1

Issue Paper 1

Session 1:November 13Ͳ15, 2017

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

borrower can establish a defense to the repayment of a loan based on an act or

omission of an institution.

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

Regulatory cite: 34 CFR 685.206(c)

Summary of issue:

Beginning with the Direct Loan program regulations issued in 1994, and as clarified in a Notice of

Interpretation issued in 1995, the current borrower defense (BD) standard requires a Direct Loan

borrower to establish the existence of an “act or omission” by the institution attended by the student

that would give rise to a cause of action against the school under “applicable State law” to demonstrate

a defense to repayment. In its 1995 Notice of Interpretation,1 the Department clarified that a BD claim

would be recognized only if it was directly related to the loan at issue or the educational services for

which the loan was provided. The regulation reads, in relevant part:

In any proceeding to collect on a Direct Loan, the borrower may assert as a defense

against 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 [34 CFR

685.206(c)(1)].

The Department currently evaluates claims under this State lawͲbased standard.

The HEA directs the Secretary to issue regulations in this area. The relevant section of the statute reads,

in full:

Notwithstanding any other provision of State or Federal law, 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, except that in no

event may a borrower recover from the Secretary, in any action arising from or relating

to a loan made under this part, an amount in excess of the amount such borrower has

repaid on such loan [HEA § 455(h), 20 U.S.C. § 1087e(h)].

Questions for consideration by the committee include:

x Whether and how should the Department establish a uniform (“Federal”) standard, as opposed to a

standard based on applicable State law, for evaluating BD claims?



1 https://www.gpo.gov/fdsys/pkg/FRͲ1995Ͳ07Ͳ21/html/95Ͳ17988.htm

The Department currently evaluates claims u

Acting Under 

Secretary James 

Manning stated to 

Senator Durbin on July 

7, 2017, “No borrower 

defense applications 

have been approved 

between January 20, 

2017, and today." 

as opposed to a

The Department has 

also recognized that 

a third option is to 

"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.” 81 

FR 75939.

In 2016, the Department rejected fraud as standard: "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 taxpayers, bear the cost of such injuries." 81 FR 75947. As the Department explained, 

“Gathering evidence of intent would likely be nearly impossible for borrowers. Information asymmetry between 

borrowers and institutions, which are likely in control of the best evidence of intentionality of misrepresentations, 

would render borrower defense claims implausible for most borrowers.” 81 FR 75937. 
2

x If we establish a Federal standard, what should serve as the basis for a BD claim?Should the

definition of misrepresentation that governs a borrower’s defense to repayment correspond to the

definition that governs the Department’s own enforcement actions in 34 CFR 668.71?



x Should such a Federal standard be based on common law fraud as its definition?The Restatement

(Second) of Torts defines fraudulent misrepresentation as: “One who fraudulently makes a

misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to

refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss

caused to him by his justifiable reliance upon the misrepresentation.” Restatement (Second) of Torts

§ 525 (1977).

x Should this Federal standard require a borrower to demonstrate a reasonable reliance on the act or

omission causing injury to the borrower? Are there other definitions or requirements that could be

considered?

x What should be the burden of persuasion for a borrower’s claim?In fraud cases, a majority of

courts apply the clearͲandͲconvincing standard of proof to the elements of a claim for fraud.

Restatement (Third) of Torts: Liab. for Econ. Harm § 9 (tentative draft no. 2, 2014).However, for

causes of action based on consumer protection law, some states have concluded that only a

preponderance of the evidence is required.See, e.g., Malooley v. Alice, 621 N.E.2d 265, 268 (Ill.

App. 1993).

x What factors should the Department consider when determining the amount of relief a borrower

should receive? Should the Department consider the borrower’s actions or circumstances when

determining the amount of relief? Should the Department consider whether the borrower could

have ascertained the truth without difficulty, inconvenience, or special skill?

what should serve as the basis for a BD claim?

In the 2016 rulemaking, 

the Department stated

it was “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.” 81 FR 

75935.

