1

Memorandum

To: Department of Education Negotiators

From: Massachusetts Assistant Attorney General Michael Firestone 

& California Deputy Attorney General Bernard Eskandari

Cc: Non-Department of Education Negotiators

Date: March 9, 2016

Re: Recommended Revisions to Issues 1-3 and 5

In our respective states, we have witnessed firsthand the fraud and abuse 

committed by certain schools in their efforts to secure federal loan funds and the 

devastation those loans have caused to borrowers. The Department’s express aim for this

rulemaking is laudable: “to make the process of forgiving loans efficient, transparent, and 

fair—and to ensure students receive every penny of relief they are entitled to under law.”1

But the Department’s most recent proposal misses the mark.

With the final negotiated-rulemaking session approaching on March 16, we ask 

the Department to make six changes before releasing updated draft language: (i) remove 

any statute of limitations for victimized students to raise a borrower defense; (ii) establish 

a group discharge process so that students subjected to the same abuses can be treated 

equally and efficiently; (iii) expand the Department’s reliance on the work of state 

attorneys general and other state agencies; (iv) continue to recognize violations of state 

law as a basis for borrower defense; (v) ensure that the Department’s process for granting

a discharge is not an adversarial one that pits the victimized borrower against the school; 

and (vi) identify the use of mandatory arbitration agreements that require students to sign 

away their legal rights as indicative of a failure to responsibly administer the Title IV 

program.

We are hopeful that the Department will incorporate these requests in revised draft 

language on borrower defense.

1. Remove the Statute of Limitations

Under the Department’s proposed draft language, a student borrower is offered 

just a two-year window to raise a breach of contract or substantial misrepresentation by 

the school as a defense to repayment of a Direct Loan.2 This is patently unfair given that 

there is no corresponding statute of limitations on the ability of servicers and debt 

collectors to pursue student borrowers and collect on federal student loans. This two-year 

limit is inconsistent with borrower rights under Massachusetts and California state law3

and the Holder rule, and can only serve to extinguish the legal recourse of aggrieved and 

deserving students.

 1 http://www.ed.gov/news/press-releases/education-department-appoints-special-master-inform-debt-reliefprocess (June 25, 2015 public statement by Under Secretary Ted Mitchell). 2 685.222(b)&(c)

3 See Mass. Gen .L. 93A; 735 ILCS 5/13-207; Cal Code Civ. Proc. § 431.70 The same rule generally 

applies in federal court. City of St. Paul, Alaska v. Evans, 344 F.3d 1029, 1033-35 (9th Cir. 2003) 

(discussing the concept at length and stating “[i]ndeed, courts generally allow defendants to raise defenses 

that, if raised as claims, would be time-barred.”).
2

Victimized students in our states are often unfamiliar with their legal rights and 

unaware of the violations committed against them until many years after the fact, if ever. 

Two federal agencies and three states had to complete multi-year investigations before 

Corinthian’s Heald, Wyotech and Everest borrowers became aware that they had been 

deceived regarding placement rates. Indeed, a two-year limitations period would preclude 

the very discharges that the Department has already approved for certain Heald students. 

As the Department revises its draft language, we urge it to remove the statute of 

limitations for raising a borrower defense entirely.4

2. Establish a group discharge process

The Department’s current proposal does not provide streamlined, automatic debt 

relief, even when it is clear that a predatory school has deceived and abused large 

numbers of students. Our investigations and enforcement actions have repeatedly 

unmasked schools that engaged in systemic practices that subjected all prospective and 

enrolled students to the same, egregious abuse and deception. Group process is necessary 

if the Department seeks to provide relief to all students with a rightful claim, and it is 

consistent with the Department’s current regulations and state consumer-protection laws. 

The Department’s own experience with implementing borrower defense for 

students at Corinthian’s Heald College is the strongest argument in favor of an automatic 

group process. On June 8, 2015, the Department announced that the seriously 

misrepresented job placement rates at Heald campuses between 2010 and 2014 “entitle 

the defrauded students enrolled in these programs to a discharge of their Federal Direct 

Student loans,”5 provided they complete an attestation form. The Department estimated 

that 50,000 students were eligible for a full discharge,6 but reported last December that 

just 1,312 students had navigated the process for seeking relief as of September 30, 

2015—less than 3.0% of those eligible.7 The challenge of reaching student borrowers in 

the Department’s “first major action” against schools, described by then-Secretary 

Duncan as bringing the “ethics of payday lending into higher education,”8 requires the 

rule-makers to develop a new, more effective approach that removes the burden from 

students. In the absence of a group process, only those few students assisted by legal 

counsel or lucky enough to stumble independently upon the Department’s attestation 

forms will ever secure their rightful relief.

