliable. 

Further, commenters stated that arbitration can be 

extremely costly. Commenters attributed the high costs of 

arbitration to the private nature of the system, noting 

that individual parties are often responsible for paying 

costs associated with arbitration, which may include high 

fees that arbitrators may tack on to total costs without 

sufficient notice. One commenter also cited the procedural 

limitations of arbitration as another detriment. This 

commenter stated that students may miss out on the 

opportunity for discovery in arbitration because the 

discovery process is not formalized in the same manner as 

civil lawsuits. According to the commenter, students are 

often denied access to information that is essential to 

their claims. Additionally, the commenter noted that there 

is a lack of oversight in arbitration proceedings, which 

may result in a lack of accountability among arbitrators 

for following by their own established procedures. This 

commenter also believed that the appeal process under 

arbitration is inadequate and that the narrow grounds and 

limited time frame for appeals ultimately harms students. 

Several commenters also suggested that the lack of 

transparency in the arbitration system works to the 
594

detriment of students. These commenters believed that the 

public and parties benefit from the transparency offered by 

civil litigation. Unlike civil litigation, arbitration is 

generally not public, transcripts are not provided to the 

public at large, and some proceedings include gag clauses 

to maintain privacy. 

One commenter believed that forced arbitration impedes 

the Department’s ability to effectively oversee Federal 

assistance programs and ensure proper use of taxpayer 

dollars. This commenter also suggested that forced 

arbitration is unfair to students and deprives them of the 

opportunity to receive an education in a well-regulated 

system. Several commenters lauded the Department for 

taking measures to ensure that students who are wronged by 

unscrupulous schools receive their day in court. These 

commenters were particularly concerned that many students 

have been signing their rights away upon enrollment and 

urged the Department to prevent the continuation of that 

practice. 

Discussion: We appreciate the support for the proposed 

regulations from many of the commenters. For those 

commenters that did not support § 685.300(f), many of their 

objections incorrectly suggested the regulations pose an 

outright ban or effectively preclude any use of 
595

arbitration. The regulations do not bar the use of 

arbitration and therefore do not deny students the benefits 

that the commenters ascribe to arbitration. Rather, 

consistent with the scope of our statutory authority, the 

regulations ban predispute arbitration agreements for 

borrower defense-type claims. 

The regulations do not bar the school from seeking to 

persuade students to agree to arbitrate, so long as the 

attempt is made after the dispute arises. The regulations, 

moreover, extend only to predispute agreements to arbitrate 

borrower defense-type grievances. They do not prohibit a 

school from requiring the student, as a condition of 

enrollment or continuing in a program, to agree to 

arbitrate claims that are not borrower defense-related 

grievances. Consistent with our statutory authority to 

regulate Direct Loan participation terms, the regulations 

address only predispute arbitration agreements for claims 

related to borrower defenses and not for other claims.

Changes: None.

Comments: A commenter suggested that the private nature of 

arbitration affords a level of protection to parties. 

According to this commenter, because arbitration 

proceedings are not public, parties need not be concerned 
596

about private information being revealed during 

proceedings. 

Discussion: The regulations do not ban arbitration 

entirely, but only arbitration achieved through predispute 

arbitration agreements for borrower defense-type claims. 

Students and institutions are free under this rule to agree 

to arbitration if privacy is an important consideration to 

the student. We expect that a student who chooses to 

litigate rather than pursue arbitration is already aware 

that generally litigation is a public proceeding, or 

becomes aware of that fact very quickly, and accepts that 

fact voluntarily. The regulations simply assure that a 

student will have the option to choose that forum. 

Changes: None. 

Comments: A few commenters addressed the effect of 

delegation clauses within arbitration agreements--

provisions that assign, or delegate, to the arbitrator, not 

a court, the power to decide whether a particular claim or 

grievance falls within the agreement to arbitrate. The 

commenters considered such delegation clauses problematic 

because they allow arbitrators who, according to the 

commenters, may have financial incentives that impact their 

neutrality, to make decisions regarding whether a claim 

belongs in court or arbitration. The commenters suggested 
597

that if the Department does not address delegation 

provisions, the proposed regulations may not fulfill their 

intended purpose. The commenters urged the Department to 

prohibit the use of delegation clauses to ensure that any 

questions about the enforceability or scope of predispute 

arbitration agreements are resolved by a court rather than 

an arbitrator, so that schools cannot force students into 

time-consuming arbitration proceedings to resolve threshold 

questions about enforceability. 

Discussion: The commenters identify an important issue, 

one made particularly significant because § 685.300(e) and 

(f) distinguish between borrower defense-type claims or 

grievances, which the regulations address, and other 

student claims, which it does not. The commenters rightly 

argue that the objective of the regulation may be 

frustrated if the school resists a suit by moving to compel 

arbitration and the arbitrator, not the court, were to have 

authority under the agreement to decide whether the claim 

is one that the student must arbitrate. In the NPRM, we 

described the recent history of aggressive actions to 

compel arbitration of student claims, and consider it 

reasonable to expect that schools will continue to oppose 

lawsuits by moving to compel arbitration, and would rely on 

delegation clauses in arbitration agreements to support 
598

these efforts. We did not explicitly address in the NPRM 

the use of delegation clauses, but we proposed there to 

preclude attempts, where the student had agreed to a class 

action waiver, to “seek[ ] dismissal, deferral or stay” of 

“any aspect of a class action,” § 685.300(e)(2)(i), or, if 

the student had entered into a mandatory predispute 

arbitration agreement, to “seek[ ] dismissal, deferral or 

stay” of “any aspect of a judicial action filed by the 

student.” § 685.300(f)(2)(i).93 These prohibited actions 

could rest on an express delegation clause committing to 

the arbitrator the determination whether the claim was a 

borrower-defense type claim. We did not intend to allow 

that action, and in response to the commenters who stressed 

the significance of this issue, we are adding language 

making it clear that the court, not the arbitrator, is to 

decide the scope of any arbitration agreement or class 

action waiver. Of course, if the student has in fact 

agreed to arbitrate some or all claims in a post-dispute 

agreement, then the school has every right, pursuant to 

these terms of its Direct Loan agreement with the 

Department, to oppose litigation by relying on that 

 

93 Indeed, in at least two of the cases cited in the NPRM, an essential element of the ruling turned on 

whether the student had agreed to arbitration of issues about the arbitrability of the claims at issue. 

Eakins v. Corinthian Colleges, Inc., No. E058330, 2015 WL 758286 (Cal. Ct. App. Feb. 23, 2015); 

Kimble v. Rhodes College, No. C-10-5786, 2011 WL 2175249 (N.D. Cal. June 2, 2011). 
599

arbitration agreement. However, the regulation is intended 

to protect the rights of students who agree, predispute, 

only to arbitration of other kinds of claims, to have their 

borrower defense claims heard by a court. To ensure that 

goal is achieved, we believe that any arbitration agreement 

with a Direct Loan borrower should place power to decide 

the scope of the agreement in the court, not the 

arbitrator. 

Changes: We have modified §§ 685.300(e)(3) and 

685.300(f)(3) to add to the required provisions and notices 

the statement that “we agree that only the court is to 

decide whether a claim asserted in the lawsuit is a claim 

regarding the making of the Direct Loan or the provision of 

educational services for which the loan was obtained.” 

Comments: A few commenters recommended alternatives to 

proposed § 685.300(f). One commenter recommended that the 

Department eliminate its ban and instead provide suggested 

best practices to facilitate dispute resolution. Another 

commenter recommended that the Department develop rules to 

govern arbitration proceedings rather than banning them 

entirely. Some rules proposed by the commenter included: 

(1) a neutral arbitrator, (2) more than minimal discovery, 

(3) a written arbitration award, (4) all forms of relief 

available in court available in arbitration, and (5) 
600

prohibition on imposing unreasonable costs in arbitration. 

Another commenter suggested that the Department establish 

an annual threshold for the number of arbitration 

settlements for all institutions. Under this proposal, 

institutions would only be held accountable if their number 

of arbitration proceedings exceeded this threshold.

Discussion: The regulations do not ban arbitration 

entirely, as suggested by some of the commenters. Rather, 

the regulations ban predispute arbitration agreements for 

borrower defense-type claims. We discussed at some length 

in the last negotiated rulemaking session the proposal to 

regulate the conduct of arbitration, rather than banning 

compelled predispute arbitration agreements, but in issuing 

this final rule, we conclude that limiting agreements to 

arbitrate borrower defense claims to those entered into 

after a dispute has arisen will achieve the goal of an 

informed decision by the borrower. Therefore, we have no 

reason to set a limit on the number of such arbitrations a 

school may conduct. The regulations do, however, require 

information from the school about the substance and 

outcomes of arbitration.

Changes: None. 

Comments: One commenter suggested that eliminating 

mandatory arbitration would be overly burdensome on our 
601

judicial system because many claims that otherwise would 

have gone to arbitration will wind up in court.

Discussion: The regulations allow students who agree to 

arbitration to use that method, rather than pursuing relief 

through a lawsuit, and we have no expertise or experience 

from which to estimate the effect of the regulation on 

judicial filings. 

Changes: None.

Comments: One commenter contended that the Department’s 

position is logically inconsistent, because the commenter 

viewed the Department as simultaneously asserting that 

courts do not provide adequate relief for students, while 

also asserting that access to the judicial system is 

essential for students to obtain relief. 

Discussion: We do not believe, and did not state, that the 

judicial system provides inadequate relief for students; to 

the contrary, we noted that recent history shows that 

access to the judicial system was denied by widespread use 

of mandatory predispute arbitration agreements and class 

action waivers. Far from implying that the judicial system 

did not or could not provide relief, we included in the new 

borrower defense Federal standard, for new loans, an 

alternative that rests entirely on a court judgment on a 

borrower defense claim based on State law. 
602

Changes: None.

Comments: One commenter stated that permitting only postdispute arbitration agreements would be entirely 

ineffective and cautioned the Department against allowing 

only post-dispute arbitration as an option to students. 

Another commenter urged the Department to implement 

additional safeguards to protect students under postdispute arbitration agreements. This commenter was 

concerned that schools could potentially force students to 

sign post-dispute arbitration agreements with prohibitions 

limiting their ability to seek relief and urged the 

Department to take measures to prevent schools from 

engaging in this activity. 

Discussion: Section 685.300(f) does not limit the ability 

of the school to enter into a post-dispute arbitration 

agreement, even one that would include arbitration of a 

borrower defense-type claim. A student with an actual 

claim has every reason to question the consequences of 

agreeing to arbitrate the claim, as opposed to filing suit, 

and at that point we expect such a decision to be an 

informed choice by the student.

Changes: None. 

Comments: A commenter noted that some students would have 

difficulty joining in a class action for various reasons, 
603

and would lack the resources to pursue an individual suit, 

but that recently consumers have had success by 

participating in aggregate litigation. The commenter 

feared that the NPRM by barring class action waivers would 

not have barred the institution from attempting to force an 

individual student to pursue litigation alone and not as 

part of a combined suit. 

Discussion: The regulation as proposed would bar an 

institution from relying on a mandatory predispute 

arbitration agreement by “dismissal, deferral, or stay of 

any aspect of a judicial action filed by the student.” 

§685.300(f)(2)(i). We consider that language to include 

the action described by the commenter, such as actions to 

challenge the student’s joinder in a single suit under Fed. 

R. Civ. Proc. 20 or a similar rule by which individual 

litigants may consolidate their actions. We clarify that 

in this final regulation. An institution remains free to 

seek relief on grounds other than that the individual is 

barred from joinder in an action by reason of the terms of 

the arbitration agreement. 

Changes: Section 685.300(f)(2)(i) is revised to include 

opposing joinder in a single action.

Internal Dispute Processes
604

Comments: One commenter expressed strong approval for 

§ 685.300(d), which would ban schools from requiring 

students to use the school’s internal complaint process 

before seeking remedies from accrediting agencies or 

government agencies. However, a few commenters strongly 

believed that students should exhaust internal grievance 

procedures before seeking relief externally. These

commenters noted that internal grievance procedures offer 

students adequate opportunities to seek relief. A few of 

these commenters touted the transparency and collaboration 

between students and institutions that results from 

engaging in these proceedings. 

Discussion: The regulations do not discourage the use and 

promotion of internal grievance procedures, and we 

encourage schools to adopt those procedures in order to 

remedy grievances before they become claims that lead to 

litigation or arbitration. The regulations also do not bar 

the institution from addressing the grievance as fully as 

it may wish immediately, whether or not the student chooses 

to raise the complaint to authorities. The institution may 

succeed in resolving the matter. However, if the student 

believes that the grievance is significant enough to 

warrant the attention of law enforcement officials or 

bodies empowered to evaluate academic matters, we believe 
605

that the benefit of bringing that complaint to their 

attention outweighs the benefits of attempting to compel 

the student to delay. The regulations do not impose any 

duty on an authority or accreditor to take any particular 

action, and they may choose to defer or delay consideration 

of the complaint until completion of the institutional 

process. However, the regulations would help those 

authorities better monitor institutional performance by 

making timely notice of complaints more likely. 

Changes: None.

Comments: One commenter suggested that proposed 

§ 685.300(d) conflicts with State law that requires that 

students exhaust internal dispute resolution procedures 

prior to seeking other relief. 

Discussion: State law may require a consumer to make a 

written demand on a merchant before filing suit, and the 

regulations do not supersede such a law. Some State laws 

or case law may also require a student to exhaust a 

school’s administrative appeal process before filing suit 

on a grievance.94 Section 685.300(d) addresses not the 

filing of a lawsuit, but rather a very different matter: 

seeking redress from the State agency with authority to 

address the complaint, or the accreditor for the school. 

 

94 See, e.g., Susan M. v. New York Law Sch., 76 N.Y.2d 241, 556 N.E.2d 1104 (1990).
606

If those authorities decline to intervene, the student is 

left in effect with the need to pursue any internal 

grievance process. The regulations in no way require those 

authorities to exercise their independent judgment. The 

regulations simply bar the school from attempting to block 

the student from seeking redress from those authorities. 

The regulations leave the school free to respond to a 

student’s lawsuit by contending that applicable law 

precludes judicial review of the claim or requires the 

litigant to first exhaust available internal procedures. 

Changes: None.

Forbearance (Sections 685.205(b)(6) and 682.211)

Comments: Several commenters expressed support for the 

Department’s proposal to grant an administrative 

forbearance to a Direct Loan borrower who applies for 

relief under the borrower defense provisions. Commenters 

were also supportive of the proposal to grant FFEL 

borrowers the same type of administrative forbearance that 

Direct Loan borrowers would receive.

Multiple comments supported the Department’s proposed 

use of forbearance (along with information about how to 

decline forbearance and providing information about incomedriven repayment plans). One commenter, however, 

recommended that the Department require borrowers to 
607

request forbearance instead of expecting borrowers to 

decline forbearance (opting-in rather than opting-out). 

Commenters also expressed the view that forbearance should 

apply to all loan types. 

Another commenter suggested that the use of 

administrative forbearance or the suspension of collection 

activity would lead to frivolous claims intended to delay 

repayment.

A group of commenters recommended that forbearance for 

a borrower who files a borrower defense claim be granted in 

yearly increments, or for some other explicit time frame 

designated by the Department, during which the Department 

will make a determination of eligibility for a borrower 

defense claim. These commenters noted that servicing 

systems generally require periods of forbearance to have 

explicit begin and end dates. The commenters believed that 

the proposed change would resolve the servicing requirement 

and permit the Department to designate an explicit time 

frame for servicers (such as one to three years) during 

which the Department would make a determination of 

eligibility for relief under a borrower defense claim. 

Under the commenters’ proposal, upon receiving the 

notification of the Department’s determination of 

eligibility for relief under borrower defenses, FFEL Loan 
608

servicers would either end the forbearance and resume 

servicing or maintain the forbearance until the borrower’s 

loans are consolidated into a Direct Consolidation loan. 

A group of commenters recommended that, if the 

Department plans to begin the process for prequalification 

or consolidation before the effective date of the final 

regulations, the Department consider permitting early 

implementation of the new mandatory administrative 

forbearance under § 682.211(i)(7). The commenters noted 

that without the new authority to grant mandatory 

administrative forbearance, discretionary forbearance can 

be used to suspend servicing and collection. However, 

these commenters pointed out that discretionary forbearance 

requires a borrower’s request and agreement to the terms of 

the forbearance. A discretionary forbearance may also be 

subject to a borrower’s cumulative maximum forbearance 

limit. If a borrower has reached his or her maximum 

forbearance limit, the loan holder would have no other 

remedy but to provide a borrower relief during the review 

period. The commenters believed that early implementation 

of § 682.211(i)(7) would be more efficient and provide a 

necessary benefit for borrowers that have reached their 

cumulative maximum forbearance limit while the Department 

makes a discharge eligibility determination.
609

One commenter noted that, under the proposed 

regulation, a borrower who files a defense to repayment 

claim will experience immediate relief due to forbearance 

or suspension of collection. However, any interest that is 

not paid during forbearance will be capitalized. This 

commenter suggested that a borrower should not be 

discouraged from mounting a defense to repayment that could 

involve extended investigation by having accrued interest 

capitalized if the claim is rejected. The commenter 

recommended that the Department set a limit on the interest 

that can be capitalized or limit the length of time for 

which accrued interest can be capitalized.

A group of commenters recommended a conforming change 

to §682.410(b) to address defaulted loans held by a 

guaranty agency. In such cases, a guaranty agency is the 

holder of a loan for which the Department is making a 

determination of eligibility, not a lender. Under the 

conforming change, when the guarantor is the holder of a 

loan, the Department will notify the guarantor to suspend 

collection efforts, comparably to when a lender is notified 

by the Department under §682.211(i)(7) of a borrower 

defense claim. Upon receiving notification of the 

Department’s determination, a guarantor would either resume 

collection efforts or maintain the suspension until the 
610

borrower’s loans are consolidated into a Direct 

Consolidation loan.

Discussion: We appreciate the commenters’ support for 

granting forbearance and providing information about 

alternatives and believe it will aid borrowers while the 

Department reviews their applications. Forbearance is 

available to Direct Loan borrowers and administered by the 

loan servicers.

 The Department will allow lenders and loan holders to 

implement § 682.211(i)(7) early, so that they may grant the 

forbearance prior to July 1, 2017. Lenders and loan 

holders will be required to grant such forbearance as of 

July 1, 2017, the effective date of these regulations. 

We disagree that forbearance should be an opt-in 

process, as we believe that the majority of borrowers will 

want to receive the forbearance, making an opt-out process 

both more advantageous to borrowers and more efficient. 

We also disagree that providing forbearance and 

suspending collection activities will lead to substantial 

numbers of frivolous claims. Borrowers experiencing 

difficulty with their monthly loan obligations may avail 

themselves of income-driven repayment plans, loan 

deferment, and voluntary forbearance upon request. 

Additionally, because applicants for forbearance are 
611

required to sign a certification statement that the 

information contained on their application is true and that 

false statements are subject to penalties of perjury, we do 

not expect a sizeable increase in fraudulent claims.

We disagree with the recommendation that the 

Department set a limit on the amount of accrued interest 

that may be capitalized, or the length of time that 

interest may be allowed to accrue, during the 

administrative forbearance. We have seen no evidence that 

capitalization of interest that accrues during a 

forbearance period while a discharge claim is being 

reviewed discourages borrowers from applying for loan 

discharges. Even in situations when the suspension of 

collection activity may be for an extended period of time--

such as during bankruptcy proceedings--interest that 

accrues during the suspension of collection activity is 

capitalized. We see no justification for limiting 

capitalization of interest during the period in which a 

borrower defenses claim is being evaluated by the 

Department.

We agree with the commenters that it is preferable to 

have a set time period for mandatory forbearances granted 

during the period that the Department is reviewing a 

borrower defense claim. In addition to resolving the 
612

systems issues raised by the commenters, it would help 

borrowers to have precise begin and end dates for the 

forbearance. Granting these forbearances in yearly 

increments, with the option to end the forbearance earlier 

if the borrower does not qualify, would be consistent with 

most of the other mandatory forbearances in the FFEL 

Program, which are granted in yearly increments, or a 

lesser period equal to the actual period of time for which 

the borrower is eligible for the forbearance. In most 

cases, we do not believe that the full year for the 

forbearance will be required. 

We also agree to make the conforming changes that 

would address defaulted loans held by a guaranty agency.

Changes: We have modified § 682.211(i)(7) to specify that 

the administrative forbearance is granted in yearly 

increments, until the loan is consolidated or the 

Department notifies the loan holder to discontinue the 

forbearance.

We have added a new § 682.410(b)(6)(viii), requiring a 

guaranty agency to suspend collection activities on a FFEL 

Loan held by the guaranty agency for borrowers seeking 

relief under § 682.212(k) upon notification by the 

Department. 
613

Closed School Discharges (Sections 674.33, 682.402 and 

685.214) 

General

Comments: Several commenters supported the proposed closed 

school discharge regulations. These commenters appreciated 

the Department’s proposal to provide more closed school 

discharge information to borrowers and to increase access 

to closed school discharges. One commenter strongly 

supported the proposed changes to the closed school 

discharge regulations that would require greater outreach 

and provision of information to students at schools that 

close, and would automatically discharge the loans of 

students from closed schools who do not re-enroll within 

three years. This commenter believed that too many 

students at schools that close neither receive a closed 

school discharge nor complete their program at another 

school. 

A group of commenters also felt that too few eligible 

borrowers apply for closed school discharges, primarily 

because these borrowers are unaware of their eligibility. 

These commenters believed that amending the regulations to

provide additional closed school discharge information to 

borrowers, to make relief automatic and mandatory for 

borrowers who do not re-enroll within one year, and to 
614

provide for review of guaranty agency denials, would ensure 

that eligible students get relief.

One commenter supported strengthening regulations to 

hold institutions accountable and protect student borrowers 

from fraudulent and predatory conduct. This commenter 

applauded the Department’s efforts on behalf of Latino 

students who are overrepresented in institutions that 

engage in this conduct, while suggesting that more must be 

done to ensure the success of these students.

A group of commenters recommended that the Department 

broaden the scope of the proposed regulation to apply to 

any planned school closures, rather than only school 

closures for which schools submit teach-out plans. These 

commenters noted that very few closing schools arrange for 

teach-outs at other schools, and that many of the recent 

school closures did not involve teach-outs. These 

commenters believed that the proposed regulations would 

fail to ensure that students at closing schools that do not 

submit teach-out plans receive accurate, complete, and 

unbiased information about their rights prior to the school 

closure. 

One commenter recommended that the Department require 

institutions to facilitate culturally responsive outreach 

and counseling to students who opt-in to teach-out plans to 
615

ensure that they understand the benefits and consequences 

of their decision.

Discussion: We thank the commenters for their support. We 

agree that these are important provisions, and note that 

through our intended early implementation of the automatic 

closed school discharge provisions, students affected by 

the recent closure of Corinthian will be able to benefit 

from a more streamlined, automatic process for relief 

sooner. However, we do not believe that it is necessary to 

broaden the scope of the regulations to apply to “any 

planned school closures” because the current regulations 

already cover all planned school closures. Current 34 CFR 

668.14(a)(31) requires a school to submit a teach-out plan 

under several conditions, including a school intending to 

close a location that “provides at least 100 percent of at 

least one program” or if the school “otherwise intends to 

cease operations.” 34 CFR 668.14(a)(31)(iv) and (v). 

Therefore, the provision of the teach-out plan triggers the 

provision of the closed school disclosures and application 

form.

Although we agree that schools should provide 

culturally responsive outreach and counseling to students 

who opt-in to teach-out plans, we believe that it would be 

difficult to establish standards for such outreach and 
616

counseling or to define “culturally responsive” through 

regulation. However, we expect institutions to be 

cognizant of the needs of their student population, and to 

provide appropriate outreach and counseling for their 

students. At a future date, the Department may consider 

providing resources, guidance, or technical assistance to 

institutions to facilitate a culturally responsive 

dissemination of information.

Changes: None.

Availability of Disclosures

Comments: Many commenters supported the Department’s 

proposed regulations that increase disclosure requirements 

for schools that are closing. These commenters shared the 

Department’s concern that many borrowers are unaware of 

their eligibility for a closed school discharge because of 

insufficient outreach and information. These commenters 

noted that, in some instances, closing schools inform 

borrowers of the option to complete their program through a 

teach-out, but either fail to advise them of the option for 

a closed school discharge, or advise them of the option in 

a way that discourages them from pursuing a discharge. 

According to these commenters, students often receive a 

closed school loan discharge application from the 

Department after deciding whether to enroll in teach-out 
617

programs. The commenters believe that students must 

receive clear, accurate, and complete information much 

earlier in the process when they are making major 

decisions. The commenters speculated that students who 

have enrolled in, but have not completed, a teach-out 

program may not realize they are still eligible for a 

closed school discharge, and may feel committed to pursuing 

the teach-out even though it is not in their best interest 

to do so. 

A group of commenters urged the Department to clarify 

that closed school discharges may be available to eligible 

students who have re-enrolled in another institution. 

These commenters argued that relief should not be limited 

to students who do not re-enroll in a title IV-eligible 

institution. Commenters stated that the HEA and current 

regulations provide that a borrower is eligible for closed 

school discharge if the borrower did not complete a program 

due to school closure and did not subsequently complete the 

program through a teach-out or credit transfer. Students 

who participate in a teach-out or who transfer credits but 

do not complete their program remain eligible for a closed 

school discharge, as do students who re-enroll in a 

different institution but do not transfer credits or 

transfer some credits to an entirely different program. 
618

According to these commenters, this clarification is 

particularly important because students attending closing 

institutions have reported frequent instances of having 

been misled by closing institutions and recruiters from 

proprietary schools. 

In these commenters’ view, the low application rate 

for closed school discharges is due to a lack of 

understandable and accessible information about closed 

school discharges. 

A group of commenters noted that in some cases it may 

be unclear when loan discharge information should be 

provided because the 60-day forbearance or suspension of 

collection activity period may expire while the borrower is 

still within the six-month grace period before collection 

begins. Therefore collection activities will not be 

resumed by the guaranty agency or lender under 

§682.402(d)(6)(ii)(H), or by the Department under 

§685.214(f)(4). These commenters urged the Department to 

revise the regulations to clarify that the closed school 

discharge information must be provided either when 

collection first begins (when a borrower enters repayment 

after the grace period and will be more inclined to 

exercise their discharge rights) or when collection is 

resumed, whichever is applicable. 
619

A group of commenters supported the Department’s 

proposal to require closing schools to provide discharge 

information to students. When schools announce that they 

are closing, they currently have no obligation to inform 

their students about their loan discharge rights and 

options. According to these commenters, students feel 

compelled to continue their educations in ways that may not 

be in their best interests because they lack sufficient 

information. For example, commenters contended that when a 

teach-out is offered, students often believe they are 

obligated to participate, even though they have a right to 

opt for a closed school discharge instead. Alternatively, 

although instruction may be seriously deteriorating, 

students may feel compelled to complete the program at the 

closing school, unaware that they have a right to withdraw 

within 120 days of the closure and receive a closed school

discharge. These commenters also suggested that students 

may feel compelled to accept another school’s offer to 

accept their credits, without understanding that by 

accepting the offer they may become ineligible for a closed 

school discharge. 

Because of the issues discussed above, these 

commenters supported the Department’s proposal to require 

schools to provide borrowers with a notice about closed 
620

school discharge rights when they submit a teach-out plan 

after the Department initiates an action to terminate title 

IV eligibility or other specified events. 

A group of commenters recommended that we revise the 

regulations to require that whenever a school notifies the 

Department of its intent to close, it must provide a 

written notice to students about the expected date of 

closure and their closed school discharge rights, including 

their right to a discharge if they withdraw within 120 days 

prior to closure. 

One commenter stated that the proposed regulations

would require the dissemination of a closed school 

discharge application to students who are not and will not

be eligible for discharge. The commenter recommended that 

the Department revise proposed §668.14(b)(32) so that an

institution would not be required to disseminate a closed

school discharge application if the institution's teachout plan provides that the school or location will close

only after all students have graduated or withdrawn. 

According to this commenter, if a school that plans to 

close remains open until all students have graduated or

withdrawn, few if any students would be eligible for a

loan discharge.

The commenter believed that the proposed regulations
621

create incentives to withdraw that are contrary to public

policy favoring program completion. The commenter 

recommended that proposed §668.14(b)(32) be revised to

provide that when an institution arranges a teach-out

opportunity that would permit a student to complete his or

her program, the institution would only be required to

provide the discharge application and accompanying

disclosure if the student declines the teach-out

opportunity. The commenter suggested that the Department 

require that institutions inform students of their

opportunity to discharge their loans before the school

closes and before the student makes any decision as to

whether to participate in the teach-out. The commenter 

believed that it is unrealistic to assume that students

will not take advantage of the opportunity to discharge

their loan debt, particularly when students can simply

enroll in another institution and complete their program 

after receiving a discharge. 

Another commenter disagreed with the inclusion of 

voluntary school closures in § 668.14(b)(31)(iv) where the 

institution intends to close a location that provides 100 

percent of at least one program. The commenter stated that 

when a school decides that a particular location is no 

longer desirable or viable, and makes plans to responsibly 
622

teach-out the enrolled students itself, the school should 

not be treated like a school which has lost State approval, 

accreditation, or Federal eligibility. The commenter 

believed that the proposed regulation would discourage 

schools from acting responsibly and undertaking the 

considerable expense to voluntarily teach-out a location 

because after receiving a discharge application, students 

would be more likely to withdraw and seek a discharge 

rather than finishing their education. This commenter 

recommended limiting the requirement that closing schools 

provide a discharge application and a written disclosure to

situations described in § 668.14(b)(31)(ii) and (iii), 

where there is some likelihood that the school’s behavior 

may have disadvantaged students.

Some commenters urged the Department to locate the 

provision requiring closing schools to provide a discharge

application and written disclosures in § 668.26, rather 

than § 668.14, the section of the regulations pertaining to 

the PPA. These commenters asserted that placing this 

provision in the PPA could lead to potential False Claims 

Act liability centered around disputes of fact that cannot 

be resolved absent undergoing discovery in a court 

proceeding. According to these commenters, schools would 

face the risk of costly litigation to address issues of 
623

fact regarding whether students received proper notice, 

even where schools have documented the proper provision of 

notice. 