If we establish

The Department 

established a federal 

standard in final 2016 

regulations that would 

“allow a borrower to 

assert a borrower 

defense on the basis of 

a substantial 

misrepresentation, a 

breach of contract, or a 

favorable, nondefault 

contested judgment 

against the school.” 81 

FR 75926.

definition of misrepresentation correspond

The Department previously said the definition 

should correspond, and noted “[a]ligning the 

definition and types of substantial 

misrepresentations for borrower defense with the 

Department's long-held authority to bring 

enforcement actions under part 668 . . . will provide 

more clarity for schools and reduce their burden in 

having to interpret and adjust for the new borrower 

defense standards.” 81 FR 75947.

The Department also 

concluded the 

definition of 

misrepresentation in § 

668.71 should be 

updated to include 

“not only false or 

erroneous 

statements, but also 

misleading 

statements that have 

the likelihood or 

tendency to mislead 

under the 

circumstances” and to 

clarify that “omissions 

of information are 

also considered 

misrepresentations.” 

81 FR 75945.

reasonable reliance o

The Department recognized in 2016 that "reasonableness" of reliance depends 

on the borrower's circumstances and the context of the interaction, explaining “it 

is appropriate” to “consider the totality of circumstances in which the statement or 

omission occurs, including the specific group at which a statement . . . was 

targeted, to determine whether the statement or omission was misleading under 

the circumstances." 81 FR 39342. "We also recognize that school conduct that 

takes advantage of the borrower's distress or lack of knowledge or sophistication 

may also . . . affect[] a borrower's reasonable reliance on a misrepresentation." 81 

FR 39343. The Department also found that when an institution has made a 

substantial misrepresentation to a group of borrowers, such as advertising false 

job placement rates, there should be a “rebuttable presumption” of “reasonable 

reliance” by those borrowers, noting a similar presumption “exists under Federal 

consumer law.” 81 FR 75971.

the clearͲandͲconvincing standard of proof

The Department previously concluded that the “preponderance of the evidence” standard “is 

appropriate” for borrower defense claims, explaining: “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.” It noted: “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." 81 FR 75936.

the amount of relief a

The Department previously 

stated that “the starting 

point for any relief 

determination is the full 

amount of the borrower's 

costs incurred to attend the 

institution” and that "the 

presence of some modest 

value does not mean full 

relief is inappropriate." 81 

FR 75957. 

The 2016 regulations placed 

the burden of proof on the 

school to prove any value of 

education when the 

Department seeks relief 

from the school for a group 

of students based on 

widespread school 

misconduct. 81 FR 76086.

could

have ascertained the truth w

The Department 

recognized in 2016 

that in certain 

situations, “a borrower 

would have reason to 

believe he or she 

could rely on the 

information being 

given,” such as when 

“the statement was 

made by an individual 

whom the borrower 

believed could be 

trusted to give 

accurate information, 

such as a school 

admissions officer.” 81 

FR 75948.

based on common law fraud
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Issue Paper 2

Session 1:November 13 – 15, 2017

Issue: Developing a regulatory framework for the process of submitting and evaluating

a borrower defense to repayment (BD) claim

Statutory cites: §455(h) of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 685.206(c)

Summary of issue:

Regulations currently in effect do not describe the process for a borrower to submit and the Department

to evaluate a BD claim.An ideal BD claim process should be easily understood, facilitate the submission

of sufficient evidence to adjudicate the claim, establish clear expectations for the borrower and the

school regarding next steps and timeframes, and assure claims are addressed fairly and equitably for

both the borrower and the institution.

Questions for consideration by the committee include:

x What process should a borrower follow to submit and establish a basis for a BD claim?

x Should a borrower be granted an automatic administrative forbearance and should collection

actions be stopped while his or her BD claim is being processed?

x What evidence should the borrower be required to provide to support a BD claim?

x What due process and notification requirements should the Department provide to an institution of

a pending BD claim?What opportunity should be provided for the school to respond to a

borrower’s BD claim?

x Should the process differ depending on whether the school is open or closed?

x Should the process provide an opportunity for borrowers with other Federal loans to consolidate

those loans into the Direct Loan (DL) program to allow the borrower to raise a defense to repayment

of those loans under the DL regulation?