Fortunately, a streamlined, automatic group approach to providing student 

borrower relief is consistent with Department’s current discharge practices and Secretary 

Duncan’s promise to “make this [borrower defense] process as easy as possible for them

 4 Alternatively, consistent with the equitable principle of many state laws, allow borrowers to raise a 

defense for as long as the Department seeks repayment of student loans. As noted, presently the 

Department may collect on federal student loans in perpetuity. 5 http://blog.ed.gov/2015/06/debt-relief-for-corinthian-colleges-students/ 6 https://www2.ed.gov/documents/press-releases/report-special-master-borrower-defense-1.pdf 7 https://www2.ed.gov/documents/press-releases/report-special-master-borrower-defense-2.pdf 8 http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-collegestudents.html?_r=0
3

[student borrowers], including by considering claims in groups wherever possible.”9

Under the rules for seeking a closed school discharge, “[t]he Secretary may discharge a 

loan 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 the discharge.”10 This language, explicitly permitting automatic, group 

discharges, is also found in the regulations authorizing discharge for false certification.11

We urge the Department to adopt similar language in § 685.222(j) to avoid the unfair and 

duplicative burdens of the current Heald procedure, which has left over 97% of eligible 

students without the benefits they are entitled to under law. 

Proposed Language to add to § 685.222(j): The Secretary shall discharge a 

loan 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 the discharge based on a breach of contract or a [qualifying] substantial 

misrepresentation.

Congress’s direction to the Secretary to provide for borrower defenses against 

repayment empowers the Secretary to adopt this provision.12 There is nothing 

inconsistent about recognizing a defense to repayment on behalf of a group of borrowers, 

especially where one borrower representative of the group has made such a claim.

Relatedly, we ask that the Department to amend § 685.222(d) to allow for group 

determinations of eligibility based upon a school’s “substantial misrepresentation” by 

removing the unnecessary requirement of individual reliance contained in the final clause 

of the first sentence.13 The Department’s own definition of a “substantial

misrepresentation” giving rise to borrower defense is “any misrepresentation to a person 

on which that person could reasonably be expected to rely . . . to that person’s 

detriment,”14 a definition much more consistent with the unfair and deceptive trade 

practice laws in many states, which have long-recognized the importance of objective 

standards in determining honest statements from fraudulent ones. If the Department feels 

the need to raise the threshold for granting group determinations, we ask that, in place of 

an individualized standard, the Department consider defining a “qualifying substantial 

misrepresentation,” as “any misrepresentation to a group of persons on which a person 

could reasonably be expected to rely to their detriment.”

3. Expand reliance on the work of state attorneys general and other government agencies

 9 http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-collegestudents.html?_r=0 10 § 685.214(c)(2) (emphasis added). 11 § 685.215(c)(7). 12 1087e(h) “the Secretary shall specify in regulations which acts or omissions of an institution of higher 

education a borrower may assert as defense to repayment of a loan....”

13 § 685.222(d) (“The borrower has a defense to repayment under this section if the school or any of its 

representatives, or any institution, organization, or person with whom the school has an agreement to 

provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, 

made a substantial misrepresentation in accordance with 34 CFR part 668, subpart F, that the borrower 

relied on when the borrower decided to attend, or to continue attending, the school.”) (emphasis added). 14 § 668.71(c).
4

The Department’s draft proposed rule allows distressed student borrowers to 

secure debt relief on the basis of an investigation or enforcement action by a state or 

federal agency only if the agency obtains a judgment against the school.15 This rule is far 

too narrow to be effective and is inconsistent with the Department’s commitment to 

“whenever possible, . . . rely on evidence established by appropriate authorities in 

considering whether whole groups of students (for example, an entire academic program 

at a specific campus during a certain time frame) are eligible for borrower defense 

relief.”16 State attorneys general often settle cases or resolve investigations in order to 

secure monetary relief that aids both students and taxpayers. Attorneys general should not 

be forced to forego restitution and litigate with schools in order to ensure that 

investigative findings can form the basis of a defense to repayment for affected 

borrowers. We therefore urge that the Department amend § 685.222(b) to grant borrowers 

a defense to repayment if the government agency has secured “any judgment or 

determination in a court of competent jurisdiction or an admission by the school.” 

We also recommend that findings by state agencies shared with the Department 

should trigger an automatic review by the Department under § 685.222(j). Given the role 

of state regulators and state attorneys general in protecting consumers and enforcing state

trade practices laws,17 and our recognized role in the “triad” of higher education 

oversight, we believe that this practical change will help streamline and strengthen 

borrower defense implementation. 

