1

Memorandum

To: Department of Education Negotiators

From: California Deputy Attorney General Bernard Eskandari & 

Massachusetts Assistant Attorney General Michael Firestone 

Cc: Non-Department of Education Negotiators

Date: March 15, 2016

Re: Recommended Revisions to Issues 1-3

The Department’s most recent proposal is a positive step toward achieving its

stated aim: “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

The 

proposal addresses a number of the concerns raised by the Attorney General negotiators 

and other stakeholders, and incorporates many of the recommendations made to the 

Department, including recognizing the critical importance of an automatic, group process 

to discharge loans and reimburse students for payments made on those discharged loans.

We are encouraged by the Department's responsiveness to these concerns and 

others raised in our previous memo. We particularly appreciate the Department's strong 

stand against the use by schools of binding arbitration agreements that force students to 

give up their legal rights. In this final session we are looking forward to a productive 

discussion and resolving our remaining concerns.

We believe that the following recommendations will greatly strengthen the 

Department’s proposal and are hopeful that the Department will incorporate them into its 

final rule.

1. Realize the full potential of a group claims process by opening it to state 

attorneys general, state and federal enforcement agencies, and legal-aid 

representatives

We are encouraged that the Department has established a group process that will 

help victimized students obtain relief more easily than through individual claims.

Nevertheless, we remain concerned that the group process will prove inaccessible to 

borrowers. Under the Department’s current proposal, students would be powerless to 

initiate a group process because only the Secretary has that authority.2 Borrowers with 

legitimate defenses to repayment should not be forced to choose between the individualclaim process, which would likely prove difficult to the large majority who cannot afford 

counsel, and awaiting action by the Secretary.

The proposed group-claim process has the potential to provide deserved relief to 

 

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

Proposal § 685.222(f).
2

defrauded students on a broad basis, but the critical weaknesses in initiating that process 

threatens to reduce its effectiveness. To actually realize the potential of the group 

process, the Department should allow attorneys general, state and federal enforcement 

agencies, and legal-aid representatives to initiate it. Because of their ongoing relationship 

with students and extensive knowledge of the educational landscape, these 

representatives are well positioned to identify and propose worthy classes of borrowers.

Proposed revisions to §685.222(f):

(f) Group borrower defense claims, generally. (1) Upon consideration of factors 

including, but not limited to, common facts and claims, fiscal impact

administrative efficiency, and the promotion of compliance by the school or other 

title IV, HEA program participants, the Secretary may initiate a process to 

determine whether a group of borrowers identified by the Secretary has a common 

basis for borrower defense. Upon the written request of a state attorney general, 

state or federal enforcement agency, or a legal aid representative, the Secretary 

shall initiate a process to determine, within a reasonable period of time, whether a 

group of borrowers has a common basis for borrower defense.

2. Fix the imbalance of power in the open-school, group process

The Department should also act to correct a potentially significant imbalance in 

the relative strengths of the parties in the group-claim process. The current proposal 

requires the Secretary to appoint “a Department official to present the group’s claim”

once the Secretary has determined that the group process is warranted3but provides no 

further guidance about the official to be appointed, her professional qualifications, her 

duties and responsibilities, her independence, her access to Department information, or 

the resources that she will have at her disposal. And while the Department’s proposal 

would allow schools to oppose group discharge through “evidence and argument 

presented” by their attorneys directly to the hearing official,4the draft regulations do not 

even require that the Department-appointed official who serves as borrowers’ sole 

representative in the proceedings be an attorney. This disparity in representation is 

concerning. Fairness demands that borrower groups have independent counsel to

zealously advance their cause because they will surely face opposition from coordinated 

teams of well-heeled lawyers representing schools.

This likely imbalance of power is exacerbated by the Department’s proposal to 

link group discharge directly to the school’s liability for reimbursement to the 

Department, incentivizing schools to pour resources into defending against borrowerdefense liability.

5 We are also concerned that, in light of the inherent unfairness of the 

proposed group process, a student placed by the Secretary in a group that ultimately 

 

3

Proposal § 685.222(f)(2)(i).