 

Regulations currently in effect d

On June 14, 2017, 

Sec. DeVos 

postponed the 

effective date of 

borrower defense 

regulations finalized 

November 1, 2016. 

She stated in the 

press release that the 

borrower defense 

process in that 

regulation is “a 

muddled process 

that's unfair to 

students and schools, 

and puts taxpayers on 

the hook for significant 

costs.” 

The issues identified 

in this Issue Paper 

were discussed 

extensively in the 

2016 rulemaking. 

Where exactly did 

that process go 

wrong, in the 

Department's view?

easily understood,

The Department's 2016 rule 

explained “the individual borrower 

defense process . . . is intended to 

be a simple process that a borrower 

may access without the aid of 

counsel.” 81 FR 75928. 

d a borrower follow to submit and establish

The 2016 final 

regulations also 

provided for the 

Secretary to “allow a 

claim to proceed 

without receiving an 

application” from an 

individual.” 81 FR at 

75928. The 

Department has used 

this authority in the 

past to grant automatic 

group borrower 

discharge. 

n automatic administrative forbearance

In 2016, the 

Department's view 

was that automatic 

administrative 

forbearance "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." 81 FR 

76050-51.

the borrower be required to provide

The Department 

previously stated that 

“wherever possible” it 

“will rely on evidence 

established by 

appropriate 

authorities” to consider 

whether “whole groups 

of students are eligible 

for borrower defense 

relief.” https://

www.ed.gov/news/

press-releases/factsheet-protectingstudents-abusivecareer-colleges. The 

2016 rules allow 

evidence to “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.” 81 FR 

75940.

What opportunity should be provided for the school to respond to

The Department previously 

recognized that to “even the playing 

field for students,” who generally 

don't have access to lawyers, the 

process should not pit schools 

against students: “Individual claims 

will be decided in a nonadversarial 

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.” 

81 FR 75962.

an opportunity for borrowers with other Federal loans

The Department 

previously 

committed to 

providing “an 

effective process for 

all borrowers”, 

including FFEL 

borrowers, to access 

borrower defense 

relief. 81 FR 75961
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Issue Paper 3

Session 1:November 13Ͳ15, 2017

Issue: Financial Responsibility and Administrative Capability

Statutory cites: §§487(a) and (c), and 498, of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 668.14, 668.16, 668.43, and part 668 subpart L

Summary of issue:

Under the HEA, the Secretary establishes standards for financial responsibility and administrative

capability that institutions must meet to participate in the Federal student financial aid programs

authorized under title IV.If an institution violates these requirements, the Secretary may limit, suspend,

terminate, or otherwise condition the institution’s title IV participation.

Under the Department’s current regulations at 34 CFR 685.206(c), borrower defense discharges are

granted in instances where it is determined that an institution has committed a violation of applicable

State law.When the Department discharges a borrower’s loans, the taxpayer assumes the costs of that

discharge.This raises the question of to what extent the institution is liable for the costs to the

Department/taxpayer of those violations and the resulting discharges.However, allegations of

institutional misconduct may increase the likelihood that an institution will close, not have sufficient

resources to pay outstanding or forthcoming borrower defense claims, or both.Therefore, if the

Department decides to promulgate regulations requiring institutions to bear financial responsibility for

borrower defense claims, it may also be necessary to require that institutions post sureties in some

instances to ensure that the taxpayers are not solely responsible for borrower defense loan discharges

stemming from the institution’s unlawful acts.

Questions for consideration by the committee:

x Under what conditions or to what extent should institutions incur liability for reimbursement of

borrower defense claims?

x Should the Department require the posting of sureties by institutions that are determined to be

at risk for closure and/or borrower defense claims? Which metrics should be used when making

these determinations?

x Should the Department take additional steps to protect taxpayer interests?

