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Issue Paper 1

Session 2: January 8-11, 2018

Issue: Whether to establish a Federal standard for the purpose of determining if a 

borrower can establish a defense to the repayment of a Direct Loan or recover 

for amounts already paid on a Direct Loan based on an act or omission of an 

institution.

Statutory cite: Section 455(h) of the Higher Education Act of 1965, as amended

Regulatory cite: 34 CFR 685.206(c), 685.222, 685.300, 685.308

Summary of changes: Creates a regulatory section that establishes, for loans first disbursed on or after 

July 1, 2019, a new Federal standard applicable to borrower defense claims 

made by borrowers and for Department recovery actions against institutions. 

Under the proposed regulations, borrowers with an eligible Direct Loan would 

be entitled to a discharge (or recover amounts already paid) of all or a portion of 

the loan if the borrower establishes either: (1) an institutional 

misrepresentation, (2) a court judgment against an institution, or (3) a final 

judgment from an arbitrator or administrative tribunal against an institution. 

The proposed regulations would also describe in detail how a borrower 

establishes the basis for a claim.

Changes: See regulatory text below.

[Note to negotiators: Section 685.222 is a new section. For ease of readability and editing during 

negotiated rulemaking, the section is formatted as plain text. Changes made subsequent to the second 

session of negotiated rulemaking are noted in redlined text.]

Section 685.222 Borrower defense and Department recovery actions against institutions

(a) Introduction.

(1) For the purposes of this section and section 685.206(dc), a “borrower defense” refers to an act or 

omission of an institution at which the borrower enrolled that relates to the making of a Direct Loan or 

the making of a loan that was repaid by a Direct Consolidation Loan for enrollment at the institution or 

the provision of educational services for which the loan was made, and includes one or both of the 

following:

(i) A defense to the repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; 

and
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(ii) A right to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in 

part.

(2) A borrower may assert a borrower defensea Direct Consolidation Loan that repaid a Direct Loan, 

FFEL Program Loan, Federal Perkins Loan, Health Professions Student Loan, or Loan for Disadvantaged 

Students under subpart II of part A of title VII of the Public Health Service Act; or a Health Education 

Assistance Loan, or Nursing Loan made under part E of the Public Health Service Act which the borrower 

had a basis for a borrower defense claim prior to the consolidation.

(32) For loans first disbursed prior to July 1, 2019, the borrower may assert a borrower defense claim of 

a Direct Loan consistent with section 685.206(c).

(43) For loans first disbursed on or after July 1, 2019, the borrower may assert a borrower defense claim 

consistent with this section.

(5) The Department may initiate a recovery action against an institution consistent with paragraph (c) of 

this section.

(6) The Department administers this section consistent with the procedures described in section 

685.206(c) and 34 CFR Part 668, Subpart G.

(4) For purposes of this section, a borrower may assert a borrower defense claim regarding the 

“provision of educational services” for an act or omission of the by an institution concerning the nature 

of the institution’s educational program, the nature of the institution’s financial charges, the 

employability of graduates of the institution’s educational program, the eligibility of the educational 

program for licensure or certification, the State agency authorization or approval of the institution or 

educational program, or an accreditor approval of the institution or educational program.

(b) Borrower defense.

(1) For loans first disbursed on or after July 1, 2019, the Secretary will discharge the borrower’s 

obligation to repay a Direct Loan and will refund amounts paid on the loan, in whole or in part, less any 

amounts already refunded to the borrower from any source pursuant to section 685.206(d)(8), if the

borrower establishes a defense by clear and convincing evidence that substantial weight of the evidence 

demonstrates that --

(i) The institution at which the borrower enrolled acted with an intent to deceive, knowledge of the 

falsity of a misrepresentation, or reckless disregard for the truth in making made a misrepresentation of 

material fact, opinion, intention, or law upon which the borrower reasonably relied under the 

circumstances in deciding to obtain a Direct Loan to enroll or continue enrollment in a program at the 

institution, and which that resulted in financial harm to the borrower; 

(ii) The borrower has obtained, from a State or Federal court of competent jurisdiction, a 

nondefaultfinal, definitive contested State or Federal judgment rendered in a contested proceeding and 
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was awarded monetary damages against the institution relating to the loan or the provision of 

educational services for which the loan was obtained; or

(iii) The borrower has obtained, from an arbitrator or a hearing official in a State or Federal 

administrative tribunal agreed to by the borrower and the institution, a nondefault contested final, 

definitive judgment, or equivalent final determination, rendered in a contested proceeding and was 

awarded monetary damages against the institution relating to the loan or the provision of educational 

services for which the loan was obtained. .