One commenter recommended a technical change for nondefaulted loans, by moving the proposed requirement to 

provide a second application from guarantor 

responsibilities in § 682.402(d)(6)(ii)(J) to lender 

responsibilities in § 682.402(d)(7)(ii). 

Discussion: We appreciate the support of the commenters 

who agreed with our proposed changes to the disclosure 

requirements. The commenters are correct that a borrower 

may receive a closed school discharge even if the borrower 

re-enrolls at another institution of higher education. 

Under current §685.214(c)(1)(C), an otherwise eligible 

borrower who re-enrolled at another institution may qualify 

for a closed school discharge if the borrower did not 

complete the program of study at another school, or by 

transferring credits earned at the closed school at another 

school. 

With regard to the recommendation that the Department

revise the regulations to specify that closed school 

discharge information be provided either when collection 

first begins, or when collection resumes, whichever is 

applicable, we do not believe that a lender in the FFEL 
624

program would find the use of the term “resume” confusing. 

We note that current regulations in § 682.402(d)(7)(i) use 

the term “resume.” We are not aware of any cases in which 

a FFEL lender failed to meet the requirements in the 

current regulations to “resume” collections activities 

because the lender had not yet begun collection activities.

We disagree with the recommendation that a school that 

plans to keep a closing location open until all of the 

students have either graduated or withdrawn should be 

exempted from the requirement to provide its students with 

the closed school disclosures or the application. Because

all students at such a school or location are entitled to 

the option of a closed school discharge, we believe that 

all such borrowers should receive this information, so that 

they have full knowledge of their options. While many of 

the students at such a school location may plan to take 

advantage of the teach-out, not all necessarily will. 

We disagree with the recommendation that the closed 

school discharge form only be provided to borrowers who 

decline the teach-out. As other commenters pointed out, 

students may accept a teach-out not realizing that they 

have other options. The disclosure information and the 

information on the discharge application form will apprise 

borrowers of their options, and help the borrower to make 
625

an informed decision based on full knowledge of the 

borrower’s options.

We disagree with the comment suggesting that the 

proposed regulations create an incentive to withdraw that 

is contrary to public policy. Although public policy 

generally favors higher rates of program completion, it is 

not always in the individual borrower’s best interest to 

continue a program through graduation. In a closed school 

situation, the value of the degree the borrower obtains may 

be degraded, depending on the reasons for the school 

closure. Borrowers at closing schools may incur 

unmanageable amounts of debt in exchange for relatively 

low-value degrees. We do not believe that it is good 

public policy to require these borrowers to repay that debt 

if they cannot or choose not to complete the program and 

are eligible for a closed school discharge.

Similarly, we disagree with the recommendation that 

voluntary school closures be exempted from the 

requirements. As noted earlier, the teach-out requirements 

in 34 CFR 668.14(a)(31) apply whether the school is forced 

to close or voluntarily closes. We see no basis for 

exempting schools that voluntarily close from the closed 

school discharge requirements promulgated in these final 

regulations.
626

With regard to schools being discouraged from acting 

responsibly and voluntarily providing teach-outs, as noted 

above, closing schools are required to provide teach-outs. 

A school that declines to provide teach-outs as a result of 

these final regulations would be in violation of the 

requirements specified in the school’s PPA.

We do not agree with the recommendation that a school 

be required to provide disclosures whenever a school 

notifies the Department of its intent to close. The 

regulations as proposed require a school to provide 

disclosures as result of any of the events in section 

668.14(b)(31)(ii)-(v), which includes “an institution 

otherwise intends to cease operations.” We disagree with 

the recommendation that the provision in §668.14 be moved 

to §668.26. We believe the provision is more appropriately 

included in §668.14, which enumerates the requirements of a 

school’s PPA. We do not agree that schools are at greater 

risk of costly litigation if the provision is located in 

§668.14 than they would be if the provision were located in 

§668.26. To the extent that a closed school would face 

potential liability under the False Claims Act for claims 

for Federal funds made after the school failed to comply 

with this requirement, we see little difference in the risk 
627

based on where the regulatory requirement is located in the 

Code of Federal Regulations.

We agree with the recommended technical change that, 

for non-defaulted FFEL Program loans, the regulations 

should include the requirement to provide a borrower a 

second closed school application under lender 

responsibilities in § 682.402(d)(7).

Changes: We have revised § 682.402(d)(7)(ii) to require a 

lender to provide a borrower another closed school 

discharge application upon resuming collection.

Content of Disclosures

Comments: Under the proposed regulations, institutions are 

responsible for providing written disclosures to students 

to inform them of the benefits and consequences of a closed 

school discharge. A group of commenters made 

recommendations for the content of the written materials 

that schools would be required to provide to students under 

proposed §668.14(b)(32). Specifically, these commenters 

suggested that the written disclosure describing the 

benefits and consequences of a closed school discharge as 

an alternative to program completion through a teach-out 

should encourage program completion, because earning a 

degree can lead to employment. These commenters encouraged 

the Department to work with the postsecondary education 
628

community to draft discharge applications and disclosures 

that encourage program completion.

This group of commenters also recommended 

modifications to the closed school discharge regulations, 

to proscribe the content of the disclosures. These 

commenters believed that if the Department provided or 

approved the written disclosures, it would help ensure that 

borrowers are able to make better-informed choices over how 

they proceed with their higher education.

These commenters believed that the Department should 

not rely on failing schools to ensure that students receive 

this information prior to closure. According to these 

commenters, because these schools can be liable for the 

closed school discharges, closing schools often provide 

inaccurate closed school discharge information or provide 

information in a format that students are unlikely to read 

or notice. 

To prevent misleading disclosures, which would defeat 

the purpose of the proposed regulation, these commenters 

recommend that the Department amend proposed §668.14(b)(32) 

to require that the written disclosure the school gives to 

its students be in a form provided or approved by the 

Secretary. 
629

This group of commenters recommended that the closed 

school disclosures also include the expected closure date. 

These commenters asserted that when schools announce that 

they are closing, but plan on teaching out all the existing 

programs themselves, they currently have no obligation to 

inform their students about the expected date of closure. 

These commenters suggest that, as a result, students who 

experience a deterioration in the level of instruction are 

hesitant to withdraw and in many cases do not know they 

have the right to withdraw. These commenters contend that 

even students who are aware of their right to withdraw do 

not know when they can withdraw while remaining eligible 

for a closed school discharge. 

To provide borrowers with more choice over how they 

proceed with their higher education, these commenters 

recommended that, upon notifying the Department of its 

intent to close and teach-out all existing students, the 

regulations require a school to provide a written notice to 

students about the expected date of closure and their right 

to a discharge if they withdraw within 120 days prior to 

closure.

One commenter contended that schools required to post 

letters of credit before closing have a strong financial 

incentive to minimize the number of students who choose to 
630

take a closed school discharge, regardless of what is in 

each student’s best interest. In addition, this commenter 

suggested that unscrupulous schools often aggressively 

recruit students from closed schools. This commenter 

recommended that, to ensure students at closing schools 

receive clear, accurate, and complete information about 

their options, the Department should require schools to use 

standard language and/or a standard fact sheet approved by 

the Department in their disclosures.

This group of commenters recommended that the 

disclosures clearly explain the student’s closed school 

discharge rights. The commenters asserted that closing 

schools often obfuscate a borrower’s discharge rights and 

options. In the commenters’ view, the Department’s 

proposal would only encourage continued obfuscation. Under 

the proposed regulations, a school must provide a 

disclosure that describes the benefits and consequences of 

a closed school discharge as an alternative to a teach-out 

agreement. The commenters believe that a school could 

comply with this proposed requirement by providing a long, 

complicated disclosure about benefits and consequences, 

while burying a borrower’s right to obtain a closed school 

discharge instead of participating in a teach-out. To 

prevent obfuscation and confusion the commenters 
631

recommended that the Department revise proposed 

§668.14(b)(32) to require a clear and conspicuous written 

disclosure informing students of their right to seek a 

closed school discharge as an alternative to a teach-out. 

Discussion: We do not have plans to develop written closed 

school discharge disclosure materials for schools to use, 

although we may develop such materials in the future if 

warranted. In addition, we may provide technical 

assistance to schools required to develop school discharge 

disclosure materials. We note that the Department already 

provides information on closed school discharges on our 

studentaid.gov Web site. 

The current closed school discharge form provided to 

borrowers, Loan Discharge Application: School Closure, is a 

Department form. The Department has developed this form in 

consultation with the student financial aid community. The 

form is due to expire on August 31, 2017. In the coming 

months, we will revise the form to reflect the changes in 

the closed school discharge regulations. The revised 

version of the form will go through two public comment 

periods before it is implemented.

We disagree with the recommendation that we require 

schools to provide students with the expected date of a 

school closure. The expected date of closure may not be 
632

the actual closure date, and the school may actually close 

earlier or later than that date. Providing a date that may 

or not be accurate could be confusing to borrowers. It may 

also discourage borrowers from continuing in their 

education programs when, in some cases, it may be 

beneficial for them to complete their programs at that 

institution.

Changes: None.

Procedures for Providing Disclosures

Comments: A group of commenters expressed support for the 

Department’s closed school discharge proposal, but strongly 

recommended several modifications to further the 

Department’s goal of increasing the numbers of eligible 

students who receive closed school discharges. Under 

current § 685.214(f)(2), after the Department confirms the 

date of a school closure, the Department mails a closed 

school discharge application to borrowers affected by the 

closure. The Department suspends collection efforts on 

applicable loans for 60 days. If the borrower does not 

submit the closed school discharge application within that 

timeframe, the Department resumes collection on the loan, 

and grants forbearance for the 60-day period as provided 

for under §685.214(f)(4). These commenters noted that, 

currently, after a school closes, the Department or 
633

guaranty agency is required to provide discharge 

applications to borrowers who appear to have been enrolled 

at the time of the school’s closure or to have withdrawn 

not more the 120 days prior to closure. The Department or 

guaranty agency often sends this information one to six 

months after the school has closed. Then, the Department 

or guaranty agency must refrain from collecting on the 

loans obtained to attend the closed school for 60 days. If 

the borrower does not apply for a closed school discharge 

during that time, the Department or guaranty agency is 

required to resume collection on their loans if the loans 

are not still within the six-month grace period that begins 

when a borrower ceases to be enrolled at an eligible school 

on at least a half-time basis, as provided for under 

§§685.207(b)(2)(i) and 685.207(c)(2)(i). 

 Some commenters believed that many borrowers do not 

respond to the notice regarding closed school discharge 

because it is typically provided within the six-month grace 

period. At that time the borrower is focused on his or her 

school closure rather than debt burden. These commenters 

contend that providing another closed school discharge 

application when the loan is actually being collected, and 

the borrower faces the burden of loan payments, is likely 

to increase the borrower response rate.
634

Another group of commenters proposed that after one 

year, the Department or guaranty agency should provide a 

closed school discharge application and information to 

borrowers who have re-enrolled in a title IV institution, 

noting that borrowers who have re-enrolled may still 

qualify for a closed school discharge. 

These commenters also recommended requiring that 

closed school discharge information be provided with the 

borrower’s monthly payment statement upon beginning or 

resuming collection, or the appropriate entity if the 

borrower is in default. These commenters contended that 

many closed school borrowers receive fraudulent 

solicitations containing inaccurate information. These 

commenters asserted that many borrowers are confused about 

which notifications are legitimate and which are not, and 

are most likely to trust and pay attention to the monthly 

payment statement from their loan servicer. 

This group of commenters recommended that the 

Department take measures to ensure that disclosures are 

provided on a timely basis. In the commenters’ view, the 

Department’s proposal does not address a situation in which 

the school fails to provide the required information. The 

commenters noted that most schools close due to financial 

problems, and that by the time they submit teach-out plans 
635

(if they do submit such plans), most schools have lost 

significant personnel and their operations are in disarray. 

As a result, commenters suggested that some schools are 

likely to fail to provide the required notices. The 

commenters recommended that the Department clarify that, if 

a school fails to provide the notice required under 

proposed § 668.14(b)(32) within five days after submission 

of a teach-out plan, the Secretary would be required to 

provide timely disclosures before any student may take 

steps toward participation in a teach-out plan that may 

impact his or her discharge eligibility. 

Similarly to teach-outs, a group of commenters 

recommended that whenever a school notifies the Department 

of its intent to close, the Department provide a written 

notice to students about the expected date of closure and 

their closed school discharge rights, including their right 

to a discharge if they withdraw within 120 days prior to 

closure, if the school fails to do so within five days of 

informing the Department of closure.

Discussion: Although we agree that providing the 

disclosures with the monthly payment statement would be an 

effective way of providing the disclosures to students, 

there are a variety of methods in which a loan holder can 

provide such disclosures to borrowers, and we do not 
636

believe that the Department should specify which method to 

use through regulation. However, nothing in the 

regulations prevents a loan holder from providing the 

closed school discharge disclosures in this manner.

We have concerns with the recommendation that a second 

closed school discharge application be provided to the 

borrower when payment resumes, either after the six-month 

grace period has elapsed or after the end of the 60-day 

forbearance period. We also have concerns about the 

recommendation that a second closed school discharge 

application be provided after one year if the borrower has 

re-enrolled. Borrowers are often overwhelmed with 

information that is provided to them related to their 

student loans, either by the Department or other sources. 

Providing multiple copies of the discharge form to 

borrowers at different points in time would likely add to 

the information overload that student loan borrowers 

currently experience. We also point out that the 

Department’s current closed school discharge form is easily 

available on the Department’s studentaid.gov website.

We disagree with the recommendation that the 

Department provide the required disclosures if the school 

does not provide them within five days of submission of the 

teach-out plan. We do not believe that the commenters’ 
637

suggestion is feasible or practical. The Department 

expects regulated parties to comply with regulatory 

requirements, and typically reviews for such compliance in 

program reviews or audits. It would be difficult for the 

Department to determine whether the school has provided the 

disclosures within five days of submission of the teach-out 

plan without such a review or audit. 

Changes: None.

Discharge Without An Application

Comments: The Department proposed revisions to

§ 674.33(g)(3), § 682.402(d)(8), and § 685.214(c)(2) that

would permit the Department to discharge loans of 

borrowers who do not re-enroll in a title IV-eligible 

institution within three years of their school’s closure. 

Several commenters supported the Department’s proposal to 

grant a closed school discharge without a borrower 

application, based on information in its possession 

indicating that the borrower did not subsequently re-enroll 

in any title IV-eligible institution within three years 

after the date the school closed.

One commenter applauded this proposal, noting that 47 

percent of all Direct Loan borrowers at schools that closed 

from 2008-2011 did not receive a closed school discharge or 

title IV, HEA aid to enroll elsewhere in the three years 
638

following the school’s closure. The commenter asserted 

that students were left with debt but no degree, putting 

them at great risk of default. The commenter asserted that 

research has consistently shown that students who do not 

complete their programs are among the most likely to 

default on their loans, leaving them worse off than when 

they enrolled. The commenter recommended that the final 

preamble clearly state that after three years, an eligible 

borrower’s loans shall be discharged without an application 

and any amounts paid shall be refunded. This commenter 

believed that the preamble to the NPRM suggested discharge 

of loans without an application for students who have not 

re-enrolled within three years is optional, not required. 

One of the commenters supportive of the proposal noted 

that the proposed regulations would not discharge the loans 

of students who enroll in a teach-out program but do not 

complete it and are not still enrolled within three years 

of a school’s closure. The commenter noted that these 

borrowers may be unaware of their eligibility for a closed 

school discharge. The commenter recommended that the 

Department use available data on program completion among 

students receiving title IV, HEA aid to automatically 

discharge the loans of students who did not complete and 
639

are not enrolled in a comparable program within three years 

of their school closing. 

A commenter recommended that the final regulation 

provide for automatic discharges of the loans, to the 

extent that data are available to identify them, for 

borrowers who: 

 Transfer credits from a closed school and enroll 

in, but do not complete, a comparable program, 

and 

 Transfer credits to enroll in a completely 

different program. 

Several commenters did not support the automatic 

discharge provision of the proposed rule. One group of 

commenters contended that under the proposed regulations, 

the Department would discharge the loan absent any evidence 

that the failure of the student to re-enroll in another 

school was a result of the closed school or that the 

student did not receive any value for the education 

received from the closed school. This group of commenters 

believed the proposed rule would not serve the public 

interest, as it would minimize borrowers’ incentives to 

continue educational pursuits. These commenters 

recommended that the automatic discharge provision be 

deleted from the final rule. These commenters further 
640

recommended that if the automatic discharge provision is 

not removed, that schools should not be held liable for 

loans that have been automatically discharged due to a 

student’s failure to re-enroll in another school.

Another commenter believed that it would not be 

appropriate for the Department to grant a closed school 

discharge without a borrower application. In this 

commenter’s view, a loan servicer may easily provide a 

borrower with the information necessary to apply for a 

closed school discharge. This commenter noted that in many 

instances a student may have completed his or her education 

under a teach-out agreement without necessarily receiving 

any additional title IV, HEA aid, and NSLDS may not 

indicate that the student enrolled in another institution.

A group of commenters that supported the Department’s 

proposal to allow loan holders to grant closed school 

discharges without applications to borrowers who do not reenroll in a new institution within three years of their 

schools’ closures noted that, although the disclosures 

discussed earlier in this section will increase the number 

of closed school discharge applications submitted by 

eligible borrowers, many borrowers will still not likely 

respond to the disclosures. These commenters noted that 

borrowers in closed school situations, even students who 
641

receive information about their rights from State agencies 

and the Department, are often confused by contradictory 

information from their schools, as well as aggressive 

solicitations from other proprietary schools and fraudulent 

student loan debt relief companies. 

The commenters also urged the Department to make 

additional revisions in the final regulations. They 

recommended that the Department make automatic discharges 

mandatory for borrowers who have not re-enrolled in a title 

IV-eligible institution within three years of their 

schools’ closures. These commenters believed that 

discharges under the proposed rule would be entirely 

discretionary, noting that under the proposed rule, loan 

holders “may” grant discharges in certain circumstances. 

The commenters expressed concern that, given that the 

Department and guaranty agencies have conflicting duties 

and motivations to collect on loans, the discretionary 

language could make this regulation meaningless. These 

commenters also noted that the proposed regulations lack a 

mechanism for allowing an organization, borrower, or 

attorney general to demand that the Department or guaranty 

agency implement the automatic discharge provision. These 

commenters recommended that the Department make automatic 

discharge mandatory, noting that the Department proposed to 
642

make this provision mandatory during the negotiated 

rulemaking sessions.

This group of commenters also recommended shortening 

the re-enrollment period from three years to one year. 

These commenters stated that the vast majority of closed 

school borrowers who are able to transfer their credits do

so within several weeks to several months after a school 

closes. They noted that other schools often market their 

programs to affected students immediately following a 

school closure. They also claimed that that other schools, 

including community colleges, often reach out to students 

within the first few weeks after a school closure, and that 

students actively search for a new school to accept their 

closed school credits. 

Commenters contended that because very few students 

transfer their closed school credits after one year, all 

closed school borrowers who do not re-enroll in a title IV 

institution within one year should be granted a closed 

school discharge without any application. These commenters 

believed that it would be unfair to require these borrowers 

to wait three years for a closed school discharge, during 

which time they will make payments and may face burdensome 

involuntary debt collection tactics if they default.
643

This group of commenters anticipated that the vast 

majority of eligible borrowers would likely want a closed 

school discharge. However, these commenters asserted that 

some borrowers may not want a discharge. These commenters 

propose addressing this potential issue through an opt-out 

procedure, in which students receive notice of the 

consequences of the discharge and are afforded the 

opportunity to opt-out of a discharge within 60 days of 

receiving the notice. 

One commenter raised concerns that the proposal to 

discharge loans without an application from a borrower 

would deny institutions due process. This commenter 

proposed revising the regulations to clarify whether there

is a presumption that the borrower did not re-enroll

absent evidence to the contrary, or whether the 

Department must have in its possession evidence that the 

borrower did not re-enroll in another institution. The

commenter also recommended that the regulation be

revised to afford the closed school with notice and the

opportunity to contest the student’s eligibility for a

loan discharge (e.g., whether the borrower was enrolled

within 120 days of the closure or whether the borrower

was enrolled at another institution or participated in a

teach-out).
644

In the commenter’s view, the procedures the

Department follows to discharge a student loan and

make a determination regarding amounts owed by an 

institution constitute informal agency adjudication, and 

even in the context of informal adjudication, an agency 

must provide fundamental due process. The commenter 

contended that due process requires that a participant 

in an agency adjudication must receive adequate notice 

and “the opportunity to be heard at a meaningful time 

and in a meaningful manner.” Though the Department has 

flexibility in the way it provides such due process, the 

Department may not deny closed institutions the 

opportunity to communicate with the Department prior to a

discharge and recovery action. The commenter also 

expressed the view that, as a matter of public policy, it

would benefit the Department to involve closed schools 

before discharging any loans in order to ensure that 

discharges are only granted to eligible borrowers.

Another group of commenters recommended eliminating 

the automatic discharge provision. These commenters 

expressed concern with the concept of an automatic closed 

school discharge, especially if the Department intends to 

rely on the school’s NSLDS enrollment reporting process 

for information about student re-enrollment. In the 
645

school enrollment reporting process for NSLDS, schools are 

only required to include title IV recipients. Therefore, 

NSLDS may not identify students who re-enrolled but did 

not receive title IV, HEA aid. As a result, commenters 

suggested that borrowers who received credit from 

attending the closed school for the same or similar 

program of study could be improperly identified as 

eligible to receive a discharge.

Under proposed § 682.402(d)(6)(ii)(K)(3), if the 

Department determines that the borrower meets the 

requirements for a closed school discharge, the guaranty 

agency, within 30 days of being informed that the borrower 

qualifies, will take the actions described under § 

682.402(d)(6) and (7). Section 682.402(d)(6) and (7) 

specifies the responsibilities of a guaranty agency. A 

group of commenters expressed the view that the crossreference to § 682.402(d)(6) is too broad. Theses 

commenters believed that § 682.402(d)(6)(ii)(E) and § 

682.402(d)(6)(H)(1) more specifically describe the 

required action by the guarantor and should replace § 

682.402(d)(6) in the cross-reference. These commenters 

also stated that if the Department determines that the 

borrower is eligible for a discharge, the guaranty agency 
646

will pay the claim and the lender actions in § 

682.402(d)(7)(iv) do not change. 

These commenters also recommended changes to the 

regulations to provide that the guarantor pay the claim if 

the Department determines a borrower is eligible for a 

discharge. This change would not impact lender actions in 

§ 682.402(d)(7)(iv).

These commenters also recommended that, if the 

Department continues using NSLDS and providing an automatic 

discharge after three years, the Department should be 

responsible for monitoring identified borrowers during this 

period, and notifying the applicable guarantor when a 

closed school discharge must be processed. 

Discussion: We agree with the commenters who recommended 

that the Department clarify the final regulations to 

provide that closed school discharges for Perkins, FFEL and 

Direct Loan borrowers who have not re-enrolled in a title 

IV-eligible institution within three years of their 

schools’ closures are not discretionary. We have revised 

§§ 674.33(g)(3), 682.402(d)(8), and 685.214(c)(2) to 

clearly delineate the circumstances under which a closed 

school discharge is discretionary as opposed to required. 

We recognize that some borrowers will qualify for 

closed school discharges, but will not receive an automatic 
647

closed school discharge because they re-enrolled in a title 

IV school within the three-year timeframe. If the borrower 

is not participating in a teach-out, or transferring 

credits from the closed school to a comparable program at 

the new school, the borrower would still be eligible for a 

closed school discharge. We do not agree, however, that 

the Department should automatically grant closed school 

discharges in these situations. A borrower in this type of 

situation still has access to a closed school discharge; 

however, the borrower must apply directly for the 

discharge. The provisions for discharges without an 

application are intended to provide closed school 

discharges to borrowers that the Department can readily 

determine qualify for the discharge, based on information 

in our possession. A borrower who re-enrolled within the 

three-year time period may or may not qualify for a closed 

school discharge, depending on whether the borrower 

transferred credits from the closed school to a comparable 

program. A borrower who re-enrolled, but still qualifies 

for a closed school discharge, would have to provide more 

detailed information to the Department through the closed 

school application process to allow for a determination of 

the borrower’s eligibility for a closed school discharge. 

However, the Department has continued to increase and 
648

improve the quality of data reporting by institutions, 

including beginning the collection of program-level data 

for borrowers through recently implemented Gainful 

Employment regulations and through recent Subsidized 

Stafford Loan reporting requirements. While current data 

limitations make it challenging to definitively identify a 

borrower who has enrolled in a comparable program or who 

has successfully transferred credits, in future years, the 

Department may be able to identify those eligible borrowers 

who did re-enroll, but not in a comparable program. In 

that case, the Department may revisit its ability to 

provide closed school discharges automatically to those 

borrowers, using the discretion available to the Secretary 

and mirroring the three-year provision set forth in these 

regulations. This will help to ensure that as many 

eligible borrowers as possible receive the discharges for 

which they qualify.

We disagree with the commenters who recommended 

eliminating automatic closed school discharges from the 

final regulations. We note that the current regulations 

already provide for a closed school discharge without an 

application, and believe that this is an important benefit 

to borrowers. We also believe that the final regulations 

provide sufficient safeguards to prevent abuse, such as the 
649

three-year period before an automatic closed school 

discharge is granted. Therefore, we also decline to accept 

the recommendation that we reduce the three-year time 

period to one year. 

With regard to the three-year time period, we note 

that the discharge of a loan is a significant benefit to a 

borrower, with potentially significant fiscal impacts. 

Absent a closed school discharge application from a 

borrower, we do not believe that a one-year period of nonenrollment would be sufficient to discharge a borrower’s 

debt. 

We see no basis for exempting schools from liability 

for closed school discharges when the discharge is granted 

without an application.

We do not believe an opt-out notice for the automatic 

discharge without an application is necessary. It is 

unlikely that a sufficient number of borrowers will choose 

not to have their loans discharged to justify the 

administrative burden involved in sending the borrower an 

opt-out notice. We are also concerned that an opt-out 

notice could be confusing, and result in “false positives”—

borrowers inadvertently choosing to opt out of the 

discharge.
650

We acknowledge that the automatic discharge process 

could result in discharges being granted to some borrowers 

who were able to complete their programs but we believe 

this would be a negligible number of borrowers. Even a 

borrower who does not receive title IV, HEA aid to attend 

another school, may still receive an in-school deferment. 

Both receipt of additional title IV, HEA aid and receiving 

an in-school deferment would be reported to NSLDS. Unless 

the borrower is attending in a less-than-half-time status, 

the Department will be able to determine whether a borrower 

has re-enrolled at another title IV eligible institution 

during the three-year period. We believe that the likely 

minimal potential cost of granting discharges to a very 

small number of borrowers who do not qualify is 

counterbalanced by the benefit of granting closed school 

discharges to large numbers of borrowers who qualify for 

them, but do not receive them under our current procedures.

The comment regarding the Department monitoring 

borrowers during the three-year period relates to 

operationalization of the final regulations. The 

Department will develop procedures for determining whether 

borrowers qualify for a closed school discharge without an 

application, and the appropriate method of notifying 

guaranty agencies if the Department makes such a 
651

determination. We note, however, that the final 

regulations in §682.402(d)(8)(iii) give guaranty agencies 

the authority to grant closed school discharges without an 

application based on information in the guaranty agency’s 

possession. 

We disagree with commenters who stated that closed 

school discharge procedures may deny schools of due 

process. The closed school discharge procedures do not 

currently involve the school in the determination process. 

The Department currently pursues recovery of the amounts 

lost through closed school and other discharges under 

section 437(c) of the HEA through the ordinary audit and 

program review process. Thus, in the final audit 

determination or the final program review determination 

issued upon closure of a school or one of its locations, 

the Department asserts a claim for recovery of the amounts 

discharged. The school may challenge that claim in an 

appeal under Subpart L of Part 668, as it can with any 

other audit or program review liability.95 

Changes: We have revised §§ 674.33(g)(3), 682.402(d)(8), 

and 685.214(c)(2) to clearly delineate the circumstances 

 

95 See, e.g., In the Matter of Coll. of Visual Arts, Respondent, Docket No.: 15-05-SP, 2015 WL 6396241, 

at *1 (July 20, 2015); In the Matter of Pennsylvania Sch. of Bus., Respondent, Docket No. 15-04-SA, 

2015 WL 10459890, at *1 (Oct. 27, 2015).
652

under which a closed school discharge is discretionary, as 

opposed to required.

Comments: None.

Discussion: Upon further review, the Department determined 

that the proposed regulations related to automatic closed 

school discharges needed to specify the period of time for 

which borrowers from closed schools would be evaluated to 

determine whether they would qualify for automatic 

discharges. The Department concluded that it would be 

administratively feasible to conduct such an evaluation for 

borrowers at schools that closed on or after November 1, 

2013.

Changes: We have revised §§ 674.33(g)(3)(ii), 

682.402(d)(8)(ii), and 685.214(c)(2)(ii) to specify that 

they apply with respect to schools that closed on or after 

November 1, 2013.

Review of Guaranty Agency Denials

Comments: Some commenters expressed strong support for the 

proposed regulation that would allow borrowers the right to 

appeal to the Department when guaranty agencies deny closed 

school discharges. One commenter noted that the right to 

appeal is paramount to due process. This commenter stated 

that the right to appeal provides qualified borrowers with 
653

a safety net for obtaining debt relief and also provides a 

framework for accountability in guaranty agency decisions.

These commenters noted that the guarantor in this case 

would need to notify the lender to resubmit the closed 

school claim for reimbursement. 

A group of commenters recommended that the Department 

retain current language requiring the guaranty agency to 

state the reasons for its denial. The group of commenters 

supported the Department’s proposal to provide for the 

review of guaranty agency denials of closed school 

discharge applications for FFEL Loans. These commenters 

averred that FFEL borrowers, whose loans are held by 

guaranty agencies, should have the same right to challenge 

an erroneous unpaid refund or closed school discharge 

denial as Direct Loan and FFEL Loan borrowers whose loans 

are held by the Department. The commenters noted that 

current FFEL Loan regulations do not provide borrowers with 

any right to seek review of guaranty agency denials of

closed school discharges. The commenters also noted that, 

even when FFEL borrowers are entitled to administrative 

review, their right to seek further review in court is not 

clear, unlike Direct Loan borrowers. Commenters noted that 

the APA does not provide for judicial review of decisions 

by private, non-governmental entities such as guaranty 
654

agencies, nor is there any explicit right to judicial 

review of guaranty agency decisions in the HEA. 