 

In 2016, the Department's view 

was that “institutions that are 

providing clear, complete, and 

accurate information to 

prospective and enrolled students 

are exceedingly unlikely to 

generate successful borrower 

defense claims.” 81 FR 75957 

, the taxpayer assumes the costs of

The Department previously stated 

that “a significant share” of the cost 

of borrower defense “will be offset

by the recovery of funds from 

institutions whose conduct gave rise 

to the claims.” 81 FR 75927

raises the question of to what extent the institution is liable fo

The Department 

stated in 2016 that 

applicable law gives 

the Department the 

right to recover the 

full amount from the 

school losses incurred 

on Direct Loans. 81 

FR 75930. It also 

stated that 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. 

81 FR 75955.

if the

Department decides to promulgate regulations requiring institutions to bear financial responsibility

Both the 

Department's 1995 

and 2016 borrower 

defense rules provide 

for the Secretary to 

initiate proceedings 

against an institution 

to recover losses 

owing to successful 

borrower defense 

claims. 60 FR 37770; 

81 FR 75929. 

r to what extent

Should the Department require

In 2016, the 

Department 

included financial 

responsibility 

requirements in 

order to provide “far 

stronger 

incentives for 

schools to avoid 

committing acts or 

making omissions 

that could lead to a 

valid borrower 

defense claim.” 81 

FR 76050

at risk for closure and/or borrower defense claims?

The Department previously 

explained: “Recent experiences 

with Corinthian, in which the 

Department ended up with no 

financial protection for either 

closed school or borrower 

defense claims,” convinced it 

that sureties are necessary, and 

that “the routine tests under 

current regulations did not 

result in financial protection, 

because Corinthian appeared at 

the time...to pass those tests.” 

81 FR 39361

metrics s

In 2016, the Department observed that it 

“has, since at least the 1994 regulations, 

consistently considered” that “a single 

significant occurrence” could be 

“sufficient grounds to render an institution 

not financially responsible.” 81 FR 75980. 

The Department also found it necessary to 

apply certain financial protection triggers to 

proprietary institutions because of “the 

fundamental differences in the 

governance structures and missions of 

the public and nonprofit sectors and the 

unique nature of the business model under 

which these institutions operate.” 81 FR 

75934
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Issue Paper 4

Session 1:November 13Ͳ15, 2017

Issue: PreͲdispute Arbitration Agreements, Class Action Waivers, and Internal Dispute

Processes

Statutory cites: §§454(a)(6) and 455(h), of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 685.300(b)(11), (d)Ͳ(i) [2016 regulatory package]

Summary of issue:

Some institutions require students to sign an enrollment agreement prior to matriculation that requires

a student to pursue arbitration or the internal resolution of claims made against the institution before

the student may submit complaints to outside entities or litigate the claim in court. Such institutions

may also include provisions by which students waive their right to be a part of, or to initiate, a class

action lawsuit. Critics of arbitration agreements have argued that arbitration can be a secretive process

that lets companies dictate the terms of negotiations. Defenders have argued that arbitration

agreements can lower the cost of delivering education by avoiding costly litigation and that arbitration is

an efficient way to resolve disputes.

At the same time, prohibitions on preͲdispute arbitration agreements and class action waivers have

been held to violate the Federal Arbitration Act (FAA). The FAA “establishes a liberal federal policy

favoring arbitration agreements” that applies “unless the FAA’s mandate has been overridden by a

contrary congressional command.” CompuCredit Corp. v. Greenwood, 565 U.S. 95, 97Ͳ98 (2012). This

policy protects the right of parties to set dispute resolution procedures by contract.

The Department of Justice recently took the position in litigation over the National Labor Relations Act

(NLRA) that administrative interpretation of another federal statute cannot supersede the FAA policy in

favor of arbitration. Brief for the United States as Amicus Curiae Supporting Petitioners in Nos. 16Ͳ285

and 16Ͳ300 and Supporting Respondents in No. 16Ͳ307, Epic Systems Corp. v. Lewis, No. 16Ͳ285 (U.S.