(iv) For the purpose of (b)(1)(ii), a “final, definitive judgment rendered in a contested proceeding” 

includes a Proof of Claim filed against the bankruptcy estate of the institution once the claim is 

adjudicated in a contested matter or adversary proceeding, such that the claim is no longer contingent, 

disputed, or unliquidated in a case arising Chapter 11 of the Bankruptcy Code, or allowed by a trustee in 

a case arising under Chapter 7 of the Bankruptcy Code. 

(2) A borrower must file a borrower defense claim under paragraph (b)(1) of this section within three 

years of the date the borrower discovered, or reasonably should have discovered, the 

misrepresentation. 

(23) The Secretary will find that the substantial weight of the evidence supports the approval of a 

borrower defense claim when the borrower’s statement is supported by corroborating evidence

provided by the borrower or otherwise in the possession of the Secretary.

(24) For the purposes of this section—

(i) A “misrepresentation” is a statement, act, or omission by an eligible institution to a borrower that is 

intentionally false or misleading or made with a reckless disregard for the truth and that relates to the 

making of a Direct Loan for enrollment at the institution or the provision of educational services for 

which the loan was made. that would mislead a reasonable person regarding the nature of the 

educational program, the nature of financial charges, the employability of graduates of an educational 

program, the eligibility of the educational program for licensure ore certification, the State agency 

authorization or approval of the educational program, or an accreditor approval of an institution or 

educational program Evidence that a misrepresentation described in paragraph (b)(1)(i) of this section

has occurred includes, but is not limited to:

(A) Actual licensure passage rates materially different from those included in the institution’s marketing 

materials, website, or other communication made to the student;

(B) Actual job placement employment rates materially different from those included in the institution’s 

marketing materials, website, or other communication made to the student;

(C) The inclusion in the institution’s marketing materials, website, or other communication made to the 

student of specialized, programmatic, or institutional certifications, accreditation, or approvals not 

actually obtained or the failure to remove within a reasonable period of time such certifications or 

approvals from marketing materials, website, or other communication when invalidated or withdrawn;
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(D) The inclusion in the institution’s marketing materials, website, or other communication made to the 

student of representations regarding the widespread or general transferability of credits that are only 

transferrable to limited types of programs or institutions or the transferability of credits to a specific 

program or institution when no reciprocal agreement exists with another institution or such agreement 

is materially different than what was represented;

(E) A representation regarding the employability or specific earnings of graduates without an agreement 

between the institution and another entity for such employment or sufficient evidence of past 

employment or earnings to justify such a representation;

(F) A representation regarding the availability, amount, or nature of any financial assistance available to 

students from the institution or any other entity to pay the costs of attendance at the institution that is 

not fulfilled following the enrollment of the borrower; 

(G) A representation regarding the amount of tuition and fees that the student would be charged for the 

program that is materially different in amount, method, or timing of payment from the actual tuition 

and fees charged to the student;

(H) A representation that the institution, its courses, or programs are endorsed by vocational 

counselors, high schools, colleges, educational organizations, employment agencies, members of a 

particular industry, students, former students, or governmental officials, the United States armed forces, 

or other individuals or entities when the institution has no permission to use such an endorsement; s 

exist as stated; 

(I) A representation regarding the educational resources provided by the institution that are necessary

for the completion of the student’s educational program’s size, location, facilitieis, training equipment of 

similar learning resources necessary for a student to complete the program, or the number, availability, 

of qualifications of its personnelprogram that are materially different from the institution’s actual 

circumstances at the time the representation is made, which may include representations regarding the 

institution’s size, location, facilities, training equipment, or the number, availability, or qualifications of 

its personnel;

(J) The nature or extent of prerequisites for enrollment in a course or program.;

(K) Any other circumstances as determined by the Secretary; or

(iii) A violation by the institution of a requirement of the Higher Education Act or the Department’s 

regulations is not a basis for a borrower defense claim unless the violation would otherwise give rise to a 

successful borrower defense claim under this section or section 685.206(c), as applicable. The Secretary 

will not approve a borrower defense claim under this section or section 685.206(c) of this Part when the 

borrower submits a claim based on—

(A) Personal injury;

(B) Sexual harassment;
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(C) A violation of civil rights;

(D) Slander or defamation;

(E) Property damage claims;

(F) Educational malpractice, which is tortious cClaims about the general quality of the student’s 

education or the reasonableness of an educator’s conduct in providing educational services; or

(G) Academic disputes and disciplinary matters.