As a result, commenters said that FFEL borrowers whose 

loans are held by guaranty agencies have no clear way to 

challenge an erroneous closed school discharge decision 

from a guaranty agency. Only Direct Loan and FFEL Loan 

borrowers whose loans are held by the Department may seek 

judicial review of administrative unpaid refund or closed 

school discharge denials. These commenters believe that 

the Department’s proposed rule would address what the 

commenters consider an arbitrary denial of borrower due 

process.

This group of commenters recommended one modification 

to the proposed regulations. Under current 

§682.402(d)(6)(ii)(F), if a guaranty agency denies a closed 

school discharge application, it must notify the borrower 

in writing of its determination and the reasons for the 

determination. Under the proposed regulation, a guaranty 

agency would still be required to notify the borrower of 

its determination, but would not be required to notify the 

borrower of its reasons for the determination. These 

commenters believed that removing this requirement would 

frustrate the purpose of the review process and urged the 

Department not to remove the notification requirement. 
655

Multiple groups of commenters noted that the proposed 

regulations do not provide a time frame during which a 

borrower can request an appeal of a denied closed school 

discharge by the guarantor. These commenters recommended a 

30-day timeframe, which would align with the timeframe 

allowed for an appeal of a false certification discharge 

denial. These commenters also proposed language that would 

allow a borrower to submit a request after the 30-day 

period. 

One group of commenters proposed that the guarantor 

would still submit the appeal to the Department; however, 

collection of the loan would continue during the 

Department’s review. 

Another group of commenters also recommended 

additional language to address situations in which a 

borrower submits a request after the 30-day period. The 

commenters suggested that in this case, the guarantor would 

still submit the appeal to the Secretary; however, unlike 

with a timely request, collection of the loan (nondefaulted 

or defaulted) would continue during the Secretary’s review.

This group of commenters stated that the proposed 

regulations are not clear on the availability of an appeal 

option for non-defaulted borrowers. These commenters 

recommended adding language to clarify that non-defaulted 
656

borrowers should be afforded the same opportunity to 

appeal. Under the proposed regulations, a guarantor would 

be responsible for notifying a defaulted borrower of the 

option for review by the Secretary. For consistency, the 

commenters believed it would be reasonable for the 

guarantor to utilize this same process for non-defaulted 

borrowers. 

These commenters also believed that it would be less 

confusing for a borrower for the guarantor to retain the 

loan until 30 days after the agency’s notification to the 

borrower of the right to appeal. Commenters proposed that 

if the borrower appeals within 30 days, the loan should 

remain with the guarantor until the Secretary renders a 

final determination on the borrower’s appeal. These 

commenters recommended that the guarantor should be 

responsible for notifying defaulted and non-defaulted 

borrowers of the option for review by the Secretary. 

Under proposed §682.402(d)(6)(ii)(K)(3), if the 

Department determines that the borrower meets the 

requirements for a closed school discharge, the guaranty 

agency, within 30 days of being informed that the 

borrower qualifies, will take the actions described under 

§ 682.402(d)(6) and § 682.402(d)(7). Section 

682.402(d)(6) specifies the responsibilities of a guaranty 
657

agency and 682.402(d)(7) specifies the responsibilities of 

a lender. 

A group of commenters expressed the view that the 

cross-reference to §682.402(d)(6) is too broad. These 

commenters believed that § 682.402(d)(6)(ii)(E) and 

682.402(d)(6)(ii)(H)(1) more specifically describe the 

required action by the guarantor and should replace § 

682.402(d)(6) in the cross-reference. These commenters 

also recommended that we clarify under § 

682.402(d)(6)(ii)(K)(3) if the Department determines that 

the borrower is eligible for a discharge, the guaranty 

agency will pay the claim and the lender will be required 

to take the actions specified in § 682.402(d)(7)(iv).

Discussion: We do not believe that a 30-day timeframe for 

appealing a denial of a closed school discharge claim by a 

guaranty agency is sufficient. We have retained the 

language in the NPRM, which did not provide a timeframe for 

such an appeal.

We agree with the commenters who recommended that 

proposed § 682.402(d)(6)(ii)(F) be revised to specify that, 

when a guaranty agency notifies a borrower of the denial of 

a closed school discharge claim and of the opportunity to 

appeal the denial to the Department, that the notification 

from the guaranty agency should state the reasons for the 
658

denial. Since the proposed revision to the regulation is 

intended to provide borrowers an opportunity to appeal a 

negative decision, a borrower should have the opportunity 

to address the issues that led to the denial during the 

appeal process.

We agree with the commenters that the regulations 

should provide for an appeal process for non-defaulted FFEL 

borrowers (whose loans are held by lenders) as well as for 

defaulted FFEL borrowers (whose loans are held by guaranty

agencies). Although the NPRM only addressed an appeal 

process for FFEL Program loans held by a guaranty agency, 

our intent was to provide an appeal process for FFEL 

Program loans held by either a lender or a guaranty agency. 

We agree that the cross-references to § 

682.402(d)(6)(ii)(K)(3) should be written more narrowly, 

and have made additional technical corrections to the FFEL 

regulations, based on the recommendations relating to the 

process for granting discharges in the FFEL Program. These 

technical corrections are identified in the “Changes” 

section, below.

Changes: We have revised § 682.402(d)(6)(ii)(F) to 

stipulate that a guaranty agency that denies a borrower’s 

closed school discharge request must notify the borrower of 

the reasons for the denial.
659

We have revised the cross-references in § 

682.402(d)(6)(ii)(K)(3), to more specifically describe the 

guarantor’s action. We have also changed the crossreference from (d)(7) to (d)(7)(iv), clarifying that after 

the guaranty agency pays the claim the lender actions in 

(d)(7)(iv) do not change. 

We have made a technical correction to 

§682.402(d)(6)(ii)(H), deleting the reference to a guaranty 

agency exercising a forbearance during the suspension of 

collection activity. 

We have revised §682.402(d)(7)(iii) to clarify that a 

borrower whose FFEL Loan is held by a lender, has the same 

appeal rights as a borrower whose loan is held by a 

guaranty agency if the guaranty agency denies the closed 

school discharge request.

Miscellaneous Recommendations

Comments: One commenter supported the proposed changes to 

the closed school discharge regulations, but believed that 

the proposal did not go far enough to provide displaced 

students with comprehensive assistance and an explanation 

of their right to debt relief. This commenter urged the 

Department to ensure that a clearly identifiable, 

knowledgeable, and accessible representative is made 

available on campus immediately after announcement of an 
660

impending closure, to provide in-person, meaningful 

assistance to displaced students. 

In addition, this commenter recommended that the 

Department offer ongoing assistance through the creation of 

a student loan discharge hotline and/or on-line computer 

chat, and hyper-links on the Department’s website directing 

students to assistance in their local communities. The 

commenter averred that assistance should be made available 

in multiple formats (telephone, smartphone apps, mail, in 

person, and on-line), as many students at closing or closed 

schools do not own or have limited access to computers. 

A group of commenters recommended that the discharge 

regulations for Perkins and Direct Loans be amended to 

extend the 120-day look back period by the number of days 

between the expected and actual date of closure whenever 

the actual closure date is later than the expected and 

disclosed closure date.

Another commenter recommended prohibiting the 

capitalization of interest when the collections process has 

been suspended because a student is filing for a closed 

school discharge.

A group of commenters recommended that the terminology 

throughout § 682.402(d) be updated for consistency with 

current § 682.402 regulations for other discharges types. 
661

Specifically, commenters suggested replacing references to 

written and sworn statements with references to 

applications. 

Discussion: We appreciate the recommendations for 

additional steps the Department may take to assist 

borrowers in closed school situations. Many of these 

recommendations relate to activities that are not governed 

by regulations, or are out of the scope of this regulatory 

action. 

With regard to the comment recommending that we extend 

the look-back period beyond 120 days if the expected 

closure date is different than the actual closure date, we 

do not believe such a change is necessary. Under current 

regulations in §685.214(c)(1)(B), the Department has the 

authority to extend the look-back period due to 

“exceptional circumstances.” We believe that this 

provision provides appropriate flexibility to the 

Department in cases where it may be necessary to extend the 

look-back period.

Under § 682.202(b)(2)(ii) and (iii) a lender may 

capitalize interest that accrues during a period of 

authorized deferment or forbearance. We see no 

justification for exempting the 60-day forbearance period 

from this practice.
662

We agree with the recommendation to update the 

terminology throughout § 682.402(d) for consistency with 

current § 682.402 for other discharges types, and will make 

those changes in the final regulations. 

Changes: In §§ 682.402(d)(6)(ii)(B)(1), (d)(6)(ii)(B)(2), 

(d)(6)(ii)(F)(5), (d)(6)(ii)(G), and (d)(6)(ii)(H) of the 

FFEL closed school discharge regulations, we have replaced 

the terms “sworn statement” or “written request” with the 

term “application”, to conform the regulations with the 

current closed school discharge application process.

Data Requests

Comments: A group of commenters recommended that the 

Department disclose, at the school level, information about 

closed school discharges, including information about the 

Department’s outreach to borrowers, the number of 

applicants, the number of applicants who receive a 

discharge, the total amount discharged, and the amount 

collected from schools to offset the discharged amounts. 

Similarly, this group of commenters requested that the 

Department disclose, at the school and discharge type 

level, information about false certification discharges, 

including the number of applicants, the number of 

applicants who receive a discharge, and total amount 

discharged and related offsets. In addition, this group of 
663

commenters recommended that the Department disclose the 

number of borrowers for whom a death discharge has been 

requested, the number of borrowers for whom a death 

discharge has been granted, and the total discharged 

amount.

Discussion: We thank the commenters for their thoughtful 

reporting recommendations; however, we do not have plans to 

provide such information at this time. We note that 

publication of data at this level may require providing the 

school with the opportunity to review and challenge or 

correct inaccurate information. However, the Department may 

be able to publish more aggregated versions of these data 

for public review at a later date. The Department is not 

prepared to implement such processes at this time, but will 

consider releasing these data moving forward.

Changes: None.

False Certification Discharges (Section 685.215)

High School Diploma

Comments: Commenters generally supported the proposed 

improvements to the false certification process. Some 

commenters noted that broadening the reasons that loans may 

be discharged due to false certification may provide a 

simpler process for loan discharge than borrower defense to 

repayment for many borrowers.
664

A group of commenters expressed support for the 

proposed regulatory changes that would provide a false 

certification loan discharge to borrowers whose schools 

have falsely reported that they earned a high school 

diploma, including schools that have facilitated the 

borrower’s attainment of a fabricated high school diploma. 

The commenters noted that that proposed §685.215(a)(1)(ii) 

would allow for discharge of a borrower’s loan 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. The commenters viewed this 

proposed regulation as a critical improvement over the 

current false certification regulations. 

However, several commenters expressed concern that 

some otherwise eligible borrowers may be denied discharges 

because their financial aid applications, which were 

completed by the school, indicate that they reported having 

earned a high school diploma. 

A group of commenters recommended revisions to the 

final regulations regarding what they referred to as 

“unfair” evidentiary burdens. These commenters recommended 

that the Department clarify that students whose schools 

falsely certified that they have high school diplomas, 
665

including schools that do so by falsely certifying 

financial aid applications, are eligible for false 

certification discharges.

One group of commenters recommended that the 

Department further modify the regulatory language to 

clarify that borrowers who report to their school that they 

earned a high school diploma are ineligible for a false 

certification loan discharge, but that borrowers whose 

FAFSA falsely indicates the borrower had earned a high 

school diploma may be eligible for a false certification 

loan discharge.

Another group of commenters believed that the 

Department should revise the proposed regulations to ensure 

that a borrower will qualify for a false certification 

discharge only if the borrower can fulfill the bases for 

discharge. These commenters recommended that the Department 

revise proposed §685.215(c) to require borrowers to 

demonstrate each element of the bases for discharge under 

proposed §685.215(a)(l) in order to qualify for a 

discharge. The commenters also recommended that the 

Department provide guidance regarding acceptable online 

high schools.

These commenters observed that the Department's 

intent, as stated in the preamble to the NPRM, is that 
666

borrowers who provide false information to postsecondary 

schools regarding high school graduation status will not 

obtain a false certification discharge. Proposed 

§685.215(a)(l) (“Basis for Discharge”) states that a false 

certification discharge is available if a borrower reported 

to the postsecondary school that the borrower did not have 

a high school diploma. The commenters believed that the 

section of the proposed regulation regarding borrower 

qualifications for discharge does not reflect the 

Department's intent. Proposed §685.215(c) ("Borrower 

qualification for discharge") does not require a borrower 

to demonstrate that the borrower presented accurate 

information regarding the borrower's high school graduation 

status to the postsecondary school.

These commenters believe that under the proposed 

regulations, taxpayers may be forced to pay for false 

certification discharges for borrowers who did not meet the 

test in proposed §685.215(a)(l) and yet qualified under 

proposed §685.215(c)(1). The commenters noted that the 

Department can seek recovery from institutions for certain 

losses determined under proposed §685.2125(a)(l). However, 

if borrowers are granted discharges under the weaker 

standard at proposed §685.215(c)(1), then in many cases the 
667

Department will be unable to collect from institutions 

under the stronger standard at proposed §685.215(a)(l).

The commenters believed that schools should be able to 

rely on the fact that a high school is accredited by a 

reputable accrediting agency, absent a list of high schools 

that provide instruction to adult students and that are 

acceptable to the Department. Another commenter requested 

that the Department provide schools with a reliable source 

of information regarding appropriately accredited high 

school diploma programs available to adults, including 

those that are offered online.

A group of commenters expressed concerns that the 

proposed false certification and unauthorized payment 

discharge rule would penalize institutions for the false 

certification of the student or the independent actions of 

a third party.

In addition, these commenters recommended that, under 

the evidentiary standards articulated in proposed 

§685.215(c)(1), a borrower requesting a false certification 

loan discharge should be required to certify that, at the 

time of enrollment, he or she did not represent to the 

school, either orally or in writing, that he or she had a 

high school diploma. The commenters believed that this 
668

evidentiary requirement would help deter frivolous false 

certification claims.

Some commenters observed that, pursuant to proposed 

§685.215(a)(l)(ii), a borrower would be eligible for a 

false certification loan discharge if the school the 

borrower attended certified the eligibility of a student 

who is not a high school graduate based on “[a] high school 

diploma falsified by the school or a third party to which 

the school referred the borrower.” The commenters 

recommended that the regulation be revised to clarify that 

a school is only penalized if it referred a student to a 

third party for the purpose of having the third party 

falsify the high school diploma. These commenters believed 

that it is not uncommon for a school to refer a student to 

a third-party servicer to verify the diploma, particularly 

in the case of students who graduated from foreign high 

schools. The commenters believed that institutions should 

not be penalized if a third-party verification entity 

falsified the legitimacy of the foreign credential without 

the school's knowledge.

Discussion: We thank the commenters who are supportive of 

the proposed revisions of the false certification of high 

school graduation status regulatory provisions. However,

we do not agree that the regulations need further 
669

modification to address situations in which a borrower who 

is not a high school graduate states on the FAFSA that the 

borrower is a high school graduate. If a borrower falsely 

stated on the FAFSA that they were a high school graduate, 

but also reported to the school that they were not a high 

school graduate, and the school certified the eligibility 

of the borrower based on the FAFSA, the school would still 

have falsely certified the eligibility of the borrower. In 

this situation, the borrower would qualify for a false 

certification discharge--assuming the borrower did not meet 

the alternative to high school graduation status in effect 

at the time--regardless of the information on the student’s 

FAFSA. The same would hold true whether the FAFSA was 

actually completed by the borrower, or completed by the 

school. We note that, while a school may assist a student 

in completing a FAFSA, a school may never complete a FAFSA 

for a student. Conversely, if a borrower falsified the 

FAFSA on their own initiative, did not inform the school 

that they were not a high school graduate, and the school 

did not receive any discrepant information indicating that 

the borrower was not a high school graduate, the borrower 

would not qualify for a false certification discharge. 

Borrowers who deliberately provide misleading or false 

information in order to obtain Federal student loans do not 
670

qualify for false certification discharges based on the 

false or misleading information that the borrower provided 

to the school.

We agree with the commenters who noted a discrepancy 

between the language in proposed §685.215(a)(l) and 

proposed §685.215(c)(l). Section 685.215(a)(l) provides 

the basic eligibility criteria for a false certification 

discharge based on false certification of a borrower’s high 

school graduation status. Section 685.215(c)(1) describes 

how a borrower qualifies for a discharge. The two sections 

are intended to mirror each other, not to establish 

slightly different standards for the discharge. If a 

borrower, in applying for the discharge, is only required 

to state that the borrower “did not have a valid high 

school diploma at the time the loan was certified,” the 

question of whether the borrower “reported not having a 

high school diploma or its equivalent” would not be 

addressed. 

We also agree that the standards under which the 

Department may seek recovery for losses under § 

685.215(a)(1) should not be different from the standards 

under which a borrower may receive a false certification 

discharge under §685.215(c)(1).
671

The commenter who recommended that schools be able to 

rely on a high school’s accreditation status by a 

“reputable accrediting agency” did not specify what 

criteria would be used to determine if an agency 

accrediting a high school is reputable, and does not 

suggest a process for making such determinations. 

Moreover, even if it were feasible for the Department to 

provide a list of acceptable high schools for title IV 

student financial assistance purposes or guidance regarding 

acceptable schools, there is no guarantee that a diploma 

purporting to come from such a school is legitimate. 

We do not share the concern of commenters that the 

proposed regulations may penalize a school for relying on 

the independent actions of a third party. If a school is 

relying on a third party to verify the high school 

graduation status of a borrower, it is incumbent on the 

school to ensure that the third-party is providing 

legitimate verifications. We note that high school 

graduation status, or its approved equivalent, is a 

fundamental borrower eligibility criterion for title IV 

federal student assistance. Any school that wishes to 

participate in the title IV, HEA programs and outsources 

the determination of high school graduation status to a 
672

third party without ensuring that the third party is 

trustworthy, is acting irresponsibly.

We also note, in response to this comment, that the 

Department is not proposing revisions to the regulations 

governing false certification discharges due to 

unauthorized payment.

We also disagree with the comment recommending that a 

school should only be penalized if it referred a student to 

a third-party “for the purpose of having the third party 

falsify the high-school diploma.” This commenter raised 

this issue in particular with regard to students who 

graduated from foreign high schools. The commenter stated 

that schools often use third parties to verify the 

legitimacy of a foreign credential. We do not believe that 

the Department must demonstrate intent on the part of a 

school when assessing liabilities against a school due to 

false certification of borrower eligibility. We do not 

believe that a school that routinely certifies eligibility 

of borrowers who graduated from foreign high schools can 

credibly claim to be ignorant of the legitimacy of a thirdparty verification entity that the school uses for 

verification purposes.

We agree with the comment that the false certification 

loan discharge application should include a certification 
673

from the borrower that the borrower did not report to the 

school that the borrower had a high school diploma. The 

current form, Loan Discharge Application: False 

Certification (Ability to Benefit), expires on August 31, 

2017. After these final regulations are published, we will 

revise the form to make it consistent with these final 

regulations. The revised version of the form will go 

through two public comment periods, with the intent of 

being finalized by the time these regulations become 

effective on July 1, 2017.

Changes: We have revised § 685.215(c)(1) to clarify that 

the borrower must have reported to the school that the 

borrower did not have a high school diploma or its 

equivalent.

Disqualifying Condition

Comments: Current regulations under § 685.215(a)(1)(iii) 

provide for a discharge if a school certified the 

eligibility of a borrower who would not meet requirements 

for employment in the occupation for which the training 

program supported by the loan was intended. The proposed 

regulations would modify this provision to clarify that the 

relevant “requirements for employment” are “State 

requirements for employment” in the student’s State of 

residence at the time the loan was originated.
674

A group of commenters sought confirmation that, while 

a borrower may be eligible for a false certification 

discharge due to a condition that disqualified them for 

employment in the field for which postsecondary education 

was pursued, the postsecondary institution would not be 

financially liable for the discharged loan. These 

commenters believed that this is the Department's intent 

because the remedial action provision at proposed § 685.308 

does not list the disqualifying condition discharge 

provision at proposed § 685.215(a)(l)(iv) as a basis for 

institutional liability. These commenters observed that 

the current version of § 685.308 states the Department may 

seek recoupment if the loan certification resulted in whole 

or in part from the school's violation of a Federal statute 

or regulation or from the school's negligent or willful 

false certification. 

These commenters averred that anti-discrimination laws 

limit schools’ ability to deny admission to a prospective 

student, even when the individual would be disqualified for 

employment in the career field for which the program

prepares students. The commenters recommended that the 

Department state explicitly in the preamble to the final 

regulations that disqualifying condition discharges will 

not result in institutional liabilities.
675

Another commenter asserted that it would be 

administratively burdensome for institutions to maintain 

the knowledge necessary to determine what conditions would 

disqualify a prospective student for employment in a 

specific field. This commenter suggested that this would 

be particularly challenging for distance education programs 

that serve students remotely, since these institutions 

would only be aware of potentially disqualifying conditions 

that the student discloses. 

A group of commenters echoed this concern, stating 

that it would be administratively burdensome for distance 

education programs to comply with proposed § 685.215(c)(2). 

In these commenters’ view, a primarily distance education 

institution may not have occasion to become aware of a 

student’s disqualifying physical or mental condition unless 

and until the student voluntarily discloses such 

information. In addition, for institutions that operate in 

numerous States, the commenters stated that it would be 

administratively burdensome and near impossible for an 

institution to remain constantly vigilant about potential 

changes to State statutes, State regulations, or other 

limitations established by the States that may affect a 

student’s eligibility for employment.
676

Since institutions must comply with various antidiscrimination laws when admitting students, several 

commenters argued that institutions should not be held 

liable for discharges based on disqualifying conditions 

unless it can be shown that the institution engaged in 

substantial misrepresentation. Another commenter stated 

that there are legitimate reasons why institutions—

including, but not limited to, distance education 

institutions--may not be aware of a student’s disqualifying 

physical or mental condition or criminal record. The 

commenter claimed that, under applicable Department 

regulations, an institution may not make a preadmission 

inquiry as to whether an applicant has a disability. The 

commenter cited regulations at 34 CFR 104.42(b)(2) limiting 

schools’ ability to determine whether applicants have a 

disability.

Another commenter referenced the Department’s 

publication Beyond the Box: Increasing Access to Higher 

Education for Justice-Involved Individuals, which 

encourages alternatives to inquiring about criminal 

histories during college admissions and provides 

recommendations to support a holistic review of applicants.

A commenter asked why the regulation does not specify 

that the institution knew about or could be expected to 
677

have known about the disqualifying condition. The 

commenter questioned whether a student who intentionally 

concealed a disqualifying condition should obtain a 

discharge. The commenter also raised the issue of a 

borrower whose disqualifying impairment occurs after the 

fact, but does not qualify for a disability discharge. In 

such situations, the commenter recommended that the 

Department clearly state that the school would not be 

subject to any penalty under § 685.308.

Another group of commenters recommended that the 

Department expand the regulation pertaining to 

disqualifying conditions to include certifications not 

provided by the State, such as those referenced in the 

Gainful Employment regulations such as professional 

licensure and certification requirements, including meeting 

the requirements to sit for any required licensure or 

certification exam.

A group of commenters noted their opposition to the 

Department’s proposal which, in their view, narrows 

discharge eligibility for students whose schools falsely 

certify that they meet the requirements for employment in 

the occupations for which their programs are intended to 

train. These commenters asserted that some schools 
678

frequently recruit students they know will be barred from 

employment in their field after program completion. 

These commenters objected to the proposed regulatory 

language, which addresses requirements imposed by the 

State, not by the profession. To the extent that this 

discharge provision is intended to provide relief to 

students whose schools recruit and enroll them despite the 

fact that they cannot benefit from the program, the 

commenters believed that the Department should not limit 

the scope of this protection. The commenters observed that 

while most professional licensing is found in State law and 

regulation, others--such as those from tradespecific entities--are not. In the commenters’ view, the 

proposed change would unnecessarily restrict relief to 

students who are unemployable because they are ineligible 

for certifications not provided by a State.

The commenters also believed that this change would be 

inconsistent with the Department’s Gainful Employment 

regulations, which requires schools to certify that each of 

their career education programs “satisfies the applicable 

educational prerequisites for professional licensure or 

certification requirements in that State so that the

student who completes the program and seeks employment in 

that State qualifies to take any licensure or certification 
679

exam that is needed for the student to practice or find 

employment in an occupation that the program prepares 

students to enter.” 34 CFR 668.414(d)(3). As the 

Department noted in the preamble to the NPRM for the 

Gainful Employment regulations, a student’s enrollment in a 

program intended to prepare them for a career for which 

they cannot be certified “can have grave consequences for 

students’ ability to find jobs and repay their loans after 

graduation.” 79 FR 16478.

The commenters believed that the consequences are 

equally grave for students who are unwittingly enrolled in 

programs that they personally can never benefit from, 

though their classmates might. In the view of these 

commenters, it is therefore unnecessary and unfair to 

narrow this standard for relief. 

Discussion: The proposed regulations were not intended to 

absolve schools of financial liability in the case of false 

certification due to a disqualifying condition. The 

commenters point to proposed § 685.308, which inadvertently 

omitted a cross-reference to §685.215(a)(1)(iv) in 

identifying provisions under which the Secretary “collects 

from the school the amount of the losses the Secretary 

incurs and determines that the institution is liable to 

repay.” We note that the proposed regulations include 
680

cross-references to the provisions covering false 

certification due to high school graduation status and 

unauthorized signature. We believe that discharge due to 

false certification of disqualifying status should be 

treated the same as the other types of false certification 

discharges, as it is under current regulations in § 

685.308(a)(2). 

The commenter who suggested that it would be 

administratively burdensome for schools to maintain the 

knowledge necessary to determine what conditions would 

disqualify a prospective student from employment in a 

specific field appears to be unaware of the current 

regulatory requirements. Under current 

§685.215(a)(1)(iii), the Department considers a school to 

have falsely certified a borrower’s eligibility for a title 

IV loan if the school “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 the requirements for employment 

(in the student’s State of residence when loan was 

originated) in the occupation for which the training 

program supported by the loan was intended.” The final 

regulations revise this provision to refer to “State 

requirements,” but make no additional changes to this 
681

provision. The change is consistent with our 

interpretation set forth in Dear Colleague Letter (DCL) 

GEN-95-42, dated September 1995. In that DCL, we clarified 

that for a borrower to qualify for a false certification 

discharge due to a disqualifying condition, a borrower must 

provide evidence that the borrower had a disqualifying 

condition at the time of enrollment and of “a State 

prohibition (in that student’s State of residence) against 

employment” in that occupation based on the borrower’s 

status.

We note in response to the commenters who were 

concerned about the administrative burden associated with 

compliance for distance education programs that these 

schools have been subject to this regulatory requirement 

for over 20 years. Neither the proposed regulations nor 

these final regulations would change the basic requirements 

regarding false certification due to a disqualifying 

condition.

The regulation at 34 CFR 104.42 refers to general 

postsecondary education admission procedures, not 

eligibility for title IV student financial assistance. 

While the requirements in § 685.215 do not apply to a 

school’s evaluation of whether to admit a student to a 

particular program, they do apply to its certification of 
682

that student’s eligibility for title IV student financial 

assistance for that program. Therefore, we do not believe 

that the further limitation suggested by the commenter is 

necessary.

The Department of Education Beyond The Box publication 

cited by commenters specifically addresses career-training 

programs. Further, the publication does not advise schools 

to ignore disqualifying characteristics, but rather not to 

be overbroad in their preclusion of otherwise eligible 

applicants:

Tailor questions about CJI [“Criminal Justice 

Information”] to avoid unnecessarily precluding 

applicants from entering training programs, and thus 

employment, for which they might be eligible. For 

career-oriented training programs, institutions should 

limit CJI inquiries to criminal convictions that pose 

barriers to certification and licensing. For example, 

if a State teacher’s board will not grant a license to 

anyone with a felony conviction for sexual assault or 

rape, the teaching program could specifically ask, 

“Have you ever been convicted of felony sexual assault 

or rape?” instead of broadly asking, “Have you ever 

been convicted of a crime?” This specificity would 

enable the institution to adequately assess whether a 
683

student could face occupational licensing and 

credentialing barriers (Beyond the Box: Increasing 

Access to Higher Education for Justice-Involved 

Individuals, p. 25).

As stated in the Beyond the Box publication, we expect 

schools to be aware of disqualifying conditions for 

employment in the fields for which the schools are 

providing training. Schools that offer career-training 

programs need to be proactive in determining whether 

borrowers who are training for fields that have such 

employment restrictions do not have a disqualifying 

condition for that career. 

In response to the comment regarding a student 

intentionally misleading a school, if the school could 

demonstrate that a student intentionally misled the school 

about a disqualifying condition, we would take that into 

account in determining the amount that the school is liable 

to repay under § 685.308(a). However, in our view, it 

seems unlikely that a borrower would knowingly go through 

the time, effort, and expense of enrolling in an education 

program that trains the borrower for an occupation for 

which the borrower is unemployable. A far more common 

scenario is unscrupulous schools recruiting students with 
684

disqualifying conditions who cannot possibly benefit from 

the training programs that the school offers.

With regard to borrowers who do not have a 

disqualifying condition at the time of enrollment, the 

regulations specify that a borrower qualifies for the 

discharge only if the borrower had a disqualifying 

condition that “would have” disqualified the borrower from 

employment in the occupation, and that the borrower “did 

not meet” State requirements for employment in the career. 

A condition that arose after the borrower was no longer 

enrolled at the school would not qualify the borrower for a 

false certification discharge due to a disqualifying 

condition.