June 16, 2017), 2017 WL 2665007. The Department of Justice stated that because the NLRA contains no

express congressional command overriding the FAA’s policy favoring arbitration agreements, the

National Labor Relations Board cannot read the NLRA to trump the FAA policy in favor of arbitration—

even though an agency’s interpretation of its own statute normally receives deference. Id. at 18Ͳ25.

The Supreme Court has also held that a prohibition on class arbitration waivers in consumer contracts

violates the federal policy favoring arbitration agreements. The Court explained that a stateͲlaw rule

disapproving of class arbitration waivers conflicts with the FAA because the imposition of class

procedures undermines the advantages of arbitration, including increased efficiency, decreased cost,

and reduced risk to defendants. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 347Ͳ51 (2011).

In addition, Congress recently passed, and the President signed, a resolution that nullified rules issued

by the Consumer Financial Protection Bureau (CFPB) that would have prohibited the use of class action

waivers in contracts for consumer financial products and services that provide for the arbitration of

future disputes.

The Higher Education Act (HEA) does not address arbitration agreements or class action waivers.

However, the final 2016 regulations promulgated pursuant to the HEA prohibit a school participating in

Some institutions

The Department recognized in 2016 that “only a small 

percentage of non-profit institutions currently use 

arbitration agreements with their students.” 81 FR 76016. 

On the other hand, "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[.]" 81 FR 

76022. 

Critics of arbitration a

In 2016, such critics 

included the 

Department. It found 

that predispute 

arbitration agreements 

and class action 

waivers “jeopardize the 

taxpayer investment” in 

student loans, because 

those devices “insulat[e 

institutions] from direct 

and effective 

accountability for their 

misconduct,” “deter 

publicity that would 

prompt government 

oversight agencies to 

react,” and “shift the 

risk of loss for that 

misconduct to the 

taxpayer.” 81 FR 

75926, 76022.

Defenders

“Nearly all of the 

negotiators 

supported” limitation 

on class action 

waivers and 

predispute arbitration 

in 2016. 81 FR 39381 

argued t

The Department 

considered comments 

from arbitration 

defenders, and found 

"nothing in th[ose] 

comments . . . 

demonstrates that 

these [negative] 

effects [of predispute 

arbitration and class 

action waiver] are 

exaggerated or 

mischaracterized, that 

the disadvantages and 

burdens the regulation 

would place on 

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." 81 FR 

76026 

At the same time, prohibitions on preͲdispute arbitration agreements and class action waivers have

been held to violate the Federal Arbitration Act (FAA). The FAA “establishes a liberal federal policy

favoring arbitration agreements” that applies “unless the FAA’s mandate has been overridden by a

contrary congressional command.” CompuCredit Corp. v. Greenwood, 565 U.S. 95, 97Ͳ98 (2012). This

policy protects the right of parties to set dispute resolution procedures by contract.

The Department considered these same authorities in 2016 and concluded that the 

imposition of conditions on participation in Title IV programs did not "override, displace, or 

disregard the FAA." See 81 Fed. Reg. 81 Fed. Reg. 75926, 76021-24. Rather, “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). " 81 FR 76023. “An institution that chooses not 

to continue to participate” in Title IV programs “remains free to rely on” predispute arbitration 

provisions. 81 FR 76025
6

the Direct Loan Program from (1) requiring 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 and

(2) obtaining or attempting to enforce a waiver of or ban on class action lawsuits for such claims.

The 2016 regulations also prohibit schools from requiring students to use internal complaint processes

before seeking remedies from accrediting agencies or government agencies. Some have argued that

mandatory internal grievance procedures promote transparency and collaboration between students

and institutions that helps to resolve grievances in advance of adversarial—and potentially costly—

litigation or arbitration. Others have argued that if a student believes that the grievance is significant

enough to warrant the attention of accreditors or government authorities, the complaint should be

brought to their attention right away.

Questions for consideration by the committee include:

x Apart from an outright prohibition on the use of preͲdispute arbitration agreements and class

action waivers, are there other measures in this area that the Department could take to

promote the interests of borrowers?

x Should the Department regulate schools’ internal dispute resolution processes?