(iiiv) Financial harm to the borrower has occurred when the borrower suffers monetary loss as a 

consequence of a misrepresentation described in paragraph (b)(1)(i) of this section or as found by a 

court, arbitrator, or hearing official pursuant to a judgment as described in paragraphs (b)(1)(ii) and 

(b)(1)(iii). Financial harm does not include damages for nonmonetary loss such as inconvenience, 

aggravation, emotional distress, pain and suffering, punitive damages, or opportunity costs. Financial 

harm is such monetary loss that is not predominantly due to intervening local, regional, or national 

economic or labor market conditions as demonstrated by evidence before the Secretary. Evidence of 

financial harm includes, but is not limited to the following circumstances:

(A) A significant difference between the borrower’s earnings after completing the program and the 

earnings listed for the borrower’s program of study in the institution’s marketing materials, website, or 

other communication made to the student;

(B) A significant difference between the borrower’s earnings after completing the program and the 

earnings for similar borrowers employed in the program’s intended occupational field, determined by, 

for example, earnings below the second lowest income quintile for the program of study’s intended 

occupational field according to the Standard Occupational Classification (SOC) code as published by the 

U.S. Bureau of Labor Statistics;

(CB) Lower or lost wages, extended periods of involuntary unemployment, or the cost of obtaining

nontransferable credits;

(DC) A significant difference in the actual amount or nature of the tuition and fees charged by the 

institution for which the Direct Loan was disbursed and the amount or nature of the tuition and fees 

that the institution represented to the borrower reasonably believed that the institution would charge

or was charging;

(ED) The borrower’s inability to secure employment in the field of study for which the institution 

expressly guaranteed employment; or

(FE) The borrower’s inability to complete the program because the institution no longer offers a 

requirement necessary for completion of the program in which the borrower enrolled.
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(4) The the Secretary may determine at any time that a borrower defense claim the application should 

not be approved based on evidence that rebuts the borrower’s claim, including any evidence provided 

by the institution at which the borrower enrolled. Such evidence may include, but is not limited to--

(i) For a claim based on licensure exam passage rates, the institution or program has a licensure exam 

passage rate associated with the program in which the borrower enrolls that, at a minimum, reasonably 

approximates the passage rates included in the institution’s marketing materials, website, or other 

communication made when the student enrolled;

(ii) For a claim based on the inability of the borrower to obtain the necessary certification or licensure 

for employment in the program’s intended field of employment, the borrower has obtained a 

certification or licensure related to the program in which the borrower enrolled without needing to 

complete additional coursework after completing the program; or

(iii) The institution provided information to the borrower to correct the misrepresentation prior to the 

borrower enrolling in the program.; or

(iv) The institution demonstrated that its representative or agent made a misrepresentation that was 

inconsistent with or prohibited by the institution’s policies, procedures and training at the time it was 

made.

(45) For purposes of this section, the term “institution” includes an eligible institution, its 

representatives and agents, or any institution, organization, or person with whom the eligible institution 

has an a written agreement to provide educational programs, or to provide marketing, advertising, 

recruiting or admissions services.

(c) Department recovery actions against institutions. The Secretary may initiate a recovery action against 

an institution when the Secretary determines that the borrower has asserted a successful borrower 

defense against the institution as described in this section or section 685.206(c) of this Part. 

(d) Limitations period. A borrower must file a claim under paragraph (b)(1) of this section within three 

years of the date the borrower discovered, or reasonably should have discovered, the 

misrepresentation. 

§685.300 Agreements between an eligible school and the Secretary for participation in the Direct Loan 

Program.

(a) General. Participation of a school in the Direct Loan Program means that eligible students at the 

school may receive Direct Loans. To participate in the Direct Loan Program, a school must—

* * *

(8) Provide that the school will accept Accept responsibility and financial liability stemming from its 

failure to perform its functions pursuant to the agreement;

* * *
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(11) Accept responsibility and financial liability stemming from losses incurred by the Secretary for 

repayment of amounts discharged by the Secretary pursuant to sections 685.206, 685.214, 685.216, and 

685.222;

§685.308 Remedial actions.

(a) General. The Secretary may require the repayment of funds and the purchase of loans by the school 

if the Secretary determines that the school is liable as a result of-- the unenforceability of a loan or 

loans, or the disbursement of loan amounts for which the borrower was ineligible, resulted in whole or 

in part from--

(1) The school's violation of a Federal statute or regulation; or

(2) The school's negligent or willful false certification under section 685.215; or

(3) The school’s actions that gave rise to a successful claim for which the Secretary discharged a loan, in 

whole or in part, pursuant to sections 685.206, 685.214, 685.216, and 685.222.