We addressed the question of expanding the scope of 

this provision to include non-State requirements for 

employment in certain fields, such as employment standards 

established by professional associations during the 

negotiated rulemaking sessions and in the NPRM. As we 

noted earlier, employment standards established by 

professional associations could vary, and it would not be 

practical to require schools to determine which 

professional association standards to use. The reference 

to the Gainful Employment requirements is inapplicable 
685

here, as the Gainful Employment requirements relate to the 

quality of a school’s program. 

Changes: We have revised § 685.308(a) to clarify that 

Department assesses liabilities to schools for false 

certification due to disqualifying condition or identity 

theft.

Satisfactory Academic Progress

Comments: A group of commenters supported the proposed 

regulation that would provide automatic false certification 

loan discharges for students whose satisfactory academic 

progress (SAP) was falsified by an institution. While the 

regulation specifies that these loan discharges are 

initiated by the Department, these commenters requested 

that borrowers be permitted to submit an application for 

false certification loan discharge due to the falsification 

of satisfactory academic progress by an institution.

The commenters urged the Department to clarify that 

students may also apply for a discharge on this basis, 

rather than wait for the Department to grant discharges 

without applications. The commenters observed that there 

are often False Claims Act and government cases involving 

false certification of SAP, and that many students also 

know when their academic progress was falsified by schools, 

but are not covered by such cases. 
686

The commenters suggested that information provided by 

students in discharge applications would also allow the 

Department to identify bad-acting schools and prevent abuse 

of title IV, HEA funding. These commenters recommended 

that the Department revise the proposed rules to provide a 

means for students to individually apply for discharge when 

their SAP is falsely certified by their school. 

Discussion: We continue to believe that allowing 

individual borrowers to apply for false certification 

discharges due to falsification of SAP is not practical. 

As we discussed in the NPRM, schools have a great deal of 

flexibility both in determining and in 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. Borrowers who are in danger of losing 

title IV eligibility due to a 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 

borrower’s access to title IV assistance. 

We do not believe that a school should be penalized 

for legitimate attempts to help a student who is not 

meeting SAP standards, nor do we believe a student who has 

successfully appealed a SAP determination should be able to 
687

use that initial SAP determination to obtain a false 

certification discharge on his or her student loans. In 

addition, we continue to believe that it would be very 

difficult for an individual borrower to sufficiently 

demonstrate that a school violated its own SAP procedures. 

Given these considerations, the final regulations 

continue to limit false certification discharges based on 

falsification of SAP to discharges based on information in 

the Secretary’s possession.

Changes: None.

Ability to Benefit

Comments: A group of commenters requested that the 

Department reconsider the evidentiary standard for false 

certification of a borrower’s ability to benefit. In these 

commenters’ view, the requirement for additional 

corroborating evidence beyond the self-certification of the 

borrower is unreasonable. The commenters suggested that 

borrowers who are unable to obtain corroborating evidence 

should be able to submit a sworn statement in support of 

their false certification application. 

These commenters referenced two DCLs the Department 

issued in connection with false certification of ability to 

benefit: DCL GEN-95-42 (dated September 1995) and DCL FP07-09 (dated September 2009). The commenters characterized 
688

the DCLs as establishing a presumption that students who 

claim ability to benefit fraud are not telling the truth 

unless they submit independent corroborating evidence to 

support their discharge application. To support this 

claim, these commenters quoted the statement in DCL GEN-95-

42 that the absence of findings of improper ability to 

benefit practices by authorities with oversight powers 

“raises an inference that no improper practices were 

reported because none were taking place.” 

The commenters asserted that many borrowers cannot 

provide proof of Federal or State investigations of 

particular schools because enforcement has been lenient in 

this area. They asserted that, in 1992, Congress provided 

for the false certification discharge and overhauled the 

student loan system because oversight of schools was 

inadequate.

A group of commenters criticized the Department’s 

current approach, and noted that statements that a borrower 

makes on the current Loan Discharge Application: False 

Certification (Ability to Benefit) are made under penalty 

of perjury. According to commenters, if a borrower is 

unable to provide investigative findings supporting the 

borrower’s claim, the Department or the guaranty agency 

will deny the discharge unless the borrower submits 
689

additional corroborating evidence (such as statements by 

school officials or statements made in other borrower 

claims for discharge relief).

The commenters noted that DCL FP-07-09 discusses 

guaranty agencies’ consideration of “the incidence of 

discharge applications filed regarding that school by 

students who attended the school during the same time frame 

as the applicant,” and suggested that students have no way 

of knowing whether a guaranty agency has done so in 

evaluating their applications.

The commenters asserted that students do not have 

access to school employee statements and do not know 

whether other borrowers have filed similar claims for 

relief. When borrowers are able to find attorneys to help 

them, attorneys are often unable to obtain the required 

evidence through Freedom of Information Act requests. The 

commenters also asserted that the Department does not have 

possession of all false certification discharge 

applications and does not ensure that copies are retained 

when guaranty agencies go out of business or retain all 

potentially corroborating evidence. In addition, if the 

student has carried the debt for years before learning of 

their right to a false certification discharge, the school 
690

may have closed. At that point, key documents and 

corroborating evidence may no longer be available. 

The commenters recommended that the Department revise 

its proposed regulations to specify that a student may 

establish a right to a false certification discharge 

through a “preponderance of the evidence,” as it has 

proposed for borrower defense claims. In addition, the 

commenters recommended that borrowers be presumptively 

eligible for discharge after application in the following 

circumstances:

 The school’s academic and financial aid files do not 

include a copy of test answers and results showing that the 

borrower obtained a passing score on an ability-to-benefit 

test approved by the Secretary;

 No testing agency has registered a passing score on an 

ability-to-benefit test approved by the Secretary for the 

borrower; or

 The school directed the borrower to take an online 

test to obtain a high school degree, the borrower believed 

the test to be legitimate, and the high school diploma is 

invalid. 

Discussion: In the NPRM, we removed the references to 

“ability to benefit” from the Direct Loan false 
691

certification regulatory language and replaced it with a 

cross-reference to section 484(d) of the HEA, and have 

retained that change in the final regulations. Section 

484(d) establishes the current borrower eligibility 

requirements for students who are not high school 

graduates. The current alternative to graduation from high 

school requirements are substantially different from the 

earlier ability to benefit requirements. We have provided 

guidance describing the current alternative to high school 

graduation requirements in DCL GEN-16-09.

We disagree with the recommendation to revise the 

regulations pertaining to the evidentiary standards for 

false certification of ability to benefit. Any 

modifications to these regulations could only be applied 

prospectively. Schools can be held liable for false 

certification discharges, and we cannot impose retroactive 

requirements on schools. 

We also disagree with the commenters’ characterization 

of the guidance in DCL GEN-95-42 and DCL FP-07-09. DCL FP07-09 does not require a borrower to provide additional 

corroborating evidence if the borrower is unable to do so. 

That DCL provides examples of “credible evidence” that 

would provide a guaranty agency with “an adequate basis for 

granting a discharge application” when there is no 
692

borrower-specific evidence that the borrower qualifies for 

a discharge due to false certification of ability to 

benefit.

We believe the two DCLs still provide an accurate 

description of the legal requirements for false 

certification, so we do not have plans to update them in 

the near future.

Changes: None

Interest Capitalization (Sections 682.202(b)(1), 682.405, 

and 682.410(b)(4))

Comments: Several commenters supported the proposed 

changes in §§ 682.202(b)(1), 682.405, and 682.410(b)(4), 

providing that a guaranty agency may not capitalize unpaid 

interest after a defaulted FFEL Loan has been 

rehabilitated, and that a lender may not capitalize unpaid 

interest when purchasing a rehabilitated FFEL Loan. 

A group of commenters noted that in the preamble to 

the NPRM, the Department characterized these changes as 

clarifications of existing regulations. The commenters 

disagreed with this characterization, stating that during 

the negotiated rulemaking sessions, negotiators 

representing guaranty agencies, lenders, and servicers did 

not agree that current regulations prohibit the 

capitalization of interest following loan rehabilitation. 
693

The commenters further stated that the negotiating 

committee agreed to add this issue to the negotiating 

agenda after an agreement was reached with the Department 

that the proposed changes represented a change in policy 

for prospective implementation. The commenters added that 

when the Department was asked by another member of the 

negotiating committee whether the proposed changes would 

have any retroactive impact, the Department responded that 

retroactive application was not the issue being negotiated. 

The commenter requested that the Department clarify in the 

final regulations that the changes to the FFEL Program 

regulations prohibiting the capitalization of interest 

following loan rehabilitation are amendments to the current 

rules, consistent with the commenters’ understanding of 

what was agreed to during the negotiations. Based on that 

understanding, the commenters stated that FFEL Program 

guarantors, lenders, and servicers are planning to 

implement the changes for loans that go into default on or 

after the effective date of the regulations and are 

subsequently rehabilitated. 

Discussion: We thank the commenters for their support of 

the changes to prohibit interest capitalization following 

loan rehabilitation. In response to the group of 

commenters who requested confirmation that the changes in 
694

§§ 682.202(b)(1), 682.405, and 682.410(b)(4) represent 

amendments to the current regulations and are to be applied 

only prospectively, we confirm that this is the intent. 

Changes: None.

Executive Orders 12866 and 13563

Regulatory Impact Analysis

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 

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;
695

(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 final regulatory action will have an annual 

effect on the economy of more than $100 million because 

regulations would have annual federal budget impacts of 

approximately $1.9 billion in the low impact scenario to 

$3.5 billion in the high impact scenario at 3 percent 

discounting and $1.8 billion and $3.4 billion at 7 percent 

discounting, additional transfers from affected 

institutions to student borrowers via reimbursements to the 

Federal government, and annual quantified costs of $9.8 

million related to paperwork burden. Therefore, this final 

action is “economically significant” and subject to review 

by OMB under section 3(f)(1) of Executive Order 12866. 

Notwithstanding this determination, we have assessed the 

potential costs and benefits, both quantitative and 

qualitative, of this final regulatory action and have 

determined that the benefits justify the costs.

We have also reviewed these regulations under 

Executive Order 13563, which supplements and explicitly 
696

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 

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 
697

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.”

We are issuing these final regulations only on a 

reasoned determination that their benefits 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 regulations are consistent 

with the principles in Executive Order 13563.

We also have determined that this regulatory action 

does not unduly interfere with State, local, or tribal 

governments in the exercise of their governmental 

functions.

In accordance with both Executive Orders, the 

Department has assessed the potential costs and benefits, 

both quantitative and qualitative, of this regulatory 
698

action. The potential costs associated with this 

regulatory action are those resulting from statutory 

requirements and those we have determined as necessary for 

administering the Department’s programs and activities.

In this Regulatory Impact Analysis (RIA) we discuss 

the need for regulatory action, the comments about the NPRM 

analysis and significant changes from the NPRM, the 

potential costs and benefits, net budget impacts, 

assumptions, limitations, and data sources, as well as 

regulatory alternatives we considered. Although the 

majority of the costs related to information collection are 

discussed within this RIA, elsewhere in this notice under 

Paperwork Reduction Act of 1995, we also identify and 

further explain burdens specifically associated with 

information collection requirements.

1. Need for Regulatory Action

 These final regulations address several topics related 

to the administration of title IV, HEA student aid programs 

and benefits and options for borrowers. 

As detailed in the NPRM, the Department last revised 

the borrower defense regulations over two decades ago, and 

until recently, use of borrower defense has been very 

limited. The lack of clarity in the current regulations 

has led to much confusion among borrowers regarding what 
699

protections and actions for recourse are available to them 

when dealing with cases of wrongdoing by their 

institutions. The Department received comments addressing 

this lack of clarity during the public comment period. 

The need for a clearer and more efficient process was 

also highlighted when the collapse of Corinthian generated 

an unprecedented level of borrower defense claims activity. 

As detailed extensively in the NPRM, Corinthian, a publicly 

traded for-profit higher education company that in 2014 

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. The Department committed itself to 

ensuring that students harmed by Corinthian’s 

misrepresentations receive the relief to which they are 

entitled, and realized that the existing regulations made 

this process burdensome, both for borrowers and for the 

Department. Under the current process, the Department 

would be required to devote significant resources to 

reviewing individual State laws to determine which law to 

apply to each borrower’s claim. The Department appointed a 

Special Master in June of 2015 to create and oversee the 

process of providing debt relief for these Corinthian 

students. As of October 2016, approximately 3,787 borrower 
700

defense discharges totaling $73.1 million had been 

completed and another 7,858 closed school discharges 

totaling approximately $103.1 million have been processed. 

Moreover, the Department has received thousands more 

claims--both from former Corinthian students and from 

students at a number of other institutions--that are 

pending a full review, and expects to receive more as the 

Department continues to conduct outreach to potentially 

affected students. 

The Department remains committed to ensuring that 

borrowers with a valid defense to repayment are able to 

benefit from this option. Research has shown that large 

sums of student debt can reduce levels of participation in 

the economy, especially if borrowers are unable to obtain 

adequate income to repay their debts.96 If the borrower is 

harmed such as by being provided with educational 

credentials worth significantly less than an institution’s 

misrepresentation has led him or her to believe, the 

borrower may be entitled to some relief from the loans 

associated with such education. The changes to the 

borrower defense provisions in these final regulations will 

 

96 The Economics of Student Loan Borrowing and Repayment, Wen Li, Federal Reserve Bank of 

Philadelphia, available at https://philadelphiafed.org/-/media/research-anddata/publications/business-review/2013/q3/brq313_economics-of-student-loan-borrowing-andrepayment.pdf.
701

update the process and standard for determining relief and 

allow the Department to effectively address claims that 

arise in the modern postsecondary educational system.

The landscape of higher education has changed 

significantly over the past 20 years, including a 

substantial increase in the number of students enrolled in 

distance education. Because distance education allows 

students to enroll in courses and programs based in other 

States and jurisdictions, it has created additional 

challenges as it relates to the Department’s current 

borrower defense regulations.

The current regulations require an analysis of State 

law to determine the validity of a borrower defense claim. 

This approach creates complexities in determining which 

State law applies and may give rise to potential 

inequities, as students in one State may receive different 

relief than students in another State, despite common 

underlying facts and claims. 

The expansion of distance education has also impacted 

the Department’s ability to apply its borrower defense 

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 
702

based.97 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.

The final regulations give students access to 

consistent, clear, fair, and transparent processes to seek 

debt relief. The new Federal standard will 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. Additionally, 

the final regulations separately address predispute 

arbitration clauses, another possible obstacle to borrowers 

pursuing a borrower defense claim. These final regulations 

also prohibit a school participating in the Direct Loan 

 

97 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. 
703

Program from obtaining, through the use of contractual 

provisions or other agreements, a predispute agreement for

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 final 

regulations also prohibit a school participating in the 

Direct Loan Program from obtaining an 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 dispute processes 

before contacting accrediting or government agencies with 

authority over the school regarding such claims. In 

addition, the final regulations 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 students, the Federal 

government, and taxpayers against potential institutional 

liabilities.

Additionally, to enhance and clarify other existing 

protections for students, these regulations update the 

basis for obtaining a false certification discharge, 

clarify the processes for false certification and closed 

school discharges, require institutions to provide 
704

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. 

These regulations 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.

These regulations also 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 at 

which the median borrower has not repaid in full, or paid 

down the balance of, the borrower’s loans include a warning 

in advertising and promotional materials about those 

repayment rate outcomes; require that a school disclose on 

its Web site and to prospective and enrolled students about 

events for which it is required to provide financial 

protection to the Department; clarify the treatment of 
705

spousal income in the PAYE and REPAYE plans; and make other 

changes that we do not expect to have a significant 

economic impact. 

2. Summary of Comments and Changes from the NPRM

A number of commenters expressed that the RIA in the 

NPRM was inadequate and did not support proceeding with the 

regulations without further study. Commenters noted that 

the accuracy of several of the Department’s past budget 

estimates had been questioned by Congressional committees 

and other outside reviewers. Several commenters pointed 

out that the wide range in the estimate, from $646 million 

up to $41.3 billion over the 2017 to 2026 loan cohorts, 

indicated that the Department does not know the potential 

budget impact of the regulation. Other commenters noted 

that if the impact is at the higher end of the range, the 

analysis does not quantify benefits greater than the costs 

to justify the decision to proceed with the regulations. 

Another set of comments focused on the impact of the 

regulations on higher education, the costs to institutions, 

and the potential for institutional closures. A number of 

commenters expressed concern that institutional closures 

related to the regulations, especially the financial 

responsibility provisions, will reduce access to higher 

education for low-income and minority students. Materials 
706

included with the comments analyzed National Postsecondary 

Student Aid Study 2012 (NPSAS 2012) data to demonstrate 

that students at for-profit institutions are, on average, 

more likely to be older, racial minorities, veterans, parttime, financially independent, responsible for dependents, 

and Pell Grant recipients. A number of commenters 

suggested that the costs of providing financial protection 

would result in increased costs for students and 

potentially limit access to higher education. Other 

commenters were concerned with a lack of analysis about the 

costs of the financial protection or the possibility that 

schools would be unable to obtain a letter of credit and 

would lose access to title IV, HEA funding and be forced to 

close. Several commenters suggested that the regulations 

would open the floodgates to frivolous claims that would 

overwhelm the Department and institutions, exacerbating the 

harmful effects on higher education.

One commenter argued that the proposed regulations 

would result in a large number of disappointed borrowers 

filing borrower defense claims without merit. Several 

commenters were concerned that the projected net budget 

impact referred to in the NPRM of as much as $42.698 

billion during the coming decade would undermine the 

integrity of the Direct Loan Program and that neither 
707

American taxpayers, nor schools that have successfully 

educated students, could cover these costs if thousands of 

students or graduates start requesting discharges of their 

loans. The commenters argued that the regulations lack any 

quality control measure to ensure that the Department would 

not be hit with an influx of fraudulent claims. They cited 

a recent lawsuit in which a former law student 

unsuccessfully sued her law school for false advertising. 

Finally, a number of commenters suggested the high 

cost estimate was overstated because schools would change 

their practices and limit behavior that would result in 

valid borrower defense claims. Another commenter 

questioned the characterization of the net budget impact as 

a cost based on the idea that the Department should not 

collect on loans established fraudulently. Several 

commenters noted that the potential fiscal impact should 

not factor into decisions about whether borrowers are 

eligible for relief.

We appreciate the comments about the RIA in the NPRM. 

As discussed in the NPRM, given the limited history of 

borrower defense claims and the limitations of available 

data, there is uncertainty about the potential impact of 

the regulations. Per OMB Circular A-4, in some cases, 

uncertainty may be addressed by presenting discrete 
708

alternative scenarios without addressing the likelihood of 

each scenario quantitatively. The uncertainty about 

borrower defense was acknowledged and reflected in the wide 

range of scenario estimates in the NPRM. The Department 

presented the range of scenarios and discussion of sources 

of uncertainty in the estimates in order to be transparent 

and encourage comments that might aid the Department in 

refining the estimates for the final regulations.

We do not agree that the analysis was inadequate to 

support proceeding with the regulations. Under Executive 

Orders 12866 and 13563, the Department must adopt a 

regulation only upon a reasoned determination that its 

benefits justify its cost. The Executive Orders recognize 

that some benefits and costs are difficult to quantify, and 

provide that costs and benefits include both quantifiable 

measures--to the fullest extent that they can be usefully 

estimated--as well as qualitative measures of costs and 

benefits that are difficult to quantify but “essential to 

consider.” OMB Circular A-4 provides that in cases where 

benefit and cost estimates are uncertain, benefit and cost 

estimates that reflect the full probability distribution of 

potential consequences should be reported. Where possible, 

the analysis should present probability distributions of 

benefits and costs and include the upper and lower bound 
709

estimates as complements to central tendency and other 

estimates. If a lack of knowledge prevents construction of 

a scientifically defensible probability distribution, the 

Department should describe benefits or costs under 

plausible scenarios and characterize the evidence and 

assumptions underlying each alternative scenario. The 

Department took this approach in the NPRM and presents the 

analysis with relevant revisions for the final regulations.

OMB Circular A-4 suggests that in some instances when 

uncertainty has significant effects on the final conclusion 

about net benefits, the agency should consider additional 

research prior to rulemaking. For example, when the 

uncertainty is due to a lack of data, the agency might 

consider deferring rulemaking, pending further study to 

obtain sufficient data. Delaying a decision will also have 

costs, as will further efforts at data gathering and 

analysis. The Department has weighed the benefits of delay

against these costs in making the decision to proceed with 

the regulation. With respect to borrower defense, if the 

Department did not proceed with the final regulations, the 

existing borrower defense provisions would remain in effect 

and some of the costs associated with potential claims 

would be incurred whether or not the final regulations go 

into effect. The final regulations build in more clarity 
710

and add accountability and transparency provisions that are 

designed to shift risk from the taxpayers to institutions. 

Moreover, if the Department were to delay implementation of 

the final regulations to obtain further information about 

the scope of institutional behavior that could give rise to 

claims, it is not clear when a significant amount of 

relevant data would become available. Borrower responses 

in absence of the process established in the final 

regulations do not necessarily reflect the level of claims 

that will be processed under the final regulations. 

Delaying the regulations would delay the improved clarity 

and accountability from the regulations without developing 

additional data within a definite timeframe, and we do not 

believe the benefits of such a delay outweigh the costs. 

As with any regulation, additional data that becomes 

available will be taken into account in the ongoing reestimates of the title IV, HEA aid programs.

We have considered the other comments received. 

Revisions to the analysis in response to those comments and 

our internal review of the analysis are incorporated into 

the Discussion of Costs, Benefits, and Transfers and Net 

Budget Impacts sections of this RIA as applicable. Table 1 

summarizes significant changes made from the NPRM in 
711

response to comments and the Department’s ongoing 

development of the final regulations.

Table 1: Summary of Key Changes in the Final 

Regulations 

Reg Section Description of Change

Financial Responsibility Triggers:

§ 668.171(c)(1)

§ 668.171(g)

§ 668.171(h)

As detailed in Table 2, eliminates the 

$750,000 or 10 percent of current 

assets materiality threshold. 

Instead, losses from all of the 

automatic triggers except 90/10, 

cohort default rate (CDR), SEC 

delisting, and SEC warning, are used 

to recalculate the composite score. If 

the recalculated score is less than 

1.0, the school is not financially 

responsible and must provide financial 

protection.

Removes Form 8-K trigger from proposed 

§ 668.171(c)(10)(vii).

Eliminates discretionary trigger based 

on bond or credit ratings from 

proposed § 668.171(c)(10)(iv).

Reclassifies proposed automatic 

triggers including those related to 

accreditor probation and show-cause 

actions, pending borrower defense 

claims, and violations of loan 

agreements as discretionary triggers.

Specifies that in its notice reporting 

a triggering event, an institution may 

demonstrate mitigating factors about 

the event, including that the reported 

action or event no longer exists or 

has been resolved or the institution 

has insurance that will cover part or 

all of the debts and liabilities that 

arise at any time from that action or 
712

event.

Financial Protection Disclosures:

§ 668.41(i) Revised to clarify that the Secretary 

will conduct consumer testing prior to 

establishing the actions and 

triggering events that require 

financial disclosures. 

Further clarifies the requirements for 

testing with consumers before 

publishing the content of the 

disclosure, as well as the disclosure 

delivery requirements to prospective 

and enrolled students.

Financial Responsibility:

§ 668.175(f)(5)

§ 668.175(f)(2)(i)

§ 668.175(h)

Clarifies how long an institution must 

maintain the financial protection 

associated with a triggering event in 

§ 668.171.

Provides that the Secretary may 

identify other acceptable forms of 

financial protection.

Provides that the Secretary will 

release any funds held under a setaside if the institution subsequently 

provides cash, the letter of credit, 

or other financial protection required 

under the zone or provisional 

certification alternatives in § 

668.175(d) or (f).

Repayment Rate:

§ 668.41(h)

Clarifies that the Secretary will 

calculate a repayment rate based on 

the proportion of students who have 

repaid at least one dollar in 

outstanding balance, measured in the 

third year after entering repayment, 

using data reported and validated 

through the Gainful Employment 

program-level repayment rate 
713

§ 668.41(h)(3)

calculation. 

Removes the requirement that repayment 

rate warnings be delivered 

individually to all prospective and 

enrolled students. Enhances the 

requirement as to how repayment rate 

warnings must be presented in 

advertising and promotional materials.

Closed School Discharge:

§ 682.402(d)(7)(ii)

§§ 674.33(g)(3), 

682.402(d)(8), and 

685.214(c)(2)

§ 

682.402(d)(6)(ii)(F)

§ 682.402(d)

Requires a lender to provide a 

borrower another closed school 

discharge application upon resuming 

collection.

Revised to clearly delineate the 

circumstances under which a closed 

school discharge is discretionary, as 

opposed to required.

Revised to stipulate that a guaranty 

agency that denies a borrower’s closed 

school discharge request must notify 

the borrower of the reasons for the 

denial.

Updates wording in FFEL closed school 

discharge regulations to refer to 

application instead of sworn statement 

or written request.

False Certification Discharge:

§ 685.215(c)(1)

§ 685.308(a)

Clarifies that a borrower must have 

reported to the school that the 

borrower did not have a high school 

diploma or its equivalent.

Clarifies that the Department assesses 

liabilities to schools for false 

certification due to disqualifying 

condition or identity theft.

Predispute Agreements

§ 685.300 Eliminates the use of predispute 

arbitration agreements, whether or not 

they are mandatory, to resolve claims 
714

brought by a borrower against the 

school that could also form the basis 

of a borrower defense or to prevent a 

student who has obtained or benefited 

from a Direct Loan from participating 

in a class action suit related to 

borrower defense claim.

 

3. Discussion of Costs, Benefits, and Transfers

In developing the final regulations, the Department 

made some changes to address concerns expressed by 

commenters and to achieve the objectives of the regulations 

while acknowledging the potential costs of the provisions 

to institutions and taxpayers. As noted in the NPRM, the 

primary potential benefits of these 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 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 
715

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 associated with the regulations will fall 

on a number of affected entities including institutions, 

guaranty agencies, the Federal government, and taxpayers. 

These costs include changes to business practices, review 

of marketing materials, additional employee training, and 

unreimbursed claims covered by taxpayers. The largest 

quantified impact of the regulations is the transfer of 

funds from the Federal government to borrowers who succeed 

in a borrower defense claim, a significant share of which 

will be offset by the recovery of funds from institutions 

whose conduct gave rise to the claims. 

We have considered and determined the primary costs 

and benefits of these 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
716

Borrower Defense, Closed School Discharges, and False 

Certification Discharges

Students and Borrowers

The fundamental underlying right of borrowers to 

assert a defense to repayment and obligation of 

institutions to reimburse the Federal government for such 

claims that are valid exist under the current borrower 

defense regulations. These final regulations aim to 

establish processes that enable more borrowers to pursue 

valid claims and increase their likelihood of discharging 

their loans as a result of institutional actions generating 

such claims. As detailed in the NPRM, borrowers will be 

the primary beneficiaries of these regulations as greater 

awareness of borrower defense, a common Federal standard, 

and a better defined process may encourage borrowers who 

may have been unaware of the process, or intimidated by its 

complexity in the past, to file claims. 

Furthermore, these 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 they had been 

defrauded by their institutions of higher education and 

were unable to pay their student loans, understand the 
717

borrower defense process, or obtain debt relief for their 

FFEL Loans under the current regulations. We received many 

comments on the NPRM echoing this sentiment. 

Through the financial responsibility provisions, these 

final regulations introduce far stronger incentives for 

schools to avoid committing acts or making omissions that 

could lead to a valid borrower defense claim than currently 

exist. In addition, through clarification of circumstances 

that could lead to a valid claim, institutions may better 

avoid behavior that could result in a valid claim and 

future borrowers may be less likely to face such behavior. 

Providing an automatic forbearance with an option for 

the borrower to decline the temporary relief and continue 

making payments will reduce the potential burden on 

borrowers pursuing borrower defenses. These borrowers will 

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 $1.7 billion for the 
718

minimum budget estimate to $3.3 billion in the maximum 

impact estimate annually, with the primary budget estimate 

at $2.5 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 other 

expenses. Recent literature related to student loans 

suggests that high levels of student debt may decrease the 

long-term probability of marriage98, increase the 

probability of bankruptcy99, reduce home ownership rates100, 

and increase credit constraints, especially for students 

who drop out.101 Further, when borrowers default on their 

loans, everyday activities like signing up for utilities, 

obtaining insurance, or renting an apartment can become a 

challenge.102 Borrowers who default might also be denied a 

 

98 Gicheva, D. “In Debt and Alone? Examining the Causal Link between Student Loans and Marriage.” 

Working Paper (2013).

99 Gicheva, D., and U. N. C. Greensboro. “The Effects of Student Loans on Long-Term Household 

Financial Stability.” Working Paper (2014).

100 Shand, J. M. (2007). “The Impact of Early-Life Debt on the Homeownership Rates of Young 

Households: An Empirical Investigation.” Federal Deposit Insurance Corporation Center for Financial 

Research.

101 Id.

102 https://studentaid.ed.gov/repay-loans/default
719

job due to poor credit, struggle to pay fees necessary to 

maintain professional licenses, or be unable open a new 

checking account.103 While difficult to quantify because of 

the multitude of different potential borrowing profiles and 

nature of the claims of those who will seek relief through 

borrower defense and the possibility of partial relief, the 

discharge of loans for which borrowers have valid borrower 

defenses could have significant positive consequences for 

affected borrowers and associated spillover economic 

benefits.

Affected borrowers 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. 

These regulations will also give borrowers more 

information with which they can make informed decisions 

about the institutions they choose to attend. An 

institution will be required to provide a disclosure for 

certain actions and triggering events, to be determined 

 

103 www.asa.org/in-default/consequences/.
720

through consumer testing, for which 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. This disclosure, the content of which will 

be prescribed by the Secretary in a notice published in the 

Federal Register, will allow borrowers to receive early 

warning signs about an institution’s risk for students, and 

therefore borrowers may be able to select a different 

college, or withdraw or transfer to an institution in 

better standing in lieu of continuing to work towards 

earning credentials that may have limited value.