 

e a waiver of or ban on class action lawsuits

The Department “expect[ed] that the 

potential exposure to class actions 

w[ould] motivate institutions to provide 

value and treat their student 

consumers fairly in order to reduce the 

likelihood of suits in the first place.” 81 

FR 76026.

internal complaint processes

"The [2016] 

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." 81 FR 

76031. They prevent 

schools from 

requiring students to 

exhaust an internal 

complaint procedure 

before raising 

borrower defense 

claims.

. Others have argued that

“Others” includes 

the Department, as 

this was the 

Department's 

position in 2016: "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 

that the benefit of 

bringing that 

complaint to their 

attention outweighs 

the benefits of 

attempting to 

compel the student 

to delay." 81 FR 

76031.

e other measures in

In 2016, the 

Department 

concluded that 

"nothing in the 

comments opposing 

the regulation 

demonstrates 

that . . . the 

substantial problems 

created by the use 

of class action 

waivers can be 

reduced or 

eliminated by more 

modest measures." 

81 FR 76026.
7

Issue Paper 5

Session 1:November 13Ͳ15, 2017

Issue: Closed School Discharge

Statutory cites: §437(c) of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 674.33(g), 682.402(d), and 685.214

Summary of issue:

Current regulations generally require a borrower to submit a written request for a closed school

discharge.That request generally must be in the form of a sworn statement that states the borrower

(or student on whose behalf a parent borrowed):

1. Received the proceeds of a loan, in whole or in part, to attend an eligible institution;

2. Did not complete the program of study at that institution because it closed while the student

was enrolled or the student withdrew from the school not more than 120 days before the

school closed; and

3. Did not complete the program of study through a teachͲout at another school or by transferring

academic credits or hours earned at the closed school to another school.

However, the regulations also give the Secretary the authority to discharge a loan without an application

from the borrower. Under 34 CFR 685.214(c)(2), “[t]he Secretary may discharge a [Direct 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.”Similar provisions exist for

Federal Family Education Loan (FFEL) program loans and Perkins loans.

Question for consideration by the committee:

x Should the Department extend the eligibility period for seeking a closed school discharge to a

period other than the current 120 days before the school closed?

x What documentation, when necessary in support of a sworn statement, must the borrower

provide to demonstrate to the Secretary’s satisfaction that a borrower is eligible for a closed

school discharge?

x Should the Department expand upon the Secretary’s existing authority to issue a closed school

discharge without an application? What information must the Secretary possess before making

a determination to permit a discharge without an application?

 

Should t

The Department's view in 2016 was that “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.” 81 FR 76034

must the borrower

provide

Pre-2016 regulations 

allow for the 

Secretary to grant a 

closed school 

discharge without 

the borrower 

providing any 

documentation to 

the Secretary. 81 FR 

76038.

Should t

The 2016 rules provided for automatic closed school discharges, stating that the 

Department would “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.” 81 FR 76081. The automatic closed school 

discharge provisions were meant to be implemented “as soon as operationally possible.” 

81 75928.The Department explained it was “concerned that borrowers are unaware of 

their possible eligibility for a closed school discharge” and thus “[m]any borrowers eligible 

for a closed school discharge do not apply.” 81 FR 39369. It noted “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.” 81 FR 76065. 
8

Issue Paper 6

Session 1:November 13Ͳ15, 2017

Issue: False Certification

Statutory cites: §437(c) of the Higher Education Act of 1965, as amended (HEA)

Regulatory cites: 34 CFR 685.215

Summary of issue:

The HEA provides that if a student’s eligibility to borrow “was falsely certified by the eligible institution

or was falsely certified as a result of a crime of identity theft . . . then the Secretary shall discharge the

borrower’s liability on the loan (including interest and collection fees).” Section 437(c) of the HEA, 20

U.S.C. § 1087(c)(1). The corresponding Direct Loan Program regulation states that a borrower’s loans are

discharged when “a school falsely certifies the eligibility of the borrower (or the student on whose

behalf a parent borrowed) to receive the loan.” 34 CFR 685.215(a)(1).