4. Keep state law as a basis for borrower defense

The Department’s proposal unreasonably limits the categories of school 

misconduct that would give rise to a defense to repayment, by creating a federal standard 

that excludes violations of state law. The proposal limits students’ rights to only those 

circumstances where the schools either breached a contract or engaged in “substantial 

misrepresentations,” ignoring other categories of egregious school misconduct that 

violate state law.

Breach of contract and substantial misrepresentation fall short of capturing all the 

misconduct covered by state laws that protect students from exactly the sort of abuse that 

borrower defense seeks to remedy. We are concerned that the Department’s proposal 

would exclude, for example, (a) violations of state law related to affirmative-disclosure 

obligations, debt collection, and per se prohibitions on certain advertising techniques, 

such as the use of government and military seals; (b) violations of other federal laws that 

are incorporated into state law (through, for example, the unlawful prong of California’s 

 15 § 685.222(b). 16 http://www.ed.gov/news/press-releases/fact-sheet-protecting-students-abusive-career-colleges

17 These statutes generally make unlawful any unfair or deceptive trade practices as defined by state law. 

See, e.g., Mass. Gen. Law c. 93A, § 2 (“. . . unfair or deceptive acts or practices in the conduct of any trade 

or commerce are hereby declared unlawful.”); 815 Ill. Comp. Stat. 505/2 (“. . .unfair or deceptive acts or 

practices . . . in the conduct of any trade or commerce are hereby declared unlawful whether any person has 

in fact been misled, deceived or damaged thereby.”). Indeed, many trade practices statutes look to the 

Attorneys General not only as the primary enforcers of their terms, but also as the regulators who clarify 

the meaning of their statutory provisions. See, e.g., Mass. Gen. Law c. 93A, §§ 2, 4. 
5

Unfair Competition Law18), such as recruiter incentive-compensation bans; and (c) statelaw theories of liability predicated on aiding and abetting and conspiracy.

We do not oppose the creation of a national, uniform standard, so long as it serves 

as a federal floor applicable to all borrowers. But to ensure that maximum, long-standing 

consumer protections remain in place for borrowers, we urge the Department to retain the 

further protections of state law in any new standard.19

5. Avoid a process that pits victimized students against the school is unfair

In cases where the school has not already closed down, the Department proposes 

that the decision to grant a discharge be made by pitting the student against the school in 

an adversarial process, effectively requiring the student to hire a lawyer and allowing the 

school to interfere with the student’s right to obtain relief on a government loan. Any fair 

process should be sufficiently simple and straightforward so that a student can navigate it 

successfully without a lawyer. To ensure this, we urge the Department to create two 

separate and distinct processes—one process to determine a successful borrower defense

that is easily navigable for students without the assistance of legal counsel; and a second

process, between the Department and the school, to determine whether to hold the school 

liable for reimbursement if the borrower defense is successful. Fair and effective defenseto-repayment procedures must not permit schools to make the process burdensome and 

expensive for borrowers.

6. Stop predatory schools from forcing students to sign away their legal rights 

We join with the consumer and legal aid representatives on the rulemaking 

committee in asking the Department to revise the administrative capability regulations 

(34 C.F.R. § 668.16) to identify the use of pre-dispute arbitration agreements and similar 

restrictions on students’ legal rights as an indication of an institution’s failure to 

responsibly and capably administer Title IV loan funds. The drafters wrote, “when 

predatory schools bind their students to arbitrate any and all disputes that they may have 

against the school, it functions on the whole to suppress meritorious student 

complaints.”20 Although these contractual traps cannot thwart a law-enforcement action

brought by an attorney general, they do silence aggrieved students by cutting off their

private legal rights and access to the court system. The efforts of government agencies 

and the attorneys general cannot effectively counter this misconduct alone and students 

seeking loan forgiveness need access to publicly available complaints and court

 18 See Cal. Bus. & Profs. Code § 17200 et seq.

19 Moreover, any perceived burden of interpreting the laws of the various states will not be eased by 

excluding state law. Under the Department’s existing regulations, violation of state law is the only basis for 

borrower relief, and ED proposes not to apply any new DTR standard retroactively. Thus, billions of 

dollars of outstanding federal student loans dispersed before July 2017 will remain subject to a standard for 

which state law remains the only avenue for relief. 20 Proposal of Eileen Connor on behalf of the Legal Aid Community, February 11, 2106 (available at 

http://www.legalservicescenter.org/project-attorney-urges-department-of-education-to-prohibit-for-profitcolleges-from-using-forced-arbitration-to-hide-fraud-and-deception-of-students/).
6

documents to achieve the relief they are owed. For these reasons, we ask the Department 

to adopt the recommendation.

* * *

As negotiators, we appreciate the opportunity to share these recommendations 

with the Department and our fellow members of the negotiated-rulemaking committee.