Proprietary institutions will also be required to 

provide a warning through advertising and promotional 

materials if their loan repayment rate, based on the 

proportion of students who have repaid at least one dollar 

in outstanding balance and measured in the third year after 

entering repayment, using data reported and validated 

through the Gainful Employment repayment rate calculation, 

shows that the median borrower has not paid down his 

balance by at least one dollar. To estimate the effect of 

the repayment rate warning on institutions, the Department 
721

analyzed program-level repayment rate data prepared for the 

Gainful Employment regulation104 and aggregated the 

proprietary institutions data to the 6-digit OPEID level 

and found that 972 of 1,345 institutions in the 2012 

Gainful Employment data had a repayment rate that showed 

the median borrower had not paid down the balance of the 

borrower’s loans by at least one dollar. 

A number of commenters pointed to the Department’s 

failure to quantify the benefits of the proposed 

regulations in the NPRM as an indication that the analysis 

did not support the implementation of the final 

regulations. As mentioned throughout the RIA, the extent 

of the private and public benefit from the regulations is 

difficult to quantify. We have limited experience with 

borrower defense claims to draw upon in generating a 

profile of those likely to make successful claims. There 

are different potential profiles of student loan borrowers 

in terms of loan amounts, loan type composition, likelihood 

of default, fields of employment, degree level, and other 

 

104 A privacy-protected version of the data is available at 

http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/2013-repayment-rate-data.xls. 

The Department aggregated all program numerators and denominators to each unique six-digit 

OPEID and calculated how many institutions had aggregate rates under the negative amortization 

threshold and at least 10 borrowers in the denominator. Note that these data reflect students who 

entered repayment in 2007 and 2008; analysis of later cohorts (those who entered repayment in 

2011 and 2012) published through the College Scorecard, which calculate a similar repayment rate, 

showed 501 institutions with repayment rates below the negative amortization threshold.
722

factors. We do not have a basis in the data from existing 

claims to know how borrower profiles and the distribution 

and nature of claims will intersect. The economic and 

psychological benefits of debt relief may vary for a 

graduate student with high income potential receiving 

partial relief on a high level of debt and a student who 

dropped out of a certificate program with a lower level of 

debt and lower earnings potential from that program of 

education. While we do not quantify the amount, we expect 

the benefits associated with the substantial transfers to 

students from successful borrower defense claims will be 

significant. Several commenters noted that students may 

face costs or other negative impacts from these final 

regulations. In particular, commenters expressed concern 

that the closure of institutions, especially proprietary 

institutions that serve many low-income, minority, firstgeneration, and non-traditional students, will hurt access 

to higher education, especially for those groups. The 

Department acknowledges that some institutions may close if 

their actions mean that they are required to provide a 

substantial amount of financial protection, or that a large 

number of successful claims are made against them. 

However, as the regulation comes into effect and examples 

of conduct that generates claims are better understood, we 
723

expect institutions will limit such behavior and compete 

for students without such conduct, and that closures will 

be reduced over time. The Department also believes that 

institutions that do not face significant claims will be 

able to provide opportunities for students in the event of 

closures of other institutions that do. 

Another possible impact on students mentioned by some 

commenters is that the costs of financial protection or 

other compliance measures will be passed on to students in 

tuition and fee increases. We believe potential tuition 

increases will be constrained by loan limits and other 

initiatives, such as the Department’s Gainful Employment 

regulations, where institutions would be negatively 

affected by such increases. 

Institutions

Institutions will bear many of this regulation’s 

costs, 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 potentially significant amount 
724

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 these final regulations, the Department 

expects that fewer institutions will engage in conduct that 

generates borrower defense claims. Over time, the 

Department expects the number of schools that would face 

the most significant costs to come into compliance, the 

amount of transfers to reimburse the government for 

successful claims, costs to obtain required letters of 

credit, and disclosure of borrower defense claims against 

the schools to be reduced as some offenders are eliminated 

and other institutions adjust their practices. In the 

primary budget scenario 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 are estimated at $994 
725

million. On the other hand, it is possible that highquality, compliant institutions, especially in the forprofit 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 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, we 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, where available, data about 
726

their potential impact are discussed in Table 2. The 

consequences of an institution being found to be not 

financially responsible are set out in § 668.175 and 

include providing financial protection through a letter of 

credit, a set-aside of title IV, HEA funds, or other forms 

of financial protection specified by the Secretary in a 

notice published in the Federal Register. Alternatively, 

an institution that can prove it has insurance that covers 

the triggering risk is not considered to be not financially 

responsible and does not need to provide financial 

protection to the Department. 

The Department will review the triggering events 

before determining whether to require separate financial 

protection for a triggering event that occurs with other 

triggering events. Another change from the NPRM concerns 

those triggers that include a materiality threshold. 

Instead of being evaluated separately, lawsuits, borrower 

protection repayments to the Secretary, losses from gainful 

employment and campus closures, withdrawal of owner’s 

equity, and other triggers with a materiality threshold 

will be evaluated by their effect on the institution’s most 

recent composite score, which will allow the cumulative 

effect of violation of multiple triggers to be taken into 

account. If the recalculated composite score is a failing 
727

score, institutions would be required to provide financial 

protection. For the triggers evaluated through the revised 

composite score approach, the required financial protection 

is 10 percent or more, as determined by the Secretary, of 

the total amount of title IV, HEA program received by the 

institution during its most recently completed fiscal year. 

For the other triggers, the amount of financial protection 

required remains 10 percent or more, as determined by the 

Secretary, of the total amount of title IV, HEA program 

received by the institution during its most recently 

completed fiscal year, unless the Department determines 

that based on the facts of that particular case, the 

potential losses are greater.

Table 2: Financial Responsibility Triggers

Description Impact

Automatic Triggers Evaluated through Revised Composite 

Score Calculation: Institution found to be not financially 

responsible under § 668.171 and must qualify under an 

alternative standard if the addition of the triggering 

liability to the institution’s most recently calculated 

composite score causes it to fail the composite score.

Triggering liabilities that occur during the period between 

the fiscal year for which the Secretary last calculated the 

institution’s composite score under § 668.172 and the next 

following fiscal year for which the Secretary calculates a 

composite score are evaluated. Requires financial 

protection of no less than 10 percent of prior year’s title 

IV, HEA aid and such additional amount as the Secretary 

demonstrates is needed to protect from other losses that 

may arise within the next 18 months. 
728

Lawsuits and Other Actions: § 668.171(c)(1)(i) and (ii)

Triggered if an institution 

is required to pay any debt 

or incur any liability 

arising from a final judgment 

in a judicial proceeding, or 

from an administrative 

proceeding or determination, 

or from a settlement. 

Triggered if the institution 

is being sued in an action 

brought on or after July 1, 

2017 by a Federal or State 

authority for financial 

relief on claims related to 

the making of the Direct Loan 

for enrollment at the school 

or the provision of 

educational services and the 

suit has been pending for 120 

days.

Triggered if the institution 

is being sued in a lawsuit 

other than by a Federal or 

State authority related to 

the making of a Direct Loan 

or provision of educational 

services which has survived a 

motion for summary judgment 

or the time for such motion 

has passed.

If claims do not state a 

dollar amount and no amount 

has been set in a court 

ruling: (1) For Federal and 

State borrower defenserelated action, the 

Department will calculate 

loss by considering claim to 

seek the amount set by a 

court ruling, or if no ruling 

has been issued, in a written 

demand or settlement offer by 

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. 
729

the agency, or the amount of 

all tuition and fees for the 

period in the suit, for the 

program or location described 

in the allegations. 

Institution allowed to show 

suit is limited to a smaller 

portion of the school and 

that tuition and fees for 

that portion should be used; 

and (2) For all other suits 

the potential loss (if none 

is stated in the complaint or 

in a court ruling) is the 

amount in a written demand 

pre-suit, the amount offered 

by the plaintiff to settle, 

or the amount stated in 

discovery leading up to a 

trial.

Accreditor Actions: (Teach-Outs) § 668.171(c)(1)(iii)

Triggered if institution 

required by its accrediting 

agency to submit a teach-out 

plan that covers the closing 

of the institution or any of 

its branches or additional 

locations.

The amount of title IV, HEA 

aid allocated in the previous 

year to the closed locations 

will be used to recalculate 

the composite score.

Gainful Employment: § 668.171(c)(1)(iv)

Triggered if the potential 

loss from the closure of

programs that are one year 

away from losing their 

eligibility for title IV, HEA 

program funds causes the 
730

recalculated composite score 

to fall below 1.0.

The amount of title IV, HEA 

aid allocated in the previous 

year to programs that could 

lose eligibility in the next 

year will be used to 

recalculate the composite 

score.

Withdrawal of Owner’s Equity: § 668.171(c)(1)(v)

The amount of equity 

withdrawn will be used to 

recalculate the composite 

score. Applies only to 

proprietary institutions and 

provides that funds 

transferred between 

institutions in a group that 

have a common composite score 

are not considered 

withdrawals of owner’s 

equity.

Description Impact

Automatic Triggers Not Evaluated through Revised Composite 

Score Calculation: Institution found to be not financially 

responsible under § 668.171 and must qualify under an 

alternative standard if the triggering events occur.

Non-Title IV Revenue : § 668.171(d)

If an institution fails the 

90/10 revenue test in its 

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, HEA funds. The total 

title IV, HEA funding for 

those institutions in award 

year (AY) 2013-14 was $56.4 

million.

Publicly Traded Institutions – SEC or Exchange Actions: § 

668.171(e)
731

The SEC warns the institution 

that it may suspend trading 

on the institution’s stock.

The institution failed to 

file a required annual or 

quarterly report with the SEC 

within the time period 

prescribed for that report or 

by any extended due date 

under 17 CFR 240.12b-25.

The exchange on which the 

institution’s stock is traded 

notifies the institution that 

it is not in compliance with 

exchange requirements, or its 

stock is delisted.

Cohort Default Rates: § 

668.171(f)

Triggered if institution’s 

two most recent official 

cohort default rates are 30 

percent or above after any 

challenges or appeals. 

From the most recently 

released official CDR rates, 

for FY2013 and FY2012, 20 of 

3,058 non-public institutions 

that had CDR rates in both 

years were over 30 percent in 

both years. Title IV, HEA 

aid received by these 

institutions in AY2015-16 

totaled $12.8 million.

Description Impact

Discretionary Triggers: Institution found to be not 

financially responsible under § 668.171 and must qualify 

under an alternative standard if 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.

§ 668.171(g)(1): Significant 

fluctuations in title IV, HEA 

program funds 

The Department looked at 

fluctuations in Direct 

Loan amounts and found 

that 1,113 of 3,534 nonpublic institutions had an 

absolute change in Direct 
732

Loan volume of 25 percent 

or more between the 2014-

15 and 2015-16 award years 

and 350 had a change of 50 

percent or more.

§ 668.171(g)(2): Citation for 

failing State licensing or 

authorizing agency 

requirements.

§ 668.171(g)(3): Failing 

financial stress test developed 

or adopted by the Secretary.

§ 668.171(g)(4): High annual 

dropout rates, as calculated by 

the Secretary.

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, 587 

from 20 to 40 percent, 32 

from 40 to 60 percent, and 

none above 60 percent. 

§ 668.171(g)(5): The 

institution was placed on 

probation or issued a showcause order or a status that 

poses equivalent or greater 

risk to accreditation.

In the March 2015 

accreditation report 

available at 

http://ope.ed.gov/accredit

ation/GetDownLoadFile.aspx

, 278 of 33,956 programs 

were on probation and 5 

were in the resigned under 

show cause status. Of the 

283 programs in those 

statuses in the March 2015 

accreditation report, 9 
733

were closed by 

institutions or had their 

accreditation terminated 

and 147 remained in the 

same status for at least 6 

consecutive months.

§ 668.171(g)(6): Institution 

violates a provision or 

requirement in a loan agreement 

that enables a creditor to 

require an increase in 

collateral, a change in 

contractual obligations, an 

increase in interest rates or 

payments, or other sanctions, 

penalties, or fees.

§ 668.171(g)(7): The 

institution has pending claims 

borrower relief discharge under

§ 685.206 or § 685.222.

§ 668.171(g)(8): The Secretary 

expects to receive a 

significant number of claims 

for borrower relief discharge 

under § 685.206 or § 685.222 as 

a result of a lawsuit, 

settlement, judgement, or 

finding from a State or Federal 

administrative proceeding.

In addition to any resources institutions would devote 

to training or changes in business practices to improve 

compliance with the final regulations, institutions would 

incur costs associated with the reporting and disclosure 

requirements of the final regulations. This additional 

workload is discussed in more detail under Paperwork 

Reduction Act of 1995. In total, the final regulations are 

estimated to increase burden on institutions participating 
734

in the title IV, HEA programs by 251,049 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 $9,175,841. 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 final 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
735

In addition to the costs detailed in the Net Budget 

Impacts section of this analysis, the final regulations 

will affect the Federal government’s administration of the 

title IV, HEA programs. The borrower defense process in 

the final regulations will 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 $923 million to $2.1 

billion. 

The accountability framework and financial protection 

triggers will 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 
736

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 final 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 final regulations will 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 will 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.
737

4. Net Budget Impacts 

The final regulations are estimated to have a net 

budget impact in costs over the 2017-2026 loan cohorts of 

$16.6 billion in the primary estimate scenario, including a 

$381 million modification to cohorts 2014-2016 for the 3-

year automatic closed school discharge. 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 nonadministrative Federal costs associated with a cohort of 

loans.

As noted by many commenters, in the NPRM we presented 

a number of scenarios that generated a wide range of 

potential budget impacts from $1.997 billion in the lowest 

impact scenario to $42.698 billion in the highest impact 

scenario. As described in the NPRM, this range reflected 

the uncertainty related to the borrower defense provisions 

in the regulations and our intent to be transparent about 

the estimates to generate discussion and information that 

could help to refine the estimates. In response to 

comments and our own internal review, we have made a number 

of revisions to the borrower defense budget impact estimate 
738

that are described in the discussion of the impact of those 

provisions. 

The provisions with the greatest impact on the net 

budget impact of the regulations are those related to the 

discharge of borrowers’ loans, especially the changes to 

borrower defense and closed school discharges. As noted in 

the NPRM, borrowers may pursue closed school, false 

certification, or borrower defense discharges depending on 

the circumstances of the institution’s conduct and the 

borrower’s claim. 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. The precise split among the types of claims will 

depend on the borrower’s eligibility and ease of pursuing 

the different claims. While we recognize that some claims 

may be fluid in classification between borrower defense and 

the other discharges, in this analysis any estimated effect 

from borrower defense related claims are described in that 

estimate, and the net budget impact in the closed school 

estimate focuses on the process changes and disclosures 

related to that discharge. 

Borrower Defense Discharges
739

As the Department will eventually have to incorporate 

the borrower defense provisions of these final regulations 

into its ongoing budget estimates, we have moved closer to 

that goal in refining the estimated impact of the 

regulations to reflect a primary scenario. The uncertainty 

inherent in the borrower defense estimate given the limited 

history of borrower defense claims and other factors 

described in the NPRM is reflected in the additional 

sensitivity runs that demonstrate the effect of changes in 

the specific assumption being tested. Another change from 

the NPRM is the specification of an estimated baseline 

scenario for the impact of borrower defense claims if these 

final regulations did not go into effect and borrowers had 

to pursue claims under the existing borrower defense 

regulation. Similar to the NPRM, the estimated net budget 

impact of $14.9 billion attributes all borrower defense 

activity for the 2017 to 2026 cohorts to these final 

regulations, but with the baseline scenario, we present an 

estimate of the subset of those costs that could be 

incurred under the existing borrower defense regulation. 

These final regulations 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 
740

defense claims--both those made for Direct Loans first 

disbursed prior to July 1, 2017, and for those made under 

the 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, we have used the limited data 

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, comments on the 

NPRM analysis, and information about past investigations 

into the type of institutional acts or omissions that would 

give rise to borrower defense claims to refine the primary 

estimate and sensitivity scenarios that we believe will 

capture the range of net budget impacts associated with the 

borrower defense regulations. 

While we have refined the assumptions used to estimate 

the impact of the borrower defense provisions, the ultimate 

method of estimating the impact remains entering a level of 

net borrower defense claims into the student loan model 

(SLM) by risk group, loan type, and cohort. The net 

present value of the reduced stream of cash flows compared 

to what the Department would have expected from a 

particular cohort, risk group, and loan type generates the 
741

expected cost of the regulations. Similar to the NPRM, we 

applied an assumed level of school misconduct, borrower 

claims success, and recoveries from institutions 

(respectively labeled as Conduct Percent, Borrower Percent, 

and Recovery Percent in Tables 3-A and 3-B) to the 

President’s Budget 2017 (PB2017) loan volume estimates to 

generate the estimated net borrower defense claims for each 

cohort, loan type, and sector. 

The limited history of borrower defense claims and 

other factors that lead the Department to the range of 

scenarios described in the NPRM are still in effect. These 

factors include the level of school misconduct that could 

give rise to claims and institutions' reaction to the 

regulation to cut back on such activities, borrowers' 

response to the regulations including the consolidation of 

FFEL and Perkins borrowers to access the Direct Loan 

borrower defense process, the level of group versus 

individual claims, and the extent of full or partial relief 

applied to claims. Additionally, other regulatory and 

enforcement initiatives such as the Gainful Employment 

regulations, creation of the Student Aid Enforcement Unit, 

and greater rigor in the Department’s review of accrediting 

agencies may have overlapping effects and may affect loan 

volumes and potential exposure to borrower defense claims 
742

at some institutions. To demonstrate the effect of the 

uncertainty about these factors, we estimated several 

scenarios to test the sensitivity of the various 

assumptions. 

In refining our approach and estimating a primary 

scenario with several sensitivity runs, we also changed the 

assumptions from the NPRM in response to comments and our 

own review. The development of the estimated baseline 

scenario described in Table 3-B is one of the changes. 

Another major change is the incorporation of a deterrent 

effect of the borrower defense provisions on institutional 

behavior. In the NPRM, there was no change across cohorts 

in the level of school misconduct giving rise to claims. 

Upon review, we believe it is more likely that the borrower 

defense provision will have an impact like that of other 

title IV policies such as the cohort default rate or 90/10

in that institutions will make efforts to comply as the 

rule comes into effect and the precedents for what 

constitutes behavior resulting in successful claims are 

developed. In the past, when provisions targeting specific 

institutional activities or performance have been 

introduced, there has generally been a period of several 

years while the worst performers are removed from the 

system and while other institutions adapt to the new 
743

requirements and a lower steady state is established. We 

expect a similar pattern to develop with respect to 

borrower defense, as reflected in the Conduct Percent in 

Table 3-A. Another change reflected by the Conduct Percent 

is an increase in maximum level of claims from public and 

private non-profit institutions to 3 percent. Many 

commenters expressed concern about the effect of the 

regulations on these sectors or questions about the type of 

misconduct leading to claims that exist in those sectors. 

A number of commenters pointed to graduate programs, 

especially law programs, as a potential source of claims. 

Graduate students took out approximately 36 percent of all 

Direct Loans in 2015-16.105 Given the history of court 

decisions related to law school debt, the presumed greater 

sophistication of graduate borrowers, and the possibility 

of partial relief due to the value of the education 

received, we still do not expect many successful claims to 

come from these sectors but did increase the level to 

account for the possibility. The other major change is the 

introduction of a ramp-up in the Borrower Percent and the 

Recovery Percent to reflect an increase in borrower 

 

105 Federal Student Aid, Student Aid Data: Title IV Program Volume by School, available at 

https://studentaid.ed.gov/sa/about/data-center/student/title-iv.
744

awareness and the effectiveness of the financial 

responsibility protections over time.

There are a number of other potential mitigating 

factors that we did not explicitly adjust in our estimates 

in order to avoid underestimating the potential cost of the 

borrower defense provisions. Several commenters expressed 

concern about the effect of the regulations on access to 

higher education, especially for low-income, minority, or 

first-generation students. It is possible that the mix of 

financial aid received by students could shift if they 

attend different institutions than they would if the rule 

were not in place, but we believe that students whose 

choice of schools may have been affected by an 

institution’s wrongdoing will find an alternative and 

receive similar amounts of title IV, HEA aid. Some 

students who may not have pursued higher education without 

the institution’s act or omission may not enter the system, 

reducing the amount of Pell Grants or loans taken out, but 

we do not expect this to be a substantial portion of 

affected student borrowers. In the case of Pell Grants in 

particular, we do not want to estimate savings from 

potential reductions in aid related to borrower defense 

until such an effect is demonstrated in relevant data. 

Similarly, default discharges may decrease as borrowers 
745

seek discharge under the borrower defense provisions of 

these final regulations. If borrowers with valid borrower 

defense claims differ in their payment profile from the 

overall portfolio, the effect on the level of defaults, 

especially in some risk groups, could be substantial. 

Table 3-A presents the assumptions for the primary 

budget estimate with the budget estimate for each scenario 

presented in Table 4. As in the NPRM, we also estimated 

the impact if the Department received no recoveries from 

institutions, the results of which are discussed after 

Table 4. As in the NPRM, we do not specify how many 

institutions are represented in the estimate, 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, the five largest 

proprietary institutions in loan volume received 26 percent 

of Direct Loans disbursed in the proprietary sector in 

award year 2014-15 and the 50 largest represent 69 

percent.106

 

106 Federal Student Aid, Student Aid Data: Title IV Program Volume by School Direct Loan Program 

AY2015-16, Q4, available at https://studentaid.ed.gov/sa/about/data-center/student/title-iv 
746

As was done in the NPRM, the PB2017 loan volumes by 

sector were multiplied by the Conduct Percent that 

represents the share of loan volume estimated to be 

affected by institutional behavior that results in a 

borrower defense claim and the Borrower Percent that 

captures the percent of loan volume associated with 

potentially eligible borrowers who successfully pursue a 

claim to generate gross claims. The Recovery Percent was 

then applied to the gross claims to calculate the net 

claims that were processed in the Student Loan Model as 

increased discharges. The numbers in Tables 3-A and 3-B 

are the percentages applied for the primary estimate and 

baseline scenarios for each assumption. 

Table 3-A: Assumptions for Primary Budget Estimate

Conduct Percent

Cohort

2Yr 

Pub 2Yr Priv 2Yr Prop

4Yr 

Pub 4Yr Priv

4Yr 

Prop

2017 3.0 3.0 20 3.0 3.0 20

2018 2.4 2.4 16 2.4 2.4 16

2019 2.0 2.0 13.6 2.0 2.0 13.6

2020 1.7 1.7 11.6 1.7 1.7 11.6

2021 1.5 1.5 9.8 1.5 1.5 9.8

2022 1.4 1.4 8.8 1.4 1.4 8.8

2023 1.3 1.3 8.4 1.3 1.3 8.4

2024 1.2 1.2 8 1.2 1.2 8

2025 1.2 1.2 7.8 1.2 1.2 7.8

 

accessed August 22, 2016. https://studentaid.ed.gov/sa/about/data-center/student/title-iv 

accessed August 22, 2016.
747

2026 1.1 1.1 7.7 1.1 1.1 7.7

Borrower Percent

Cohort

2Yr 

Pub 2Yr Priv 2Yr Prop

4Yr 

Pub 4Yr Priv

4Yr 

Prop

2017 35 35 45 35 35 45

2018 36.8 36.8 47.3 36.8 36.8 47.3

2019 38.6 38.6 49.6 38.6 38.6 49.6

2020 42.4 42.4 54.6 42.4 42.4 54.6

2021 46.7 46.7 60 46.7 46.7 60

2022 50 50 63 50 50 63

2023 50 50 65 50 50 65

2024 50 50 65 50 50 65

2025 50 50 65 50 50 65

2026 50 50 65 50 50 65

Recovery Percent

Cohort

2Yr 

Pub 2Yr Priv 2Yr Prop

4Yr 

Pub 4Yr Priv

4Yr 

Prop

2017 75 23.8 23.8 75 23.8 23.8

2018 75 23.8 23.8 75 23.8 23.8

2019 75 26.18 26.18 75 26.18 26.18

2020 75 28.80 28.80 75 28.80 28.80

2021 75 31.68 31.68 75 31.68 31.68

2022 75 33.26 33.26 75 33.26 33.26

2023 75 34.93 34.93 75 34.93 34.93

2024 75 36.67 36.67 75 36.67 36.67

2025 75 37.4 37.4 75 37.4 37.4

2026 75 37.4 37.4 75 37.4 37.4

 

We also estimated a baseline scenario for the 

potential impact of borrower defense in recognition that 

many claims could be pursued under the existing State 

standards. The publicity and increased awareness of 

borrower defense could lead to increased activity under the 

existing regulations. In addition to the Corinthian 

claims, as of October 2016, the Department had received 
748

nearly 4,400 claims from borrowers of at least 20 

institutions. The Federal standard in the final 

regulations will provide a unified standard across all 

States but is based on elements of relevant consumer 

protection law from the various States. We estimate that 

the final regulations could increase claims beyond those 

that could be pursued without it by an average of 

approximately 10 percent for the FY2017 cohort. This is 

based on our initial review of claims presented that does 

not reveal significant differences between the State and 

Federal standards, limiting the expected increase in claims 

from the adoption of the Federal standard. The baseline 

school conduct percentage does improve over time, but at a 

slower rate than occurs under the regulation. The borrower 

claim percentage for the baseline is based on the history 

of limited claims, informational sessions107 during which 

during which 5 to 10 percent was presented as a reasonable 

rate when borrowers have to submit applications or 

otherwise initiate the process, and the level of effort 

used by the Department and advocates to get the Corinthian 

claims into the system. The recovery percentage reflects 

the fact that public institutions are not subject to the 

 

107 Conference calls with the Department, non-Federal negotiators, and Professor Adam Zimmerman 

were held on March 9, 2016 and March 10, 2016 from 12:00 pm to 1:00 pm.
749

changes in the financial responsibility provisions because 

of their presumed backing by their respective States. 

Therefore, the baseline and primary recovery scenarios are 

the same for public institutions and set at a high level to 

reflect the Department’s confidence in recovering the 

expected low level of claims against public institutions. 

Table 3-B presents the assumptions used to generate the 

share of the total net budget impact that we believe could 

have occurred even in the absence of these final 

regulations.

Table 3-B: Assumptions for Estimated Baseline Scenario

Conduct Percent

Coho

rt

All 

Sect 

ors

2Yr 

Pub

2Yr 

Priv

2Yr 

Pro

p

4Yr 

Pub

4Yr 

Priv

4Yr 

Pro

p

2017 2.7 2.7

18.

0 2.7 2.7

18.

0

2018 2.6 2.6

17.

1 2.6 2.6

17.

1

2019 2.4 2.4

16.

2 2.4 2.4

16.

2

2020 2.3 2.3

15.

4 2.3 2.3

15.

4

2021 2.2 2.2

14.

7 2.2 2.2

14.

7

2022 2.1 2.1

13.

9 2.1 2.1

13.

9

2023 2.0 2.0

13.

2 2.0 2.0

13.

2

2024 1.9 1.9

12.

6 1.9 1.9

12.

6

2025 1.8 1.8

11.

9 1.8 1.8

11.

9

2026 1.7 1.7

11.

3 1.7 1.7

11.

3
750

Borrower Percent

Coho

rt

All 

Sect 

ors

2Yr 

Pub

2Yr 

Priv

2Yr 

Prop

4Yr 

Pub

4Yr 

Priv

4Yr 

Prop

2017 8

2018 8.4

2019 8.8

2020 9.3

2021 9.7

2022 10.2

2023 10.7

2024 11.3

2025 11.8

2026 12.4

Recovery Pct

Coho

rt

All 

Sect

ors

2Yr 

Pub

2Yr 

Priv

2Yr 

Prop

4Yr 

Pub

4Yr 

Priv

4Yr 

Pro

p

2017 75 5 5 75 5 5

2018 75 5 5 75 5 5

2019 75 5 5 75 5 5

2020 75 5 5 75 5 5

2021 75 5 5 75 5 5

2022 75 5 5 75 5 5

2023 75 5 5 75 5 5

2024 75 5 5 75 5 5

2025 75 5 5 75 5 5

2026 75 5 5 75 5 5

As noted in the NPRM, and throughout this RIA, the 

Department recognizes the uncertainty associated with the 

factors contributing to the primary budget assumptions 

presented in Table 3-A. The baseline scenario defined by 

the assumptions in Table 3-B indicates the net costs of 

claims the Department assumes could occur in absence of 

these final regulations. The $4.9 billion estimated cost 
751

for the baseline scenario is provided for illustrative 

purposes and, as discussed above, is included in the $14.9 

billion total estimated cost for the borrower defense 

provisions. To demonstrate the effect of a change in any 

of the assumptions, the Department designed the following 

scenarios to isolate each assumption and adjust it by 15 

percent in the direction that would increase costs, 

increasing the Conduct or Borrower percentages and 

decreasing recoveries. As the gross claims are generated 

by multiplying the PB2017 estimated volumes by the Conduct 

Percent and the Borrower Percent, the Con15 scenario 

demonstrates the effect of the change in either assumption. 

The recovery percentage is applied to the gross claims to 

generate the net claims, so the REC15 scenario reduces 

recoveries by 15 percent to demonstrate the impact of that 

assumption. The final two runs adjust all the assumptions 

simultaneously to present a maximum and minimum expected 

budget impact. These sensitivity runs are identified as 

Con15, Rec15, All15, and Min15 respectively. The results 

of the various scenarios range from $14.9 billion to $21.2 

billion and are presented in Table 4. 

Table 4: Budget Estimates for Borrower Defense 

Sensitivity Runs
752

Scenario Estimated 

Costs for 

Cohorts 

2017-2026 

(Budget 

Authority 

in $mns) 

Annualized 

Cost to 

Federal 

Gov’t (3% 

discounting)

Annualized 

Cost to 

Federal 

Gov’t (7% 

discounting)

Primary Estimate $14,867 $1,471 $1,452

Baseline Scenario 

Estimate

$4,899 $485 $478

Con15 $16,770 $1,659 $1,638

Rec15 $16,092 $1,592 $1,571

All15 $21,246 $2,102 $2,075

Min15 $9,459 $936 $923

The transfers among the Federal government and 

affected borrowers and institutions associated with each 

scenario above are included in Table 5, with the difference 

in amounts transferred to borrowers and received from 

institutions generating the budget impact in Table 4. The 

amounts in Table 4 assume the Federal Government will 

recover some portion of claims from institutions. In the 

absence of any recovery from institutions, taxpayers would 

bear the full cost of successful claims from affected 
753

borrowers. At a 3 percent discount rate, the annualized 

costs with no recovery are approximately $2.465 billion for 

the primary budget estimate, $637 million for the baseline 

scenario, $2.758 billion for the Con15 scenario, $3.279 

billion for the All15 scenario, and $1.666 billion for the 

Min15 scenario. At a 7 percent discount rate, the 

annualized costs with no recovery are approximately $2.414 

billion for the primary budget estimate, $628 million for 

the baseline scenario, $2.699 billion for the Con15 

scenario, $3.213 billion for the All15 scenario, and $1.627 

billion for the Min15 scenario. 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 final regulations also would make changes to the closed 

school discharge process, which are estimated to cost 

$1.732 billion, of which $381 million is a modification to 

cohorts 2014-2016 related to the extension of the automatic 

3-year discharge and $1.351 billion is for cohorts 2017-

2026. The final regulations include requirements to inform 

students of the consequences, benefits, requirements, and 
754

procedures of the closed school discharge option, including 

providing students with an application form, and establish 

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. 