A student’s eligibility to borrow has been falsely certified by the school if the school:

x Certified the student’s eligibility for the loan on the basis of the borrower’s ability to benefit from

the institution’s training and the student did not meet the eligibility requirements;

x Signed the borrower's name on the loan application or promissory note without the borrower's

authorization;

x 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 the loan was originated) in the occupation for

which the training program supported by the loan was intended;

x Certified the borrower's eligibility for a Direct Loan as a result of the crime of identity theft

committed against the borrower; or

x Without the borrower’s authorization, endorsed the borrower’s loan check or signed the borrower’s

authorization for electronic transfer, unless the proceeds of the loan were delivered to the student

or applied to charges owed by the student to the school.

The Secretary also has the discretion to discharge a loan for false certification “without an application

from the borrower if the Secretary determines, based on information in the Secretary's possession, that

the borrower qualifies for a discharge” 34 CFR 685.215(c)(7).

Question for consideration by the committee:

x Should the false certification regulation be changed to include other circumstances under which a

borrower’s student loan would be considered to have been falsely certified?

 

Should the false certification regulation be changed to

The Department determined in 2016 that the false certification regulation should be 

changed “specifically to address the problem of schools encouraging non-high school 

graduates to obtain false high school diplomas to qualify for Direct Loans.” 81 FR 39377.It 

further explained that “because there is no longer a statutory basis for certifying the 

eligibility of non-high school graduates based on an `'ability to benefit',” the rule should be 

updated to “state more explicitly that a school's certification of eligibility for a borrower who 

is not a high school graduate, and does not meet the alternative to high school graduate 

requirements, is grounds for a false certification discharge.” 81 FR 39377.The Department 

also determined that the regulation should be changed to provide for false certification 

discharges where the “Department has information in its possession showing that the 

school has falsified the Satisfactory Academic Progress (SAP) of its students.” 81 FR 

39377.
9

Issue Paper 7

Session 1:November 13Ͳ15, 2017

Issue: Guaranty Agency Collection Fees

Statutory cites: §§428F(a) and 484A(a) of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 682.405(b)(1)(vi)(B)

Summary of issue:

In the Federal Family Education Loan (FFEL) Program, a guaranty agency, after it pays a default claim and

acquires the loan from the lender, is required to send an initial notice to the borrower.In that notice,

the guaranty agency must give the borrower at least 60 days to take any of several actions, including

entering into a repayment agreement with the guaranty agency.The Department, for loans it holds,

does not charge collection costs to a defaulted borrower who enters into a repayment agreement or

loan rehabilitation agreement within the 60Ͳday period following an initial notice to the borrower.

In 2015, the Department was asked whether, under Federal law, guaranty agencies could charge

collection costs to defaulted borrowers who promptly enter into a repayment agreement, including a

loan rehabilitation agreement, and who honor that agreement.In Dear Colleague Letter (DCL) GENͲ15Ͳ

14 (July 10, 2015), we addressed this issue and explained that the Department’s regulations bar a

guaranty agency from charging collection costs to a defaulted borrower who enters into a repayment

agreement (including a rehabilitation agreement) within 60 days of receiving the initial notice sent by

the guaranty agency after the guaranty agency acquires the loan from the lender and who honors that

agreement.The Department withdrew that DCL in March 2017 due to the lack of notice and

opportunity to comment and said that it would pursue rulemaking on this issue.

Question for consideration by the committee:

x Should the Department revise 34 CFR 682.410(b), regarding the charging of collection costs by a

guaranty agency to a defaulted borrower who responds within 60 days to the initial notice sent

by the guaranty agency after it pays a default claim and acquires the loan from the lender?