Chart 1 provides the history of closed schools, which 

totals 12,666 schools or campus locations through September 

2016.

Chart 1: History of School Closures
755

In order to estimate the effect of the 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 NSLDS 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, HEA 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. The Department used this information and the 

high end of closed school claims in recent years to 

estimate the effect of the final regulations related to 

closed school discharges. The resulting estimated cost to 

the Federal government of the closed school provisions is 

$1.732 billion, of which $381 million is a modification 

related to extending the 3-year automatic discharge to 

cohorts 2014 through 2016 and $1.351 billion relates to the 

2017 to 2026 loan cohorts.

The final regulations will also change the false 

certification discharge process to include instances in 

which schools certified the eligibility of a borrower who 
756

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 

final regulations will 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 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, we do 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 
757

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. 

Other Provisions

As indicated in the NPRM, there are a number of 

additional provisions in these final regulations that are 

not expected to have a significant net budget impact. 

These provisions include a number of technical changes 

related to the PAYE and REPAYE repayment plans and the 

consolidation of Nurse Faculty Loans, updates to the 

regulations describing the Department’s authority to 

compromise debt, and updates to 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. 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 
758

school, false certification, unpaid refund, or defense to 

repayment discharge. However, we believe 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. These 

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. 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 million108 in grants are 

available annually for schools to make Nurse Faculty Loans, 

and borrowers would lose access to generous forgiveness 

 

108 Department of Health and Human Services, FY 2017 Health Resources and Services 

Administration Justification of Estimates for Appropriations Committees. Available at 

www.hrsa.gov/about/budget/budgetjustification2017.pdf.
759

terms if they choose to consolidate those loans. 

Therefore, we would expect the volume of consolidation to 

be very small, and do not anticipate any significant budget 

impact from this provision. 

Assumptions, Limitations, and Data Sources

In developing these estimates, we used a wide range of 

data sources, including data from the NSLDS; 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. We also used data from 

other sources, such as the U.S. Census Bureau.

5. Accounting Statement

As required by OMB Circular A-4 (available 

at www.whitehouse.gov/sites/default/files/omb/assets/omb/ci

rculars/a004/a-4.pdf), in the following table we have 

prepared an accounting statement showing the classification 

of the expenditures associated with the provisions of these

final regulations. This table provides our best estimate 

of the changes in annual monetized costs, benefits, and 

transfers as a result of the final regulations based on the 

assumptions described in the Net Budget Impacts and 

Paperwork Reduction Act sections of this preamble.

Table 5: Accounting 
760

Statement 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%

Costs of obtaining 

LOCs or equivalents not quantified

Costs of compliance 

with paperwork 

requirements

9.87 9.84 

Category Transfers

3% 7%

Borrower Defense 

claims from the 

Federal government 

to affected 

borrowers 

(partially borne by 

affected 

institutions, via 

reimbursements

Primary

2,465 2,414

Baseline

637 628

Con15 2,758 2,699

REC15 2484 2,434
761

ALL15 3,279 3,213

MIN15 1,666 1,627

Reimbursements of 

borrower defense 

claims from 

affected 

institutions to 

affected student 

borrowers, via the 

Federal government

Primary

Baseline

152 150

CON15 1,099 1,061

REC15 891 862

ALL15 1,176 1,138

MIN15 730 704

Closed school 

discharges from the 

Federal government 

to affected 

students 178 185

6. Regulatory Alternatives Considered

In response to comments received and the Department’s 

further internal consideration of these final regulations, 

the Department reviewed and considered various changes to 

the proposed regulations detailed in the NPRM. The changes 

made in response to comments are described in the Analysis 

of Comments and Changes section of this preamble. We 

summarize below the major proposals that we considered but 
762

which we ultimately declined to implement in these 

regulations.

In particular, the Department extensively reviewed the 

financial responsibility provisions and related 

disclosures, the repayment rate warning, and the 

arbitration provisions of these final regulations. In 

developing these final regulations, the Department 

considered the budgetary impact, administrative burden, and 

effectiveness of the options it considered.

Final Regulatory Flexibility Analysis

Description of the Reasons that Action by the Agency Is 

Being Considered

The Secretary is amending 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 are also amending the Student 

Assistance General Provisions regulations to revise the 

financial responsibility standards and add disclosure 

requirements for schools. Finally, we are amending the 

discharge provisions in the Perkins Loan, Direct Loan, FFEL 

Program, and TEACH Grant programs. These changes will 

provide transparency, clarity, and ease of administration 

to current and new regulations and protect students, the 
763

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, 

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 final regulatory 

flexibility analysis to present an estimate of the effect 

of these regulations on small entities. 

Succinct Statement of the Objectives of, and Legal 

Basis for, the Final 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 
764

in place since 1995, but have rarely been 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 

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 final regulations will affect institutions of 

higher education that participate in the Federal Direct 

Loan Program and borrowers. Approximately 60 percent of 

institutions of higher education 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 institutions 

of higher education qualify as small entities--1,891 are 

not-for-profit institutions, 2,196 are for-profit 
765

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

Table 6 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 is 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 109,351 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 $3,996,777. This 

cost was based on an hourly rate of $36.55.
766

Table 6: Paperwork Reduction Act for Small Entities

Reg 

Section

OMB 

Control 

# Hours Cost

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 

teach-out. 668.14

OMB 

1845-

0022

 

985 $ 36,004 

Advertising 

warning of 

repayment rate 

outcomes; and 

disclosure to 

prospective and 

enrolled students 

of actions and 

triggering events 

for financial 

protection. 668.41

OMB 

1845-

0004

 

2,138 $78,159 

Financial 

Responsibility -

reporting of 

certain actions 

or triggering 

events in 

668.171(c)-(g) no 

later than the 

time specified in 

668.171(h) 668.171

OMB 

1845-

0022

 

1,617 $ 59,094 
767

Alternative 

Standards and 

Requirements –

requires an 

institution to 

provide the 

Secretary 

financial 

protection, such 

as an irrevocable 

letter of credit, 

upon the 

occurrence of an 

action or 

triggering event 

described in § 

668.171(c)-(g) if 

that event 

warrants 

protection as 

determined under 

§ 668.175(f)(4) 668.175

OMB 

1845-

0022

 

32,336 $1,181,881 

Borrower defense 

process -

provides a 

framework for the 

borrower defense 

process. 

Institutions 

could engage in

fact-finding, 

provide evidence 

related to claims 

and appeal 

decisions. 685.222

OMB 

1845-

0142

 

530 $ 19,372 
768

Agreements 

between an 

eligible school 

and the Secretary 

for participation 

in the Direct 

Loan Program -

prohibits 

predispute 

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-

0143

 

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 final regulations are unlikely to conflict with or 

duplicate existing Federal regulations.

Alternatives Considered

As described above, the Department participated in 

negotiated rulemaking and reviewed a large number of 

comments when developing the regulations, and considered a 

number of options for some of the provisions. We 

considered multiple issues, including the group discharge 
769

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-forprofit institutions that are a significant portion of small 

entities that would be affected by the final regulations. 

The additional options to provide financial protection may 

also benefit small entities, even though the changes were 

not specifically directed at them.

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 

the desired format, reporting burden (time and financial 

resources) is minimized, collection instruments are clearly 
770

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 these final regulations, we have displayed the 

control numbers assigned by OMB to any information 

collection requirements in this NPRM and adopted in the 

final regulations.

Discussion

Section 668.14 - Program Participation Agreement.

Requirements: 
771

Section 668.14(b)(32) of the final regulations will 

require, as part of the program participation agreement, 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.

Burden Calculation: 

From the Award Years 2011-12 to 2014-15 there were 182 

institutions that closed (30 private, 150 proprietary, and 

two 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). 
772

We estimate that an institution will require two hours 

to prepare the required written disclosure to be sent 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 eight private institutions 16 hours to prepare 

the written disclosure information required (8 institutions 

x 2 hours).

On average, we estimate that it will take the 

estimated eight private institutions that will close a 

total of 324 hours (1,904 students x .17 (10 minutes)) to 

process the required written disclosure with a copy of the 

closed school discharge application based on the mailing 

list for the estimated 1,904 enrolled students.

The burden for this process for private institutions 

is 340 hours.

On average, we estimate that it will take the 

estimated 38 proprietary institutions 76 hours to prepare 

the written disclosure information required (38 

institutions x 2 hours).
773

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 

process the required written disclosure with a copy of the 

closed school discharge application based on the mailing 

list for the estimated 9,044 enrolled students.

The burden for this process for proprietary 

institutions is 1,613 hours.

For § 668.14, the total increase in burden is 1,953 

hours under OMB Control Number 1845-0022.

Section 668.41---Reporting and disclosure of information.

Requirements:

Section 668.41(h) of the final regulations Loan 

repayment warning for proprietary institutions will expand 

the disclosure requirements under § 668.41 to provide that, 

for any award year in which a proprietary institution’s 

loan repayment rate as reported to it by the Secretary 

shows that the median borrower has not paid down the 

balance of the borrower’s loans by at least $1, the 

institution must provide a loan repayment warning in 

advertising and promotional materials. An institution with 

fewer than 10 borrowers, or that demonstrates to the 

Secretary’s satisfaction that it has borrowers in nonGainful Employment programs who would increase the 
774

institution’s repayment rate to meet the negative 

amortization threshold if included in the calculation, 

would not be required to provide the warning.

The process through which a proprietary institution 

will be informed of its repayment rate, and provided the 

opportunity to appeal that rate, is included in § 

668.41(h)(2) of the final regulations. The Department 

notifies the institution of its repayment rate. Upon 

receipt of the rate the institution has 15 days to submit 

an appeal based on the two conditions in § 668.41(h)(2)(ii) 

to the Secretary.

Additionally, § 668.41(h)(3) of the final regulations 

stipulates the treatment of required disclosures in 

advertising and promotional materials. Under the 

provision, all advertising and promotional materials made 

available by or on behalf of an institution that identify 

the institution by name must include a warning about loan 

repayment outcomes as prescribed by the Secretary. The 

Secretary may conduct consumer testing to ensure meaningful 

and helpful language is provided to the students. 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. The warning must be prominent, clear and 
775

conspicuous, easily heard or read. The Secretary may 

require modifications to such materials if the warning does 

not meet the regulatory conditions.

Burden Calculation: 

There will be burden on schools to review the 

repayment rate identified in § 668.41(h)(1) and to submit 

an appeal to the accuracy of the information, as provided 

in § 668.41(h)(2). Additionally, there will be burden for 

those institutions that are required to include the 

necessary loan repayment warning in their promotional 

materials. 

Based on an analysis of Departmental data, 972 of the 

1,345 proprietary institutions with reported repayment rate 

data would not meet the negative amortization threshold for 

the repayment rate calculation. 

We estimate that it will take the 972 institutions 30 

minutes (.50 hours) or 486 hours to review the 

institutional repayment rate and determine if it meets one 

of the conditions to submit an appeal to the Secretary (972 

institutions x .50 hours = 486 hours). 

Of the 972 institutions that would not meet the 

negative amortization loan repayment threshold, we 

anticipate that one percent or 10 institutions could meet 

the appeal criteria identified in 668.41(h)(2)(ii)(A).
776

We estimate that it will take the 10 institutions 

another 2 hours to produce the required evidence to submit 

with the appeal (10 institutions x 2 hours = 20 hours). We 

estimate it will take the approximate 10 institutions an 

additional 30 minutes (.50 hours) to submit the appeal to 

the Secretary (10 institutions x .50 hours = 5 hours) for a 

total of 25 hours.

We estimate that 5 institutions will be successful in 

their appeal, leaving 967 institutions that are required to 

include the necessary loan repayment warning in their 

promotional materials. 

We estimate it will take each of the approximate 967 

proprietary institutions a total of 5 hours to update their 

promotional materials (967 institutions x 5 hours = 4,835 

hours).

For § 668.41(h), the total increase in burden is 5,346 

hours under OMB Control Number 1845-0004.

Requirements:

Revised § 668.41(i) Financial protection disclosures

clarified the disclosure requirements regarding triggering 

events to both enrolled and prospective students, as well 

as on the institution’s Web site. The Secretary will 

conduct consumer testing to determine which actions and 

triggering events will require disclosures; and will 
777

publish the prescribed content of the disclosures in a 

Federal Register notice after conducting consumer testing 

to ensure that it is meaningful and helpful to students. 

Institutions must provide the required disclosures to 

enrolled and prospective students and post the disclosure 

to their Web sites within 30 days of notifying the 

Secretary of the relevant triggering event. Institutions 

may hand-deliver the disclosure notification, or may send 

the disclosure notification to the primary email address or 

other electronic communication method used by the 

institution for communicating with the enrolled or 

prospective student. In all cases, the institution must 

ensure that the disclosure notification is the only 

substantial content in the message. Prospective students 

must receive the disclosure before enrolling, registering, 

or entering into a financial obligation with the 

institution. 

Burden Calculation: 

There will be burden on schools to deliver the 

disclosures required by the Secretary to enrolled and 

prospective students and post it on the institution’s Web 

site under this final regulation. However, as § 668.41(i) 

commits to consumer testing of both the specific actions 

and events that will require a disclosure, and of the 
778

required disclosure itself, to be published by the 

Secretary in a Federal Register notice, burden will not be 

included here. Instead, the consumer testing procedures 

will follow information clearance review requirements. 

Prior to the implementation of the regulatory requirements 

under § 668.41(i) there will be an information clearance 

review package submitted to allow the public to comment. 

The total increase in burden is 5,346 hours for OMB 

Control Number 1845-0004. 

Section 668.171---Financial Responsibility--General

Requirements:

We added a new paragraph 668.171(h) under which, in 

accordance with procedures to be established by the 

Secretary, an institution will notify the Secretary of any 

action or triggering event described in § 668.171(c) 

through (g) in the specified number of 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 demonstrate that: 

• The amount claimed in a lawsuit by a State or 

Federal authority for financial relief on a claim 

related to the making of a Direct Loan for enrollment 
779

at the school or the provision of educational services 

exceeds the potential recovery.

• The withdrawal of owner’s equity was used 

solely to meet tax liabilities of the institution or 

its owners. 

• The creditor waived a violation of a loan 

agreement. If the 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 but would be permitted to 

show why these actions would not have an adverse 

financial impact on the institution.

• The reportable action or event no longer 

exists, has been resolved, or there is insurance to 

cover the liabilities that arise from the action or 

event.

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)-(g) 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 
780

institutions may have two 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 three events annually to report for total burden of 

2,352 hours (392 institutions x 3 events x 2 hours). For § 

668.171, the total increase in burden is 3,028 hours under 

OMB Control Number 1845-0022.

Section 668.175---Alternative standards and requirements 

Requirements:

Under the provisional certification alternative in § 

668.175(f), we added a new paragraph (f)(4) that requires 

an institution to provide the Secretary financial 

protection, such as an irrevocable letter of credit, upon 

the occurrence of an action or triggering event described 

in § 668.171(c)-(g) if that event warrants protection as 

determined under § 668.175(f)(4).

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 certifications 

alternatives. 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 
781

have two events annually to report for a total burden of 

13,520 hours (169 institutions x 2 events x 40 hours). We 

estimate that 392 proprietary institutions may have three 

events annually to report for total burden of 47,040 hours 

(392 institutions x 3 events x 40 hours).

For § 668.175, the total increase in burden is 60,560 

hours under OMB Control Number 1845-0022.

The combined total increase in burden for §§ 668.14, 

668.171, and 668.175 is 65,541 hours under OMB Control 

Number 1845-0022.

Section 682.211---Mandatory Administrative Forbearance for 

FFEL Program Borrowers

Requirements:

The final regulations 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 § 685.212(k) of the final 

regulations. The administrative forbearance will be 

granted in yearly increments or for a period designated by 

the Secretary until the Secretary notifies the lender that 
782

the loan has been consolidated or that the forbearance 

should be discontinued. If the Secretary notifies the 

borrower that the borrower will qualify for a borrower 

defense discharge if the borrower were to consolidate, the 

borrower will then be able to consolidate the loan(s) to 

which the defense applies and, if the borrower were to do 

so, the Secretary will 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 relief under a borrower 

defenses claim. 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 

lenders (76 x 4 = 304 hours). 

For § 682.211, the total increase in burden is 5,784 

hours under OMB Control Number 1845-0020.
783

Section 682.402---Closed School Discharges

Requirements:

Section 682.402(d)(6)(ii)(F) of the final regulations 

provides a second level of Departmental review for denied 

closed school discharge claims in the FFEL program. The 

final regulations require a guaranty agency that denies a 

closed school discharge request to inform the borrower in 

writing of the reasons for the denial, the opportunity for 

a review of the guaranty agency’s decision by the 

Secretary, and how the borrower may request such a review.

Section 682.402(d)(6)(ii)(I) of the final regulations 

requires the lender or guaranty agency, 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.

Section 682.402(d)(6)(ii)(K) of the final regulations 

describes the responsibilities of the guaranty agency if 

the borrower requests such a review.

Section 682.402(d)(8)(ii) of the final regulations 

authorizes 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 the borrower did not subsequently re-enroll 
784

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). 

There is an increase in burden of 108 hours under OMB 

Control Number 1845-0020.

There will be burden on guaranty agencies, upon 

receipt of the request for escalated review from the 

borrower, to 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. It is estimated that 5 percent of the 43,268, 

or 2,163 closed school applications were denied. We 
785

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). There is an increase 

in burden of 108 hours under OMB Control Number 1845-0020.

The guaranty agencies will have burden assessed based 

on these final 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 

(1,163 x .5 hours = 582 hours). There will be an estimated 

burden of 500 hours on the 10 not-for-profit guaranty 
786

agencies (1,000 x .5 hours = 500 hours). There is an 

increase in burden of 1,082 hours under OMB Control Number 

1845-0020.

There will be burden on the guaranty agencies to 

determine the eligibility of a borrower for a closed school 

discharge without the borrower submitting such an 

application. This determination 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 20 hours of 

programming will be necessary to enable 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). 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). There is an increase in burden of 540 hours under 

OMB Control Number 1845-0020.

For § 682.402, the total increase in burden is 1,838 

hours under OMB Control Number 1845-0020.
787

The combined total increase in burden for §§ 682.211 

and 682.402 is 7,622 hours under OMB Control Number 1845-

0020.

Section 685.222(e)---Process for Individual Borrowers

Requirements:

Section 685.222(e)(1) of the final regulations 

describes the steps an individual borrower must take to 

initiate a borrower defense claim. First, an individual 

borrower will submit an application to the Secretary, on a 

form approved by the Secretary. In the application, the 

borrower will certify that he or she received the proceeds 

of a loan to attend a school; may provide evidence that 

supports the borrower defense; and will 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 will also be required to provide any other 

information or supporting documentation reasonably 

requested by the Secretary. 

While the decision of the Department official will be 

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

be warranted on the claim, if the borrower defense is 

denied in full or in part, the borrower will be permitted 
788

to request that the Secretary reconsider the borrower 

defense upon the identification of new evidence in support 

of the borrower’s claim. “New evidence” will 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. There is a separate information collection 

being processed to put the final form through the 

information collection review process 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 will 

be denied and those borrowers will then request 

reconsideration by presenting new evidence to support their 
789

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 opted 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) under OMB Control Number 1845-0142.

Section 685.222(f) - Group Process for Borrower Defenses -

General 

Requirements:

Section 685.222(f) of the final regulations provides 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 will follow for borrower defenses 

for a group. 

Once a group of borrowers with common facts and claims 

has been identified, the Secretary will designate a 

Department official to present the group’s common borrower 

defense in the fact-finding process, and will provide each 

identified member of the group with notice that allows the 

borrower to opt out of the proceeding. 

Burden Calculation:
790

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) under OMB 

Control Number 1845-0142.

Section 685.222(g)---Group Process for Borrower Defense-–

Closed School

Requirements:

Section 685.222(g) of the final regulations 

establishes 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 
791

appropriate entity from which the Secretary can otherwise 

practicably recover such losses.

Under § 685.222(g)(1) of the final regulations, a 

hearing official will review the Department official’s 

basis for identifying the group and resolve the claim 

through a fact-finding process. As part of that process, 

the hearing official will 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 will 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 that elects to 

provide records or response to the hearing official’s fact 

finding. We anticipate that each group will 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 

one private closed school or persons affiliated with that 

closed school (1 private institution x 50 hours). We 
792

estimate that the fact-finding process will require 150 

hours from three 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) under OMB Control Number 

1845-0142.

Section 685.222(h) - Group Borrower for Defense–-Open 

School

Requirements:

Section 685.222(h) of the final regulations 

establishes 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 will resolve the borrower defense 

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

official will consider any evidence and argument presented 

by the school and the Department official on behalf of the 

group and, as necessary, any evidence presented on behalf 

of individual group members. 

The hearing official will issue a written decision. If 

the hearing official approves the borrower defense, that 

decision will describe the basis for the determination, 

notify the members of the group of the relief provided on 
793

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 will 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 will inform the borrowers that 

their loans will return to their statuses prior to the 

group borrower defense process. It also will notify the 

school of any liability to the Secretary for any amounts 

discharged. The Secretary will provide copies of the 

written decision to the members of the group, the 

Department official and the school. 

The hearing official’s decision will 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 will not 

take effect pending the appeal. The Secretary will render 

a final decision following consideration of any appeal. 
794

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 which 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 will 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 will require 150 

hours from the three open private institutions or persons 

affiliated with that school (3 institutions x 50 hours). 

We estimate that the fact-finding process will require 150 

hours from the three 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).

We further estimate that the appeal process will 

require 150 hours from the three open private institutions 
795

or persons affiliated with that school (3 institutions x 50 

hours). We estimate that the appeal process will require 

150 hours from the three 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 1845-0142.

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 for § 685.222 is 

1,049 hours under OMB Control Number 1845-0142.

Section 685.300-–-Agreements between an eligible school and 

the Secretary for participation in the Direct Loan Program. 

Requirements:

Section 685.300(e) of the final regulations requires 

institutions who, after the effective date of the final 

regulations, incorporate a predispute arbitration agreement 

or any other predispute agreement addressing class actions 

in any agreements with Direct Loan program borrowers to 
796

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, institutions that incorporated a 

predispute arbitration agreement or any other predispute 

agreement addressing class actions in any agreements with 

Direct Loan program borrowers prior to the effective date 

of the final regulations must provide borrowers with 

agreements or notices containing specific language 

regarding their 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 must provide this

notice to borrowers no later than the date of the loan exit 

counseling for current students or the date the school 

files an initial response to an arbitration demand or 

complaint suit from a student who has not received such 

notice.

Section 685.300(f) of the final regulations requires 

institutions who, after the effective date of the final 

regulations, incorporate predispute arbitration agreements 
797

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, institutions that incorporated predispute 

arbitration agreements with Direct Loan program borrowers 

prior to the effective date of the final regulations must 

provide borrowers with agreements or notices containing 

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. Institutions must provide this notice to 

such borrowers no later than the date of the loan exit 

counseling for current students or the date the school 

files an initial response to an arbitration demand or 

complaint suit from a student who hasn’t received such 

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 Academic Year 2014-2015 Direct 

Loan information available, there were 1,528,714 
798

Unsubsidized Direct Loan recipients at proprietary 

institutions. Assuming 66 percent of these students will 

continue to be enrolled at the time these regulations 

become effective, 1,008,951 students will be required to 

receive the agreements or notices required in § 685.300(e) 

or (f). We anticipate that it will take proprietary 

institutions .17 hours (10 minutes) per student to develop 

these agreements or notices, research who is required to 

receive them, and forward the information accordingly for 

an increase in burden of 171,522 hours (1,008,951 students 

x .17 hours) under OMB Control Number 1845-0143.

Requirements:

Section 685.300(g) of the final regulations 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 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.

Section 685.300(h) of the final regulations requires 

institutions to provide to the Secretary, copies of 

specified records connected to a claim filed in lawsuit by 
799

the school by 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 meets the 

conditions for supplying students with the changes to any 

agreements. 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 

final regulations. We anticipate that each of the 98 

schools will have an average of four filings there will be 

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 to produce the 

copies and submit to the Secretary for an increase in 

burden of 7,840 hours (98 institutions x 4 filings x 4 

submissions/filing x 5 hours) under OMB Control Number 

1845-0143. 

The combined total increase in burden for § 685.300 is 

179,362 hours under OMB Control Number 1845-0143.

Consistent with the discussion above, the following 

chart describes the sections of the final regulations 
800

involving information collections, the information being 

collected, 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 

$9,458,484 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

Regulatory 

Section Information Collection

OMB 

Control 

Number and 

Estimated 

Burden 

[change in 

burden]

Estimated 

Costs
801

§ 668.14 -

Program 

participati

on 

agreement.

The final regulation 

requires, 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 

require the institution 

to submit a teach-out 

plan.

1845-0022 

– This 

would be a 

revised 

collection

. We 

estimate 

burden 

would 

increase 

by 1,953 

hours.

$71,382
802

§668.41 –

Reporting 

and 

disclosure 

of 

information

.

The final regulation 

clarifies in § 668.41(h) 

reporting and disclosure 

requirements to provide 

that, for any fiscal 

year in which the median 

borrower of a 

proprietary institution 

had not paid down the 

balance of the 

borrower’s loans by at 

least one dollar, the 

institution must include 

a warning about that 

institution’s repayment 

outcomes in advertising 

and promotional 

materials.

Additionally, the final 

regulation clarifies 

that certain actions and 

triggering events for 

financial protection 

may, under § 668.41(i), 

require disclosure to 

prospective and enrolled 

students. Both the 

actions and triggering 

events and the 

disclosure language are 

subject to consumer 

testing.

1845-0004 

– This 

would be a 

revised 

collection

. We 

estimate 

burden 

would 

increase 

by 5,346 

hours.

$195,396
803

§668.171 -

Financial 

responsibil

ity -

General 

The final regulations 

add a new paragraph 

668.171(h) under which, 

in accordance with 

procedures to be 

established by the 

Secretary, an 

institution will notify 

the Secretary of any 

action or triggering 

event described in § 

668.171(c) through (g) 

in the specified number 

of days after that 

action or event occurs.

1845-0022 

– This is 

a revised 

collection

. We 

estimate 

burden 

will 

increase 

by 3,028 

hours.

$110,673 
804

§668.175 -

Alternative 

standards 

and 

requirement

s 

The final regulations 

add a new paragraph 

(f)(4) that requires an 

institution to provide 

the Secretary financial 

protection, such as an 

irrevocable letter of 

credit, upon the 

occurrence of an action 

or triggering event 

described in § 

668.171(c)-(g) if that 

event warrants 

protection as determined 

under § 668.175(f)(4).

1845-0022 

– This is 

a revised 

collection

. We 

estimate 

burden 

would 

increase 

by 60,560 

hours.

$2,213,46

8
805

§682.211 –

Forbearance

.

The final regulations 

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 § 

685.212(k) of the final 

regulations.

1845-0020 

– This is 

a revised 

collection

. We 

estimate 

burden 

will 

increase 

by 5,784 

hours.

$211,405
806

§682.402 -

Death, 

disability, 

closed 

school, 

false 

certificati

on, unpaid 

refunds, 

and 

bankruptcy 

payments.

The final regulations 

provide a second level 

of Departmental review 

for denied closed school 

discharge claims in the 

FFEL program. The final 

language requires 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 final regulations 

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 final regulations 

describe the 

responsibilities of the 

guaranty agency if the 

borrower requests such a 

review.

The final regulations 

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 

1845-0020 

– This is 

a revised 

collection

. We 

estimate 

burden 

will 

increase 

by 1,838 

hours.

$67,179
807

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. 
808

§685.222 –

Borrower 

Defenses

The final regulation 

describes the steps an 

individual borrower must 

take to initiate a 

borrower defense claim. 

The final regulations 

also 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 

will follow for borrower 

defenses for a group.

The final regulations 

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 

final regulations 

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.

1845-0142 

– This is 

a new 

collection

. We 

estimate 

burden 

will 

increase 

by 1,049 

hours.

(249 

Individual 

hours

800 

Institutio

nal hours) 

$

33,299
809
810

§ 685.300 

Agreements 

between an 

eligible 

school and 

the 

Secretary 

for 

participati

on in the 

Direct Loan 

Program.

The final regulations 

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 predispute 

arbitration agreements. 

There is required 

agreement and 

notification language to 

be provided to affected 

students. Additionally, 

the final regulations 

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.

1845-0143 

– This is 

a new 

collection

. We 

estimate 

burden 

will 

increase 

by 179,362 

hours

$6,555,68

1

The total burden hours and change in burden hours 

associated with each OMB Control number affected by the 

final regulations follows:

Control number Total Final 

Burden Hours

Final Change in Burden 

Hours

1845-0004 24,016 +5,346

1845-0020 8,249,520 +7,622

1845-0022 2,281,511 +65,541

1845-0142 1,049 +1,049

1845-0143 179,362 +179,362

Total 10,735,458 +258,920
811

Assessment of Educational Impact

Under § 668.171(h) of the final regulations, 

institutions are required to report to the Department 

certain events or occurrences that they may also be 

required to report to the SEC. Under SEC rules and 

regulations, institutions are generally required to report 

information that would be material to stockholders, 

including certain specified information, whereas the 

Department has identified events and occurrences unique to 

institutions of higher education that it believes could 

threaten an institution’s financial viability and for which 

it requires specific and perhaps more timely reporting. We 

believe this reporting is necessary to ensure that 

institutions provide financial protection, for the benefit 

of students and taxpayers, against actions or events that 

threaten an institution’s ability to (1) meet its current 

and future financial obligations, (2) continue as a going 

concern or continue to participate in the title IV, HEA 

programs, and (3) continue to deliver educational services.
812

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request to the person listed under FOR FURTHER INFORMATION 

CONTACT.

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of this document is the document published in the Federal 

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List of Subjects

34 CFR Part 30

Claims, Income Taxes.
813

34 CFR Part 668 

Administrative practice and procedure, Colleges and 

universities, Consumer protection, Grant programs--

education, 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.

34 CFR Parts 686

Administrative practice and procedure, Colleges and 

universities, Education, Elementary and Secondary 

education, Grant programs—education, Reporting and 

recordkeeping requirements, Student aid.

Dated: October 17, 2016

____________________________

John B. King, Jr.,

Secretary of Education.
814

For the reasons discussed in the preamble, the 

Secretary of Education amends 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 
815

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 
816

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 
817

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.
818

(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:

A. In paragraph (b)(30)(ii)(C), by removing the word 

“and”.

B. In paragraph (b)(31)(v), by removing the period 

and adding in its place “; and”.

C. By adding 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 
819

submitting a teach-out plan after the occurrence of any of 

the following events:

(i) The initiation by the Secretary of an action 

under 34 CFR 600.41 or subpart G of this part or the 

initiation of an emergency action under § 668.83, to 

terminate the participation of an institution in any title 

IV, HEA program.

(ii) The occurrence of any of the events in paragraph 

(b)(31)(ii) through (v) of this section.

* * * * * 

5. Section 668.41 is amended by adding paragraphs (h) 

and (i) and revising the authority citation to read as 

follows:

§ 668.41 Reporting and disclosure of information.

* * * * *

(h) Loan repayment warning for proprietary 

institutions—(1) Calculation of loan repayment rate. For 

each award year, the Secretary calculates a proprietary 

institution’s loan repayment rate, for the cohort of 

borrowers who entered repayment on their FFEL or Direct 

Loans at any time during the two-year cohort period, using 

the methodology in § 668.413(b)(3), provided that, for the 

purpose of this paragraph (h)--
820

(i) The reference to “program” in § 668.413(b)(3)(vi) 

is read to refer to “institution”; 

(ii) “Award year” means the 12-month period that 

begins on July 1 of one year and ends on June 30 of the 

following year; 

(iii) “Borrower” means a student who received a FFEL 

or Direct Loan for enrolling in a gainful employment 

program at the institution; and

(iv) “Two-year cohort period” is defined as set forth 

in § 668.402. 

(2) Issuing and appealing loan repayment rates. (i) 

For each award year, the Secretary notifies an institution 

of its final loan repayment rate. 

(ii) If an institution’s final loan repayment rate 

shows that the median borrower has not either fully repaid 

all FFEL or Direct Loans received for enrollment in the 

institution or made loan payments sufficient to reduce by 

at least one dollar the outstanding balance of each of the 

borrower’s FFEL or Direct Loans received for enrollment in 

the institution--

(A) Using the calculation described in paragraph 

(h)(4)(ii) of this section, the institution may submit an 

appeal to the Secretary within 15 days of receiving 

notification of its final loan repayment rate; and
821

(B) The Secretary will notify the institution if the 

appeal is--

(1) Granted and the institution qualifies for an 

exemption from the warning requirement under paragraph 

(h)(4) of this section; or

(2) Not granted, and the institution must comply with 

the warning requirement under paragraph (h)(3) of this 

section. 

(3) Loan repayment warning—(i) Promotional 

materials. (A) Except as provided in paragraph (h)(4) of 

this section, for any award year in which the institution’s 

loan repayment rate shows that the median borrower has not 

either fully repaid, or made loan payments sufficient to 

reduce by at least one dollar the outstanding balance of, 

each of the borrower’s FFEL or Direct Loans received for 

enrollment in the institution, the institution must, in all 

promotional materials that are made available to 

prospective or enrolled students by or on behalf of the 

institution, include a loan repayment warning in a form, 

place, and manner prescribed by the Secretary in a notice 

published in the Federal Register. The warning language 

must read: “U.S. Department of Education Warning: A 

majority of recent student loan borrowers at this school 

are not paying down their loans,” unless stated otherwise 
822

by the Secretary in a notice published in the Federal

Register. Before publishing that notice, the Secretary may 

conduct consumer testing to help ensure that the warning is 

meaningful and helpful to students.

(B) Promotional materials include, but are not 

limited to, an institution's Web site, catalogs, 

invitations, flyers, billboards, and advertising on or 

through radio, television, video, print media, social 

media, or the Internet. 

(C) 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.

(ii) Clarity of warning. The institution must ensure 

that the warning is prominent, clear, and conspicuous. The 

warning is not prominent, clear, and conspicuous if it is 

difficult to read or hear, or placed where it can be easily 

overlooked. In written materials, including email, 

Internet advertising and promotional materials, print 

media, and other advertising or hard-copy promotional 

materials, the warning must be included on the cover page 

or home page and any other pages with information on a 

program of study and any pages with information on costs 

and financial aid. For television and video materials, the 
823

warning must be both spoken and written simultaneously. 

The Secretary may require the institution to modify its 

promotional materials, including its Web site, if the 

warning is not prominent, clear, and conspicuous. 

(4) Exemptions. An institution is not required to 

provide a warning under paragraph (h)(3) of this section 

based on a final loan repayment rate for that award year 

if--

(i) That rate is based on fewer than 10 borrowers in 

the cohort described in paragraph (h)(1) of this section; 

or

(ii) The institution demonstrates to the Secretary’s 

satisfaction that not all of its programs constitute GE 

programs and that if the borrowers in the non-GE programs 

were included in the calculation of the loan repayment 

rate, the loan repayment rate would show that the median 

borrower has made loan payments sufficient to reduce by at 

least one dollar the outstanding balance of each of the 

borrower’s FFEL or Direct Loans received for enrollment in 

the institution. 

(i) Financial protection disclosures—(1) General. 

An institution must deliver a disclosure to enrolled and 

prospective students in the form and manner described in 

paragraph (i)(3), (4), and (5) of this section, and post 
824

that disclosure to its Web site as described in paragraph 

(i)(6) of this section, within 30 days of notifying the 

Secretary under § 668.171(h) of the occurrence of a 

triggering event or events identified pursuant to paragraph 

(i)(2) of this section. The requirements in this paragraph 

(i) apply for the 12-month period following the date the 

institution notifies the Secretary under § 668.171(h) of a 

triggering event or events identified under paragraph 

(i)(2). 

(2) Triggering events. The Secretary will conduct 

consumer testing to inform the identification of events for 

which a disclosure is required. The Secretary will 

consumer test each of the events identified in § 668.171(c)

through (g), as well as other events that result in an 

institution being required to provide financial protection 

to the Department, to determine which of these events are 

most meaningful to students in their educational decisionmaking. The Secretary will identify the triggering events 

for which a disclosure is required under paragraph (i)(1) 

in a document published in the Federal Register. 

(3) Form of disclosure. The Secretary will conduct 

consumer testing to ensure the form of the disclosure is 

meaningful and helpful to students. The Secretary will 

specify the form and placement of the disclosure in a 
825

notice published in the Federal Register following the 

consumer testing.

(4) Delivery to enrolled students. An institution 

must deliver the disclosure required under this paragraph 

(i) to each enrolled student in writing by--

(i) Hand-delivering the disclosure as a separate 

document to the student individually or as part of a group 

presentation; or 

(ii)(A) Sending the disclosure to the student’s 

primary email address or delivering the disclosure through 

the electronic method used by the institution for 

communicating with the student about institutional matters; 

and

(B) Ensuring that the disclosure 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. 

(5) Delivery to prospective students. An institution 

must deliver the disclosure required under this paragraph 

(i) to a prospective student before that student enrolls, 

registers, or enters into a financial obligation with the 

institution by--
826

(i) Hand-delivering the disclosure as a separate 

document to the student individually, or as part of a group 

presentation; or

(ii)(A) Sending the disclosure to the student’s 

primary email address or delivering the disclosure through 

the electronic method used by the institution for 

communicating with prospective students about institutional 

matters; and

(B) Ensuring that the disclosure 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.

(6) Institutional Web site. An institution must 

prominently provide the disclosure required under this 

paragraph (i) in a simple and meaningful manner on the home 

page of the institution’s Web site. 

* * * * *

(Authority: 20 U.S.C. 1092, 1094, 1099c)

6. Section 668.71 is amended in paragraph (c), in the 

second sentence of the definition of “Misrepresentation”, 

by removing the word “deceive” and adding in its place the 

words “mislead under the circumstances” and by adding a 

fourth sentence.
827

The addition reads as follows:

§ 668.71 Scope and special definitions.

* * * * *

(c) * * *

Misrepresentation: * * * 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) * * *

(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 
828

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 under 

§ 668.15 or § 668.171(c) through (g), the hearing official 

finds that the amount of the letter of credit or other 

financial protection established by the Secretary under 

§ 668.175(f)(4) is appropriate, unless the institution can 

demonstrate that the amount was not warranted because--

(A) For financial protection demanded based on events 

or conditions described in § 668.171(c) through (f), the 

events or conditions no longer exist or have been resolved 

or the institution demonstrates that it has insurance that 

will cover the debts and liabilities that arise from the 

triggering event or condition, or, for a condition or event 

described in § 668.171(c)(1)(iii) (teach out) or (iv) 

(gainful employment eligibility loss), the amount of 

educationally related expenses reasonably attributable to 

the programs or location is greater than the amount 

calculated in accordance with Appendix C of subpart L of 

this part. The institution can demonstrate that insurance 

covers risk by presenting the Department with a statement 
829

from the insurer that the institution is covered for the 

full or partial amount of the liability in question; 

(B) For financial protection demanded based on a suit 

described in § 668.171(c)(1)(i) that does not state a 

specific amount of relief and on which the court has not 

ruled on the amount of relief, the institution demonstrates 

that, accepting the facts alleged as true, and assuming the 

claims asserted are fully successful, the action pertains 

to a period, program, or location for which the maximum 

potential relief is less than the amount claimed or the 

amount determined under § 668.171(c)(2)(ii);

(C) For financial protection demanded based on the 

ground identified in § 668.171(g), the factor or event does 

not and will not have a material adverse effect on the 

financial condition, business, or results of operations of 

the institution; 

(D)(1) For financial protection demanded under § 

668.175(f)(4)(i), the institution does not participate and 

has not participated for the prior fiscal year in a title 

IV, HEA loan program; and 

(2) For any financial protection demanded of an 

institution described in paragraph (a)(3)(iii)(D)(1) of 

this section, and any portion of financial protection 

demanded of any other institution greater than 10 percent 
830

of the amount of title IV, HEA funds received by the 

institution in its most recently completed fiscal year-–

(i) The risk of loss to the Secretary on the grounds 

demonstrated by the Secretary does not exist; 

(ii) The loss as demonstrated by the Secretary is not 

reasonably likely to arise within the next 18 months; or

(iii) The amount is unnecessary to protect, or 

contrary to, the Federal interest; 

(E) 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. In the 

Secretary’s discretion, adequate protection may consist of 

one or more of the following--

(1) An agreement with the Secretary that a portion of 

the funds due to the institution under a reimbursement or 

heightened cash monitoring funding arrangement will be 

temporarily withheld in such amounts as will meet, no later 

than the end of a nine-month period, the amount of the 

required financial protection demanded; or

(2) Other form of financial protection specified by 

the Secretary in a notice published in the Federal 

Register.
831

(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;

(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 
832

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.

* * * * *

(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--
833

(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 (e) and (f) of this 

section, the Secretary considers an institution to be 

financially responsible if the Secretary determines that--

(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. An institution may not be able 

to meet its financial or administrative obligations if it 

is subject to an action or event described in paragraph 

(c), (d), (e), (f), or (g) of this section. The Secretary 

considers those actions or events in determining whether 
834

the institution is financially responsible only if they 

occur on or after July 1, 2017; 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) Debts, liabilities, and losses. (1) Except as 

provided under paragraph (h)(3) of this section, an 

institution is not able to meet its financial or 

administrative obligations under paragraph (b)(3) of this 

section if, after the end of the fiscal year for which the 

Secretary has most recently calculated an institution’s 

composite score, the institution is subject to one or more 

of the following actions or triggering events, and as a 

result of the actual or potential debts, liabilities, or

losses that have stemmed or may stem from those actions or 

events, the institution’s recalculated composite score is 

less than 1.0, as determined by the Secretary under 

paragraph (c)(2) of this section:

(i) Debts and borrower defense-related lawsuits. (A) 

The institution is required to pay any debt or incur any 

liability arising from a final judgment in a judicial 

proceeding or from an administrative proceeding or 

determination, or from a settlement; or
835

(B) The institution is being sued in an action 

brought on or after July 1, 2017 by a Federal or State 

authority for financial relief on claims related to the 

making of the Direct Loan for enrollment at the school or 

the provision of educational services and the suit has been 

pending for 120 days. 

(ii) Other litigation. The institution is being sued 

in an action brought on or after July 1, 2017 that is not 

described in paragraph (c)(1)(i)(B) of this section and-–

(A) The institution has filed a motion for summary 

judgment or summary disposition and that motion has been 

denied or the court has issued an order reserving judgment 

on the motion; 

(B) The institution has not filed a motion for 

summary judgment or summary disposition by the deadline set 

for such motions by the court or agreement of the parties; 

or 

(C) If the court did not set a deadline for filing a 

motion for summary judgment and the institution did not 

file such a motion, the court has set a pretrial conference 

date or trial date and the case is pending on the earlier 

of those two dates. 

(iii) Accrediting agency actions. The institution 

was required by its accrediting agency to submit a teach-
836

out plan, for a reason described in § 602.24(c)(1), that 

covers the closing of the institution or any of its 

branches or additional locations.

(iv) Gainful employment. As determined annually by 

the Secretary, the institution has gainful employment 

programs that, under § 668.403, could become ineligible 

based on their final D/E rates for the next award year.

(v) Withdrawal of owner’s equity. For a proprietary 

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, unless the 

transfer is to an entity included in the affiliated entity 

group on whose basis the institution’s composite score was 

calculated.

(2) Recalculating the composite score--(i) General. 

Unless the institution demonstrates to the satisfaction of 

the Secretary that the event or condition has had or will 

have no effect on the assets and liabilities of the 

institution under paragraph (g)(3)(iv) of this section, as 

specified in Appendix C of this subpart, the Secretary 

recognizes and accounts for the actual or potential losses 

associated with the actions or events under paragraph 

(c)(1) of this section and, based on that accounting, 

recalculates the institution’s most recent composite score. 
837

The recalculation will occur regularly after associated 

actions or events are reported to the Secretary. The 

Secretary recalculates the composite score under this 

paragraph using the financial statements on which the 

institution’s composite score has been calculated under § 

668.172. 

(ii) Calculation of potential loss--debts and 

borrower defense-related lawsuits. For a debt or a suit 

described in paragraph (c)(1)(i) of this section, the 

amount of loss is--

(A) The amount of debt; 

(B) For a suit, the amount set by a court ruling, or, 

in the absence of a court ruling--

(1) The amount of relief claimed in the complaint; 

(2) If the complaint demands no specific amount of 

relief, the amount stated in any final written demand 

issued by the agency to the institution prior to the suit 

or a lesser amount that the agency offers to accept in 

settlement of any financial demand in the suit; or 

(3) If the agency stated no specific demand in the 

complaint, in a pre-filing demand, or in a written offer of 

settlement, the amount of tuition and fees received by the 

institution during the period, and for the program or 

location, described in the allegations in the complaint.
838

(iii) Calculation of potential loss–-other 

litigation. For any suit described in paragraph (c)(1)(ii) 

of this section, the amount of loss is the amount set by a 

court ruling, or, in the absence of a court ruling--

(A) The amount of relief claimed in the complaint; 

(B) If the complaint demands no specific amount of 

relief, the amount stated in any final written demand by 

the claimant to the institution prior to the suit or a 

lesser amount that the plaintiff offers to accept in 

settlement of any financial demand in the suit; or

(C) If the complainant stated no specific demand in 

the complaint, in a pre-filing demand, or in a written 

offer of settlement, the amount of the claim as stated in a 

response to a discovery request, including an expert 

witness report. 

(iv) Calculation of potential loss–-other events. (A) 

For a closed location or institution, or the potential loss 

of eligibility for gainful employment programs, as 

described in paragraph (c)(1)(iii) or (iv), the amount of 

loss is the amount of title IV, HEA program funds the 

institution received in its most recently completed fiscal 

year for that location or institution, or for those GE 

programs.
839

(B) For the withdrawal of owner’s equity, described 

in paragraph (c)(1)(v) of this section, the amount of loss 

is the amount transferred to any entity other than the 

institution. 

(d) Non-title IV revenue. Except as provided under 

paragraph (h)(3) of this section, a proprietary institution 

is not able to meet its financial or administrative 

obligations under paragraph (b)(3) of this section if, for 

its most recently completed fiscal year, the 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). 

(e) Publicly traded institutions. Except as provided 

under paragraph (h)(3) of this section, a publicly traded 

institution is not able to meet its financial or 

administrative obligations under paragraph (b)(3) of this 

section if the institution is currently subject to one or 

more of the following actions or events:

(1) SEC actions. The SEC warns the institution that 

it may suspend trading on the institution’s stock.

(2) SEC reports. The institution failed to file a 

required annual or quarterly report with the SEC within the 

time period prescribed for that report or by any extended 

due date under 17 CFR 240.12b-25.
840

(3) Exchange actions. The exchange on which the 

institution’s stock is traded notifies the institution that 

it is not in compliance with exchange requirements, or its 

stock is delisted.

(f) Cohort default rates. Except as provided under 

paragraph (h)(3) of this section, an institution is not 

able to meet its financial or administrative obligations 

under paragraph (b)(3) of this section if the institution’s 

two most recent official cohort default rates are 30 

percent or greater, as determined under subpart N of this 

part, unless--

(1) 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

(2) 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. 

(g) Discretionary factors or events. Except as 

provided under paragraph (h)(3) of this section, an 

institution is not able to meet its financial or 

administrative obligations under paragraph (b)(3) of this 

section if the Secretary demonstrates that there is an 
841

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--

(1) 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;

(2) The institution is cited by a State licensing or 

authorizing agency for failing State or agency 

requirements; 

(3) The institution fails a financial stress test 

developed or adopted by the Secretary to evaluate whether 

the institution has sufficient capital 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; 

(4) As calculated by the Secretary, the institution 

has high annual dropout rates; 

(5) The institution is or was placed on probation or 

issued a show-cause order, or placed on an accreditation 

status that poses an equivalent or greater risk to its 
842

accreditation, by its accrediting agency for failing to 

meet one or more of the agency’s standards; 

(6)(i) The institution violated a provision or 

requirement in a loan agreement; and

(ii) As provided under the terms of a security or 

loan agreement between the institution and the creditor, 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 contractual 

obligations, an increase in interest rates or payments, or 

other sanctions, penalties, or fees; 

(7) The institution has pending claims for borrower 

relief discharge under § 685.206 or § 685.222; or

(8) The Secretary expects to receive a significant 

number of claims for borrower relief discharge under § 

685.206 or § 685.222 as a result of a lawsuit, settlement, 

judgement, or finding from a State or Federal 

administrative proceeding.

(h) Reporting requirements. (1) In accordance with 

procedures established by the Secretary, an institution 

must notify the Secretary of any of the following actions 

or events identified in paragraphs (c) through (g) of this 

section no later than--
843

(i) For lawsuits and for other actions or events 

described in paragraph (c)(1)(i) of this section--

(A) For lawsuits, 10 days after the institution is 

served with the complaint and 10 days after the suit has 

been pending for 120 days; and

(B) For debts arising from lawsuits and for other 

actions or events, 10 days after a payment was required or 

a liability was incurred.

(ii) For lawsuits described in paragraph (c)(1)(ii)

of this section--

(A) Ten days after the institution is served with the 

complaint;

(B) Ten days after the court sets the dates for the 

earliest of the events described in paragraph (c)(1)(ii) of 

this section, provided that, if the deadline is set by 

procedural rules, notice of the applicable deadline must be 

included with notice of the service of the complaint; and

(C) Ten days after the earliest of the applicable 

events occurs; 

(iii) For an accrediting agency action described in 

paragraph (c)(1)(iii) of this section, 10 days after the 

institution is notified by its accrediting agency that it 

must submit a teach-out plan;
844

(iv) For a withdrawal of owner’s equity described in 

paragraph (c)(1)(v) of this section, 10 days after the 

withdrawal is made;

(v) For the non-title IV revenue provision in 

paragraph (d) of this section, 45 days after the end of the 

institution’s fiscal year, as provided in § 668.28(c)(3);

(vi) For the SEC and stock exchange provisions for 

publicly traded institutions in paragraph (e), 10 days 

after the SEC or exchange warns, notifies, or takes an 

action against the institution, or 10 days after any 

extension granted by the SEC;

(vii) For State or agency actions in paragraph (g)(2)

of this section, 10 days after the institution is cited for 

violating a State or agency requirement;

(viii) For probation or show cause actions under 

paragraph (g)(5) of this section, 10 days after the 

institution’s accrediting agency places the institution on 

that status; or 

(ix) For the loan agreement provisions in paragraph 

(g)(6) of this section, 10 days after a loan violation 

occurs, the creditor waives the violation, or the creditor 

imposes sanctions or penalties in exchange or as a result 

of the waiver.
845

(2) The Secretary may take an administrative action 

under paragraph (k) of this section against the institution 

if it fails to provide timely notice under this paragraph 

(h). 

(3) In its notice to the Secretary, the institution 

may demonstrate that--

(i) For a suit by a Federal or State agency described 

in paragraph (c)(1)(i)(B) of this section, the amount 

claimed in the complaint or determined under paragraph 

(c)(2)(ii) of this section exceeds the potential recovery 

because the allegations in the complaint, if accepted as 

true, and the claims asserted, if fully successful, cannot 

produce relief in the amount claimed or, if no amount was 

claimed, the amount deemed under paragraph (c)(2)(ii) 

because they pertain to a period, program, or location for 

which the full recovery possible is a lesser amount; 

(ii) The reported withdrawal of owner’s equity under 

paragraph (c)(1)(v) of this section was used exclusively to 

meet tax liabilities of the institution or its owners for 

income derived from the institution; 

(iii) The reported violation of a provision or 

requirement in a loan agreement under paragraph (g)(6) of 

this section was waived by the creditor. However, if the 

creditor imposes additional constraints or requirements as 
846

a condition of waiving the violation, or imposes penalties 

or requirements under paragraph (g)(6)(ii) of this section, 

the institution must identify and describe those penalties, 

constraints, or requirements and may demonstrate that 

complying with those actions will not adversely affect the 

institution’s ability to meet its current and future 

financial obligations; or

(iv) The action or event reported under this 

paragraph (h) no longer exists or has been resolved or the 

institution has insurance that will cover part or all of 

the debts and liabilities that arise at any time from that 

action or event.

(i) 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 

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
847

(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.

(j) Audit opinions. Even if an institution satisfies 

all of the general standards of financial responsibility 

under paragraph (b) of this section, the 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 
848

concern, unless the Secretary determines that a qualified 

or disclaimed opinion does not significantly bear on the 

institution's financial condition.

(k) 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).

(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 (c) and (d).

B. Removing and reserving paragraph (e).

C. Revising paragraph (f).

D. Adding paragraph (h).
849

E. Revising the authority citation.

The revisions and addition read as follows:

§ 668.175 Alternative standards and requirements.

* * * * * 

(c) Letter of credit alternative for participating 

institutions. A participating institution that is not 

financially responsible either because it does not satisfy 

one or more of the standards of financial responsibility 

under § 668.171(b) through (g), or because of an audit 

opinion described under § 668.171(j), qualifies as a 

financially responsible institution by submitting an 

irrevocable letter of credit or other form of financial 

protection specified by the Secretary in a notice published 

in the Federal Register, that is acceptable and payable to 

the Secretary, for an amount determined by the Secretary 

that is not less than one-half of the title IV, HEA program 

funds received by the institution during its most recently 

completed fiscal year.

(d) Zone alternative. (1) A participating 

institution that is not financially responsible solely 

because the Secretary determines that its composite score 

under § 668.172 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, 
850

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 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;
851

(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 

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
852

(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 

requirements under paragraph (d)(2) or (3) of this section, 

the Secretary may determine that the institution no longer 

qualifies under this alternative.

* * * * *

(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, as determined annually by the 

Secretary--

(i) The institution is not financially responsible 

because it does not satisfy the general standards under § 

668.171(b)(1) or (3), its recalculated composite score 

under § 668.171(c)(2) is less than 1.0, is subject to an 

action or event under § 668.171(d), (e), (f),or (g) or 

because of an audit opinion described in § 668.171(i); or
853

(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, 

agree to a set-aside under paragraph (h) of this section, 

or, at the Secretary’s discretion, provide another form of 

financial protection specified by the Secretary in a notice 

published in the Federal Register, for an amount determined 

by the Secretary 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).

(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--

(i) May permit the institution to participate under a 

provisional certification, but--

(A) May require the institution, or one or more 

persons or entities that exercise substantial control over 
854

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 under 

paragraph (f)(4) of this section; and

(B) 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; and

(ii) May permit the institution to continue to 

participate under a provisional certification but requires 

the institution to provide, or continue to provide, the 

financial protection resulting from an event described in § 

668.171(c) through (g) until the institution meets the 

requirements of paragraph (f)(5) of this section.

(4)(i) The institution must provide to the Secretary 

the financial protection described under paragraph 

(f)(2)(i) in an amount that, together with the amount of 

any financial protection that the institution has already 

provided if that protection covers the period described in 

paragraph (f)(5) of this section, equals, for a composite 

score calculated under § 668.172, a composite score 
855

recalculated under § 668.171(c)(2), or for any other reason 

that the institution is not financially responsible--

(A) Ten percent of the total amount of title IV, HEA 

program funds received by the institution during its most 

recently completed fiscal year; and 

(B) Any additional amount that the Secretary 

demonstrates is needed under paragraph (f)(4)(ii) of this 

section.

(ii) The Secretary determines the amount specified in 

paragraph (f)(4)(i)(B) of this section that must be 

provided by the institution in addition to the amount 

specified in paragraph (f)(4)(i)(A) of this section, and 

must ensure that the total amount of financial protection 

provided under paragraph (f)(4)(i) of this section is 

sufficient to fully cover any estimated losses. The 

Secretary may reduce the amount required under paragraph 

(f)(4)(i)(B) only if an institution demonstrates that this 

amount is unnecessary to protect, or is contrary to, the 

Federal interest.

(5) The Secretary maintains the full amount of the 

financial protection provided by the institution under 

paragraph (f)(4) of this section until the Secretary first 

determines that the institution has-–
856

(i) A composite score of 1.0 or greater based on the 

review of the audited financial statements for the fiscal 

year in which all losses from any event described in 

§ 668.171(c), (d), (e), (f), or (g) on which financial 

protection was required have been fully recognized; or 

(ii) A recalculated composite score of 1.0 or 

greater, and any event or condition described in 

§ 668.171(d), (e), (f), or (g) has ceased to exist. 

* * * * *

(h) Set-aside. If an institution does not provide a 

letter of credit or financial protection acceptable to the 

Secretary for the amount required under paragraph (d) or 

(f) of this section within 45 days of the Secretary’s 

request, the Secretary offsets the amount of title IV, HEA 

program funds that an institution is eligible to receive in 

a manner that ensures that, no later than the end of a 

nine-month period, the total amount offset equals the 

amount of financial protection the institution would 

otherwise provide. The Secretary uses the funds to satisfy 

the debt and liabilities owed to the Secretary that are 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 financial protection was required, 

or provides the institution any remaining funds if the 
857

institution subsequently submits the financial protection 

originally required under paragraph (d) or (f) of this 

section.

* * * * *

(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

of the subpart or the application of its provisions to any 

person, act, or practice will not be affected thereby.

(Authority: 20 U.S.C. 1094, 1099c)

12. Appendix C to subpart L of part 668 is added to read 

as 
858

follows:

Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

 #32, Total 

Expenses

#32, Total 

Expenses

#23, Total 

Owners 

Equity

#27, Total 

Income

#27, Total 

Income

#13, Total 

Assets

#13, Total 

Assets

#13, Total 

Assets

#13, Total 

Assets

#13, Total 

Assets

N A N A N A

#13, Total 

Assets 

(expense 

allowance)

#13, Total 

Assets 

(expense 

allowance)

N A N A N A

#32, Total 

Expenses 

(expense 

allowance)

#32, Total 

Expenses 

(expense 

allowance)

Note that based on the changes to #27 Total Income and Line #32 Total expenses, the following line items may be recalculated: #34 Net Income Before 

Taxes, #36 Net Income After Taxes, #38 Net Income, #22 Retained Earnings, #23 Total Owner's Equity, and #24 Total Liabilities and Owner's Equity

Adjusting Entries

Amount of Loss

Debt, relief claimed, or other 

amount as determined under 

§668.171(c)(2)(ii)

Relief claimed, or other 

amount as determined 

under §668.171(c)(2)(iii)

Tilte IV funds received by 

the closed insitution or 

location during the most 

recently completed fiscal 

year, §668.171(c)(2)(iv)

Title IV funds received 

during the most recently 

completed fiscal year by 

GE programs in jeopardy 

of losing eligibility, 

§668.171(c)(2)(iv)

Withdrawal of Owner's 

Equity, §668.171(c)(1)(v)

 Total amount 

withdrawn, 

§668.171(c)(2)(iv)

Appendix C to Subpart L of Part 668 - Balance Sheet and Income Statement Adjustments for Recalculating Composite 

Score

Event

Borrower-defense related 

lawsuits and other debts, 

§668.171(c)(1)(i)

Other Litigation, 

§668.171(c)(1)(ii)

Accrediting Agency 

Requires Teach-out Plan 

for Closed Location, 

§668.171(c)(1)(iii)

Gainful Employment 

Programs, Loss of 

Eligiblity, §668.171(c)(1)(iv)

Section 1: Proprietary Institutions

Entries fo r Lo ss and Expenses 

Line item from Section 2, Appendix A 

Entries fo r Lo ss 

Line item from Section 2, Appendix A

Allowance for Expenses Not applicable Cost of Goods Sold (#28) / Operating Income (#25) 

multiplied by Amount of Loss
859

Debit Credit Debit Credit Debit Credit Debit Credit

 #38b, Total 

Expenses 

(Unrestricted)

 #38b, Total 

Expenses 

(Unrestricted)

 #31b, 

Total 

Revenue 

(Unrestrict

ed)

 #31b, Total 

Revenue 

(Unrestricte

d)

 #12, Total 

Assets

 #12, Total 

Assets

#12, Total 

Assets 

#12, Total 

Assets 

N A N A

#12, Total 

Assets 

(expense 

allowance)

#12, Total 

Assets 

(expense 

allowance)

N A N A

#38b, Total 

Expenses 

(expense 

allowance)

#38b, Total 

Expenses 

(expense 

allowance)

Note that based on the changes to #31b Total Revenue (Unrestricted) and #38b Total Expenses (Unrestricted), the following 

items may be recalculated: #39b Change in (Unrestricted) Net Assets, #41b (Unrestricted) Net Assets at end of year (will be same 

as #20 Unrestricted Net Assets), #25 Total Net Assets, #26 Total Liabilitites & Net Assets.