 

e lack of notice an

“The Department has consistently taken the position that costs may only be assessed on a borrower if she does not 

enter into a repayment agreement - of which a rehabilitation agreement is simply one form - in a timely manner and 

comply fully with the agreement, because failure to timely agree to voluntarily repay requires the guarantor to incur 

these collection costs.” Amicus Brief of the Dep't of Educ., Bible v. USAF at p.14. Similarly, in a 2002 filing, the 

Department stated: “The regulations [34 C.F.R. § 682.410(b)(5)] . . . direct guarantors to charge collection costs 

only to those debtors who cause the guarantor to incur collection costs by failing to agree promptly to repay 

voluntarily. The Department follows the same procedure when it takes assignment of defaulted loans from 

guarantors.” Brief of Secretary of Educ. , Educ. Credit Mgmt. Corp. v. Barnes, 318 B.R. 482 (S.D. Ind. 2004), at p.22 

(filed Mar. 14, 2002). Thus, the regulations “ensure that charges are imposed only on those debtors who fail to 

cooperate and thereby cause the guarantor to incur collections costs.” Id. at 23 

Should

This revision would be consistent with the Department's interpretation of the regulation. As the 

Department explained in a 1997 letter to a guaranty agency, § 682.410(b)(5)(ii)(D) “provides the 

borrower an opportunity to enter into a satisfactory repayment agreement before the agency either 

reports the default to a credit bureau or assesses collection costs against a borrower as required in 

§682.410(b)(2).” Letter from Ronald E. Streets, Program Specialist, Policy Dev. Div., Student 

Financial Assistance Programs, U.S. Dep't of Educ., to Phillip Cervin, Ass't Vice President, 

Collections, Texas Guaranteed Student Loan Corp. (July 28, 1997) (“Streets Letter.”). (cited in 

Amicus Brief of the Dep't of Educ., Bible v. USAF, at p.13-14).
10

Issue Paper 8

Session 1:November 13Ͳ15, 2017

Issue: Whether to recalculate a borrower’s Subsidized Usage Period and interest

accrual, if applicable, when the borrower receives a discharge of a loan for

which he or she has not received all or part of the educational benefit of the

loan

Statutory cite: § 455(q) of the Higher Education Act of 1965, as amended (HEA)

Regulatory cite: 34 CFR 685.200(f)

Summary of issue:

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

additional Direct Subsidized Loans if the borrower has received Direct Subsidized Loans for a period that

is equal to or greater than 150 percent of the length of the borrower’s current program of study. In

addition, some borrowers who are not eligible for Direct Subsidized Loans because of the 150 percent

limit become responsible for the interest that accrues on their loans when it would otherwise be paid by

the government. Neither the statute nor regulations issued prior to the delayed 2016 regulations

address what effect a discharge of a Direct Subsidized Loan has on the 150 percent limit. They also do

not address whose responsibility it is to pay the outstanding interest on any remaining loans that have

not been discharged, but have previously lost eligibility for interest subsidy.

Currently, the Department does not include in the calculation of a borrower’s subsidized usage period,

the subsidized usage period associated with a Direct Subsidized Loan or the portion of a Direct

Consolidation Loan that repaid a Direct Subsidized Loan if the borrower receives a discharge that

demonstrates the borrower did not receive all or part of the educational benefit of the loan. The

discharges that meet this description are: closed school, false certification, unpaid refund, and borrower

defense.

As a part of the November 1, 2016, final regulations, the Department reflected this practice by

amending 34 CFR 685.200(f)(4)(iii) to specify that a partial or full discharge based on school closure, false

certification, unpaid refund, or borrower defense would result in the elimination or recalculation of the

subsidized usage period associated with the loan(s) discharged in calculating a borrower’s subsidized

usage period. The Department also amended 34 CFR 685.200(f)(3)(v) to provide that if all or part of a

Direct Subsidized Loan (or applicable portion of a Direct Consolidation Loan) is discharged such that a

borrower has a remaining eligibility period, the Department reinstates the interest subsidy on any

eligible loans and refunds applicable amounts already paid by the borrower.

Questions for consideration by the committee include:

x Should the Department recalculate or eliminate the applicable subsidized usage period from

calculation of the borrower’s subsidized usage period and reinstate interest subsidy (if applicable)

when a borrower receives a loan discharge?



x If so, to which discharges should recalculation or elimination of subsidized usage periods apply?