Adjusting Entries

Gainful Employment 

Programs, Loss of 

Eligiblity, §668.171(c)(1)(iv)

Amount of Loss

Debt, relief claimed, or other 

amount as determined under 

§668.171(c)(2)(ii)

Relief claimed, or other 

amount as determined 

under §668.171(c)(2)(iii)

Tilte IV funds received 

by the closed insitution 

or location during the 

most recently 

completed fiscal year, 

§668.171(c)(2)(iv)

Title IV funds received 

during the most recently 

completed fiscal year by 

GE programs in jeopardy 

of losing eligibility, 

§668.171(c)(2)(iv)

Section 2: Non-profit Institutions

Operating expenses (#32) / Tuition & Fees (#27) 

multiplied by Amount of Loss

Entries fo r Lo ss and Expenses 

Line item from Section 2, Appemdix B

Entries fo r Lo s s 

Line item from Section 2, Appendix B

Not applicable

Event

Borrower-defense related 

lawsuits and other debts, 

§668.171(c)(1)(i)

Other Litigation, 

§668.171(c)(1)(ii)

Accrediting Agency 

Requires Teach-out 

Plan for Closed 

Location, 

§668.171(c)(1)(iii)

Allowance for Expenses

PART 674--FEDERAL PERKINS LOAN PROGRAM

13. The authority citation for part 674 continues to 

read as follows:

AUTHORITY: 20 U.S.C. 1070g, 1087aa—1087hh, unless 

otherwise noted.

14. Section 674.33 is amended by:

A. Revising paragraph (g)(3). 
860

B. Redesignating paragraphs (g)(8)(vi) through (ix) 

as paragraphs (g)(8)(vii) through (x), respectively.

C. Adding a new paragraph (g)(8)(vi).

The revision and addition read as follows:

§ 674.33 Repayment.

* * * * * 

(g) * * *

(3) Determination of borrower qualification for 

discharge by the Secretary. (i) The Secretary may 

discharge the borrower's obligation to repay an NDSL or 

Federal Perkins Loan without an application if the 

Secretary determines that--

(A) The borrower qualified for and received a 

discharge on a loan pursuant to 34 CFR 682.402(d) (Federal 

Family Education Loan Program) or 34 CFR 685.214 (Federal 

Direct Loan Program), and was unable to receive a discharge 

on an NDSL or Federal Perkins Loan because the Secretary 

lacked the statutory authority to discharge the loan; or

(B) Based on information in the Secretary's 

possession, the borrower qualifies for a discharge.

(ii) With respect to schools that closed on or after 

November 1, 2013, the Secretary will discharge the 

borrower’s obligation to repay an NDSL or Federal Perkins 

Loan without an application from the borrower if the 
861

Secretary determines that 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.

* * * * *

15. 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;

(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
862

(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

16. 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]

17. 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”.

18. Section 682.211 is amended by adding paragraph 

(i)(7) to read as follows:

§ 682.211 Forbearance.

* * * * *

(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 
863

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 be granted in 

yearly increments or for a period designated by the 

Secretary until the loan is consolidated or until the 

lender is notified by the Secretary to discontinue the 

forbearance. 

* * * * *

19. Section 682.402 is amended:

A. By revising paragraphs (b)(2) and (d)(3).

B. In paragraph (d)(6)(ii)(B)(1) and (2), by removing 

the words “sworn statement (which may be combined)” and 

adding in their place the word “application”.

C. By revising paragraph (d)(6)(ii)(F) introductory 

text.

D. In paragraph (d)(6)(ii)(F)(5) removing the words 

“and sworn statement”.

E. In paragraph (d)(6)(ii)(G) introductory text, by

removing the words “request and supporting sworn statement” 

and adding, in their place, the words “completed 

application”.

F. By revising paragraph (d)(6)(ii)(H).
864

G. By redesignating paragraph (d)(6)(ii)(I) as 

paragraph (d)(6)(ii)(J).

H. By adding new paragraph (d)(6)(ii)(I) and

paragraph (d)(6)(ii)(K).

I. By revising paragraphs (d)(7)(ii) and (iii) and 

(d)(8). 

J. In paragraph (e)(6)(iii), by 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
865

(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 

agency may approve a discharge based upon other reliable 

documentation of the borrower's or student's death. 

* * * * *

(d) * * *

(3) Borrower qualification for discharge. Except as 

provided in paragraph (d)(8) of this section, in order to 

qualify for a discharge of a loan under paragraph (d) of 

this section, a borrower must submit a completed closed 

school discharge application on a form approved by the 

Secretary. By signing the application, the borrower 

certifies--

* * * * *

(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 and 

the reasons for it, the opportunity for review by the 
866

Secretary, and how 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) of this section fails to submit the 

completed application within 60 days of being notified of

that option, the lender or guaranty agency shall resume 

collection. 

(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 
867

actions described in paragraph (d)(6)(ii)(H) or (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 paragraphs

(d)(6)(ii)(E) and (d)(6)(ii)(G)(1) of this section, and the 

lender shall take the actions described in paragraph 

(d)(7)(iv) of this section, as applicable.

* * * * *

(7) * * *

(i) * * *

(ii) If the borrower fails to submit a completed 

application described in paragraph (d)(3) of this section 

within 60 days of being notified of that option, the lender 

shall resume collection and shall be deemed to have

exercised forbearance of payment of principal and interest 

from the date the lender suspended collection activity. 

The lender may capitalize, in accordance with § 682.202(b), 

any interest accrued and not paid during that period. Upon 

resuming collection, the lender provides the borrower with 

another discharge application and an explanation of the 

requirements and procedures for obtaining a discharge.
868

(iii) The lender shall file a closed school claim 

with the guaranty agency in accordance with § 682.402(g) no 

later than 60 days after the lender receives a completed 

application described in paragraph (d)(3) of this section 

from the borrower, or notification from the agency that the 

Secretary approved the borrower’s appeal in accordance with 

paragraph (d)(6)(ii)(K)(3) of this section.

* * * * *

(8) Discharge without an application. (i) 

A borrower's obligation to repay a FFEL Program loan may be 

discharged without an application from the borrower if the-

-

(A) Borrower received a discharge on a loan pursuant 

to 34 CFR 674.33(g) under the Federal Perkins Loan Program, 

or 34 CFR 685.214 under the William D. Ford Federal Direct 

Loan Program; or

(B) Secretary or the guaranty agency, with the 

Secretary's permission, determines that 

the borrower qualifies for a discharge based on information 

in the Secretary or guaranty agency's possession.

(ii) With respect to schools that closed on or after 

November 1, 2013, a borrower's obligation to repay a FFEL 

Program loan will be discharged without an application from

the borrower if the Secretary or guaranty agency determines 
869

that the borrower did not subsequently re-enroll in any 

title IV-eligible institution within a period of three 

years after the school closed. 

* * * * *

20. Section 682.405 is amended by redesignating 

paragraph (b)(4) as paragraph (b)(4)(i) and adding

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).

* * * * *

21. Section 682.410 is amended:

A. In paragraph (b)(4) by adding, after the words “to 

the lender”, the words and punctuation “, but shall not 

capitalize any unpaid interest thereafter”.

B. By adding paragraph (b)(6)(viii).

The addition reads as follows:
870

§ 682.410 Fiscal, administrative, and enforcement 

requirements. 

* * * * *

(b) * * *

(6) * * *

(viii) Upon notification 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 guaranty agency must 

suspend all collection activities on the affected loan for 

the period designated by the Secretary. 

* * * * * 

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

22. The authority citation for part 685 continues to 

read as follows:

AUTHORITY: 20 U.S.C. 1070g, 1087a, et seq., unless 

otherwise noted. 

23. Section 685.200 is amended by adding paragraphs

(f)(3)(v) and (f)(4)(iii) to read as follows: 

§ 685.200 Borrower eligibility. 

* * * * * 

(f) * * * 

(3) * * *
871

(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 

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 of those loans 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 
872

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.

* * * * *

24. Section 685.205 is amended by revising paragraph 

(b)(6) to read as follows:

§ 685.205 Forbearance.

* * * * * 

(b) * * *

(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;

* * * * *

25. Section 685.206 is amended by revising paragraph 

(c) to read as follows:

§ 685.206 Borrower responsibilities and defenses. 

* * * * * 
873

(c) Borrower defenses. (1) For loans first 

disbursed prior to July 1, 2017, the borrower may assert a 

borrower defense under this paragraph. A “borrower 

defense” refers to any act or omission of the school 

attended by the student that relates to the making of the 

loan for enrollment at the school 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: 

(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)(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, except as provided in paragraph (c)(4) of 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, within the later of-–
874

(i) Three years from the end of the last award year 

in which the student attended the institution; or 

(ii) The limitation period that State law would apply 

to an action by the borrower to recover on the cause of 

action on which the borrower defense is based. 

(4) The Secretary may initiate a proceeding to 

collect at any time if the institution received notice of 

the claim before the end of the later of the periods 

described in paragraph (c)(3) of this section. For 

purposes of this paragraph, notice includes receipt of--

(i) Actual notice from the borrower, from a 

representative of the borrower, or from the Department; 

(ii) A class action complaint asserting relief for a 

class that may include the borrower; and

(iii) Written notice, including a civil investigative 

demand or other written demand for information, from a 

Federal or State agency that has power to initiate an 

investigation into conduct of the school relating to 

specific programs, periods, or practices that may have 

affected the borrower. 

* * * * *

§ 685.209 [Amended]

26. Section 685.209 is amended:
875

A. In paragraph (a)(1)(ii), by adding “, 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,” 

after the words “Eligible loan”.

B. In paragraph (c)(1)(ii), by adding “, for purposes 

of adjusting a borrower's monthly payment amount in 

accordance with paragraph (c)(2)(ii) of this section,” 

after the words “Eligible loan”.

C. In paragraph (c)(2)(ii)(B) introductory text, by

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), by removing the words “or 

the Secretary determines the borrower does not have a 

partial financial hardship”. 

E. In paragraph (c)(4)(iii)(B), by 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)”.

27. Section 685.212 is amended by revising paragraphs 

(a)(1) and (2) and adding paragraph (k) to read as follows:
876

§ 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 

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--
877

(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 

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, FFEL Program 

Loan, 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 part E 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-- 
878

(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 

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 the law applicable to the claim on 

which relief was granted; or
879

(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--

(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. 

* * * * * 

28. Section 685.214 is amended by: 

A. Revising paragraphs (c)(2) and (f)(4).

B. Redesignating paragraphs (f)(5) and (6) as 

paragraphs (f)(6) and (7), respectively.

C. Adding a new paragraph (f)(5).

The revisions and addition read as follows:

§ 685.214 Closed school discharge.

* * * * * 

(c) * * *

(2) If the Secretary determines, based on information 

in the Secretary’s possession, that the borrower qualifies 
880

for the discharge of a loan under this section, the 

Secretary--

(i) May discharge the loan without an application 

from the borrower; and 

(ii) With respect to schools that closed on or after 

November 1, 2013, will discharge the loan without an 

application from the borrower if 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.

* * * * *
881

29. 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).

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
882

(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 

(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 the 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. 

* * * * *
883

(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 

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 the borrower (or the student on 

whose behalf a parent received a PLUS loan)--

(i) Reported not having a valid high school diploma 

or its equivalent at the time the loan was certified; and
884

(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 

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)--

(i) 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.

(ii) [Reserved]

* * * * *

(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 
885

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 

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 
886

Secretary’s records and gathered by the Secretary from 

other sources, including guaranty agencies, other Federal 

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. The Secretary considers any 

response from the borrower and any additional information 

from the borrower, 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]

30. Section 685.220 is amended by: 
887

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) and (iii) as

paragraphs (d)(1)(i) and (ii).

31. 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 

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 
888

either this section or § 685.206(c) unless the violation 

would otherwise constitute a basis for a borrower defense 

under this section or § 685.206(c), as applicable.

(4) For the purposes of this section and § 

685.206(c), “borrower” means--

(i) The borrower; and 

(ii) In the case of a Direct PLUS Loan, any 

endorsers, and for a Direct PLUS Loan made to a parent, the 

student on whose behalf the parent borrowed.

(5) For the purposes of this section and § 

685.206(c), a “borrower defense” refers to an act or 

omission of the school attended by the student that relates 

to the making of a Direct Loan for enrollment at the school 

or the provision of educational services for which the loan 

was provided, 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 order in which the 

Secretary will consider objections, including a borrower 
889

defense, will be determined as appropriate under the 

circumstances. 

(b) Judgment against the school. 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. 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 

the 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 
890

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 to the 

borrower’s detriment when the borrower decided to attend, 

or to continue attending, the school or decided to take out 

a Direct Loan. A borrower may assert, at any time, a 

defense to repayment under this paragraph (d) of amounts 

owed to the 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 paragraph (f), 

(g), or (h) of this section 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;
891

(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

(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 the 

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, 
892

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--

(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
893

(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 

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 application 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) Upon the borrower’s request, the Department 

official identifies to the borrower the records the 

Department official considers relevant to the borrower 

defense. The Secretary provides to the borrower any of the 

identified records upon reasonable request of the borrower.
894

(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.

(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-–
895

(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. If accepted for reconsideration by the 

Secretary, the Secretary follows the procedure in paragraph 

(e)(2) of this section for granting forbearance and for 

defaulted loans; and

(ii) The Secretary may reopen a borrower defense 

application at any time to consider evidence that was not 

considered in making the previous decision. If a borrower 

defense application is reopened by the Secretary, the 

Secretary follows the procedure paragraph (e)(2) of this 

section for granting forbearance and for defaulted loans.

(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 proceeding to 

collect from the school the amount of relief resulting from 

a borrower defense under this section--
896

(i) Within the six-year period applicable to the 

borrower defense under paragraph (c) or (d) of this 

section; 

(ii) At any time, for a borrower defense under 

paragraph (b) of this section; or 

(iii) At any time if during the period described in 

paragraph (e)(7)(i) of this section, the institution 

received notice of the claim. For purposes of this 

paragraph, notice includes receipt of--

(A) Actual notice from the borrower, a representative 

of the borrower, or the Department of a claim, including 

notice of an application filed pursuant to this section or 

§ 685.206(c); 

(B) A class action complaint asserting relief for a 

class that may include the borrower for underlying facts 

that may form the basis of a claim under this section or § 

685.206(c); 

(C) Written notice, including a civil investigative 

demand or other written demand for information, from a 

Federal or State agency that has power to initiate an 

investigation into conduct of the school relating to 

specific programs, periods, or practices that may have 

affected the borrower, for underlying facts that may form 

the basis of a claim under this section or § 685.206(c).
897

 (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 participant, 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 

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; 
898

(iii) If identified members of the group are 

borrowers who have not filed an application under paragraph 

(f)(1)(ii) of this section, follows the procedures in 

paragraph (e)(2) of this section for granting forbearance 

and for defaulted loans for such identified members of the 

group, unless an opt-out by such a member of the group is 

received; and 

(iv) Notifies the school 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 the school may request 

records and respond. No notice will be provided if notice 

is impossible or irrelevant due to a school’s closure.

(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) of this 

section 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 

paragraph (f) of this section, for which the borrower 
899

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 states 

that determination and the relief provided on the basis of 

that claim as determined under paragraph (i) of this 

section.
900

(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. If a borrower 

defense application is reopened by the Secretary, the 
901

Secretary follows the procedure in paragraph (e)(2) of this 

section for granting forbearance and for defaulted loans.

(h) Procedures for group process for borrower 

defenses with respect to loans made to attend an open 

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 

a school that is not 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 fact-finding 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 
902

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 

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--
903

(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 

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. If a borrower 

defense application is reopened by the Secretary, the 

Secretary follows the procedure in paragraph (e)(2) of this 

section for granting forbearance and for defaulted loans.

(5)(i) The Secretary collects from the school any 

liability to the Secretary for any amounts discharged or 

reimbursed to borrowers under this paragraph (h).

(ii) For a borrower defense under paragraph (b) of 

this section, the Secretary may initiate a proceeding to 

collect at any time. 

(iii) For a borrower defense under paragraph (c) or 

(d) of this section, the Secretary may initiate a 

proceeding to collect within the limitation period that 

would apply to the borrower defense, provided that the 
904

Secretary may bring an action to collect at any time if, 

within the limitation period, the school received notice of 

the borrower’s borrower defense claim. For purposes of 

this paragraph, the school receives notice of the 

borrower’s claim by receipt of-–

(A) Actual notice of the claim from the borrower, a 

representative of the borrower, or the Department, 

including notice of an application filed pursuant to this 

section or § 685.206(c); 

(B) A class action complaint asserting relief for a 

class that may include the borrower for underlying facts 

that may form the basis of a claim under this section or § 

685.206(c); or

(C) Written notice, including a civil investigative 

demand or other written demand for information, from a 

Federal or State agency that has power to initiate an 

investigation into conduct of the school relating to 

specific programs, periods, or practices that may have 

affected the borrower, of underlying facts that may form 

the basis of a claim under this section or § 685.206(c). 

(i) Relief. If a borrower defense is approved under 

the procedures in paragraph (e), (g), or (h) of this 

section, the following procedures apply:
905

(1) The Department official or the hearing official 

deciding the claim determines the appropriate 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. 

(2) For a borrower defense brought on the basis of--

(i) A substantial misrepresentation, the Department 

official or the hearing official will factor the borrower’s 

cost of attendance to attend the school, as well as the 

value of the education the borrower received, the value of 

the education that a reasonable borrower in the borrower’s 

circumstances would have received, and/or the value of the 

education the borrower should have expected given the 

information provided by the institution, into the 

determination of appropriate relief. A borrower may be 

granted full, partial, or no relief. Value will be 

assessed in a manner that is reasonable and practicable.

In addition, the Department official or the hearing 

official deciding the claim may consider any other relevant 

factors;

(ii) A judgment against the school--

(A) Where the judgment awards specific financial 

relief, relief will be the amount of the judgment that 
906

remains unsatisfied, subject to the limitation provided for 

in § 685.222(i)(8) and any other reasonable considerations; 

and

(B) Where the judgment does not award specific 

financial relief, the Department will rely on the holding 

of the case and applicable law to monetize the judgment; 

and

(iii) A breach of contract, relief will be determined 

according to the common law of contracts, subject to the 

limitation provided for in § 685.222(i)(8) and any other 

reasonable considerations. 

(3) In a fact-finding process brought against an open 

school under paragraph (h) of this section on the basis of 

a substantial misrepresentation, the school has the burden 

of proof as to any value of the education.

(4) In determining the relief, the Department 

official or the hearing official deciding the claim may 

consider--

(i) Information derived from a sample of borrowers 

from the group when calculating relief for a group of 

borrowers; and 

(ii) The examples in Appendix A to this subpart.

(5) In the written decision described in paragraphs 

(e), (g), and (h) of this section, the designated 
907

Department official or hearing official deciding the claim 

notifies the borrower of the relief provided and--

(i) Specifies the relief determination; 

(ii) Advises that there may be tax implications; and 

(iii) Advises the borrower of the requirements to 

file a request for reconsideration upon the identification 

of new evidence. 

(6) 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. 

(7) The Department official or the hearing official 

deciding the case, or the Secretary as applicable, affords 

the borrower such further relief as 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.
908

(ii) Updating reports to consumer reporting agencies 

to which the Secretary previously made adverse credit 

reports with regard to the borrower's Direct Loan.

(8) 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 financial 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 

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 
909

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 

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 
910

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.

(Authority: 20 U.S.C. 1087a et seq; 28 U.S.C. 2401; 31 

U.S.C. 3702)

32. 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.)

33. Appendix A to subpart B of part 685 is added to 

read as follows:

Appendix A to Subpart B of Part 685–-Examples of Borrower 

Relief

The Department official or the hearing official 

deciding a borrower defense claim 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. The 
911

following are some conceptual examples demonstrating 

relief. The actual relief awarded will be determined by 

the Department official or the hearing official deciding 

the claim, who shall not be bound by these examples.

1. A school represents to prospective students, in widely 

disseminated materials, that its educational program 

will lead to employment in an occupation that requires 

State licensure. The program does not in fact meet 

minimum education requirements to enable its graduates 

to sit for the exam necessary for them to obtain 

licensure. The claims are adjudicated in a group 

process. 

Appropriate relief: Borrowers who enrolled in this 

program during the time that the misrepresentation was 

made should receive full relief. As a result of the 

schools’ misrepresentation, the borrowers cannot work 

in the occupation in which they reasonably expected to 

work when they enrolled. Accordingly, borrowers 

received limited or no value from this educational 

program because they did not receive the value that 

they reasonably expected.

2. A school states to a prospective student that its 

medical assisting program has a faculty composed of 

skilled nurses and physicians and offers internships 

at a local hospital. The borrower enrolls in the 

school in reliance on that statement. In fact, none 

of the teachers at the school other than the Director 

is a nurse or physician. The school has no internship 

program. The teachers at the school are not qualified 

to teach medical assisting and the student is not 

qualified for medical assistant jobs based on the 

education received at the school. 

Appropriate relief: This borrower should receive full 

relief. None of the teachers at the school are 

qualified to teach medical assisting, and there was no 
912

internship. In contrast to reasonable students’ 

expectations, based on information provided by the 

school, the typical borrower received no value from 

the program. 

3. An individual interested in becoming a registered 

nurse meets with a school’s admissions counselor who 

explains that the school does not have a nursing 

program but that completion of a medical assisting 

program is a prerequisite for any nursing program. 

Based on this information, the borrower enrolls in the 

school’s medical assisting program rather than 

searching for another nursing program, believing that 

completing a medical assisting program is a necessary 

step towards becoming a nurse. After one year in the 

program, the borrower realizes that it is not 

necessary to become a medical assistant before 

entering a nursing program. The borrower’s credits 

are not transferrable to a nursing program. 

Appropriate relief: This borrower should receive full 

relief. Because it is not necessary to become a 

medical assistant prior to entering a nursing program, 

she has made no progress towards the career she 

sought, and in fact has received an education that 

cannot be used for its intended purpose. 

4. A school tells a prospective student, who is actively 

seeking an education, that the cost of the program 

will be $20,000. Relying on that statement, the 

borrower enrolls. The student later learns the cost 

for that year was $25,000. There is no evidence of 

any other misrepresentations in the enrollment process 

or of any deficiency in value in the school’s 

education.

Appropriate relief: This borrower should receive 

partial relief of $5,000. The borrower received 

precisely the value that she expected. The school 

provides the education that the student was seeking 

but misrepresented the price.
913

5. A school represents in its marketing materials that 

three of its undergraduate faculty members in a 

particular program have received the highest award in 

their field. A borrower choosing among two 

comparable, selective programs enrolls in that program 

in reliance on the representation about its faculty. 

However, although the program otherwise remains the 

same, the school had failed to update the marketing 

materials to reflect the fact that the award-winning 

faculty had left the school. 

Appropriate relief: Although the borrower reasonably 

relied on a misrepresentation about the faculty in 

deciding to enroll at this school, she still received 

the value that she expected. Therefore, no relief is 

appropriate. 

6. An individual wishes to enroll in a selective, 

regionally accredited liberal arts school. The school 

gives inflated data to a well-regarded school ranking 

organization regarding the median grade point average 

of recent entrants and also includes that inflated 

data in its own marketing materials. This inflated 

data raises the place of the school in the 

organization’s rankings in independent publications. 

The individual enrolls in the school and graduates. 

Soon after graduating, the individual learns from the 

news that the school falsified admissions data. 

Notwithstanding this issue, degrees from the school 

continue to serve as effective, well-regarded liberal 

arts credentials. 

The Department also determines that the school 

violated the title IV requirement that it not make 

substantial misrepresentations pursuant to 34 CFR 

668.71, which constitutes an enforceable violation 

separate and apart from any borrower defense relief.

Appropriate Relief: The borrower relied on the 

misrepresentation about the admissions data to his 

detriment, because the misrepresentation factored into 

the borrower’s decision to choose the school over 

others. However, the borrower received a selective 
914

liberal arts education which represents the value that 

he could reasonably expect, and gets no relief. 

34. Section 685.300 is amended by:

A. Redesignating paragraph (b)(11) as paragraph 

(b)(12). 

B. Adding a new paragraph (b)(11).

C. Adding 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) of this section regarding student claims and 

disputes. 

* * * * *

(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 dispute 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 will not seek 

to rely in any way on a predispute arbitration agreement or 
915

on any other predispute agreement with a student who has 

obtained or benefited from a Direct Loan, 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 predispute arbitration agreement, 

or on any other predispute 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.

(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.
916

(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.

(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 

school, or, with respect to a Parent PLUS Loan, a student 

for whom the PLUS loan was obtained, that include any 

agreement regarding predispute arbitration or any other 

predispute agreement addressing class actions and that are 

entered into after the 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 
917

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. We agree that only the court is to decide 

whether a claim asserted in the lawsuit is a claim 

regarding the making of the Federal Direct Loan or the 

provision of educational services for which the loan was 

obtained.” 

(ii) When a predispute arbitration agreement or any 

other predispute agreement addressing class actions has 

been entered into before the effective date of this 

regulation and does 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 

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) 
918

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 in 

court 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 Federal Direct Loan 

or the provision by us of educational services for which 

the Federal Direct Loan was obtained. We agree that only 

the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal 

Direct Loan or the provision of educational services for 

which the loan was obtained.”

(B) Notice provision. “We agree not to use any 

predispute 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 
919

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 Federal Direct Loan 

or the provision by us of educational services for which 

the Federal Direct Loan was obtained. We agree that only 

the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal 

Direct Loan or the provision of educational services for 

which the loan was obtained.”

(f) Predispute arbitration agreements. (1)(i) The 

school will not enter into a predispute agreement to 

arbitrate a borrower defense claim, or rely in any way on a 

predispute arbitration agreement with respect to any aspect 

of a borrower defense claim. 

(ii) A student may enter into a voluntary postdispute arbitration agreement with a school to arbitrate a 

borrower defense claim. 

(2) Reliance on a predispute arbitration agreement 

with a student 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, including 

joinder with others in an action;
920

(ii) Objecting to or seeking a protective order 

intended to avoid responding to discovery in a judicial 

action filed by the student; and

(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 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 the effective date of this 

regulation: “We agree that neither we nor anyone else will 

use this agreement to stop you from bringing a lawsuit 

concerning our acts or omissions regarding the making of 

the Federal Direct Loan or the provision by us of 

educational services for which the Federal 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. We agree that only 

the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal 
921

Direct Loan or the provision of educational services for 

which the loan was obtained.” 

(ii) When a predispute arbitration agreement has been 

entered into before the effective date of this regulation 

that did not contain the provision specified in paragraph 

(f)(3)(i) of this section, the school must either 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 must 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) 

of this section or must provide the notice specified in 

paragraph (f)(3)(iii)(B) of this section 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 

predispute arbitration agreement will use it to stop you 
922

from bringing a lawsuit concerning our acts or omissions 

regarding the making of the Federal Direct Loan or the 

provision by us of educational services for which the 

Federal 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 other claims. We agree that 

only the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal 

Direct Loan or the provision of educational services for 

which the loan was obtained.”

(B) Notice provision. “We agree not to use any 

predispute arbitration agreement to stop you from bringing 

a lawsuit concerning our acts or omissions regarding the 

making of the Federal Direct Loan or the provision by us of 

educational services for which the Federal 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. We agree that only the 

court is to decide whether a claim asserted in the lawsuit 

is a claim regarding the making of the Direct Loan or the 

provision of educational services for which the loan was 

obtained.” 
923

(g) Submission of arbitral records. (1) A school 

must 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 arbitration agreement filed with the 

arbitrator or arbitration administrator.

(iii) The judgment or award, if any, issued by the 

arbitrator or arbitration administrator. 

(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 arbitration administrator related to such a 

refusal.

(v) Any communication the school receives from an 

arbitrator or an arbitration administrator related to a 

determination that a predispute 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.
924

(2) A school must 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 arbitrator, the 

arbitration administrator, or the student. 

(h) Submission of judicial records. (1) A school 

must submit a copy of the following records to the 

Secretary, in the form and manner specified by the 

Secretary, in connection with any claim concerning a 

borrower defense claim filed in a lawsuit by the school 

against the student or by any party, including a government 

agency, against the school:

(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) A school must 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. 
925

(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 borrower defense as defined in § 

685.222(a)(5), including a claim other than one based on § 

685.222(c) or (d) that may be asserted under § 685.222(b) 

if reduced to judgment;

(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;

(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) “Predispute arbitration agreement” means any 

agreement, regardless of its form or structure, between a 

school or a party acting on behalf of a school and a 

student providing for arbitration of any future dispute 

between the parties. 

* * * * *

35. Section 685.308 is amended by revising paragraph 

(a) to read as follows:

§ 685.308 Remedial actions.
926

(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), (iii), (iv) or (v), § 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 

(2) Because of the school's violation of a Federal 

statute or regulation.

* * * * *

36. 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

37. The authority citation for part 686 continues to 

read as follows:
927

AUTHORITY: 20 U.S.C. 1070g, et seq., unless otherwise 

noted. 

38. 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--

(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.

* * * * *