4

Proposal § 685.222(h)(1).

5

Proposal § 685.222(h)(2)(i).
3

proves unsuccessful will be prevented from bringing an individual claim absent “new 

evidence.”

6

We urge the Department to rectify this imbalance in the following ways:

First, the role of the Department official designated to present a group claim 

should be more clearly defined. The regulations should state that, while so assigned, the 

official shall be responsible for zealously representing and advocating the interests of the 

students, even where such interests diverges from that of the Department, and shall have 

access to all Department information and resources necessary to do so. That official 

should also be a lawyer.

Second, the Department should allow independent counsel to assist in prosecuting 

the claim on the group’s behalf or at least appear in the proceeding in an advisory role, in 

cases where counsel has a hand in initiating the group process. Interested state attorneys 

general and enforcement agencies should also be permitted to contribute supportive 

arguments, in much the same way they can currently participate in private litigation as 

amici. Not only would this potentially level the playing field, but it would also make 

better use of public resources by reducing the burden on Department officials to develop 

and present group claims.

Finally, as the Department has done with individual claims, the Department 

should separate the process for determining whether to grant an open-school, group claim 

from a subsequent process to determine whether to hold the school liable for 

reimbursement to the Department. These changes would help prevent schools from 

overwhelming the Department official or representative advancing a group claim.

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

agencies by allowing non-contested judgments to serve as a basis for borrower 

defense

The Department’s most recent proposal requires that judgments establishing a 

borrower defense be “contested.” This is a marked retreat from the Department’s

previous proposal, in which any judgment—not just “contested” judgments—could serve 

as a basis for borrower defense. Requiring a contested judgment is impractical, 

unreasonable, and unrealistic. State attorneys general often settle cases or otherwise 

resolve investigations without obtaining a contested judgment in order to obtain 

immediate injunctive relief to protect the public, efficiently secure monetary relief for 

victims, and to minimize taxpayer expense. Attorneys general should not be forced to 

litigate unnecessarily with schools—to the detriment of students, taxpayers, and the 

public—just to ensure that investigative findings can form the basis of a defense to 

repayment for affected students. 

 

6

Proposal § 685.222(h)(3) (reconsideration requires “new evidence” under § 685.222(e)(5)). 
4

Proposed revisions to §685.222(f): 

(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 favorable contested judgment or 

determination based on State or Federal law in a court of competent jurisdiction, 

or an admission by the school. A borrower may assert a borrower defense under 

this paragraph (b) at any time.

4. Keep state law as a basis for borrower defense 

For loans first disbursed on or after July 1, 2017, the Department’s proposal strips 

away borrowers’ ability to assert defenses based on violations of state law.7This 

represents a substantial step back from the Department’s existing regulations, which 

premise defense to repayment exclusively on state law.8It is also inconsistent with the 

Department’s public statement, from just last week, that it would “incorporate crucial 

elements of state consumer protection laws in these regulations.”

9

By creating a federal standard that excludes violations of state law, the 

Department’s proposal unreasonably limits the categories of school misconduct that 

would give rise to a borrower defense. The proposal would allow students to assert a 

defense in only two circumstances: where the school breached a contract or engaged in 

“substantial misrepresentations.”

10 While these two categories may be the Department’s 

focus today, as we and others have discussed, other types of egregious misconduct also 

harm students and are worthy of borrower defense.11 By failing to recognize state law—

which is well developed and provides robust consumer protections—as a basis for 

borrower defense, the Department’s proposal fails to provide the flexibility necessary to 

adequately protect students.12

 

7 While the proposal does allow students to assert a defense if a state-law “contested judgment” is obtained 

against a school, this is insufficient: due to the costs and uncertainty inherent in all civil litigation, litigants 

rarely let a dispute go to trial and almost never proceed to judgment.

8

34 CFR § 685.206(c).

9

https://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-studentspredatory-higher-education-institutions

10 At the same time, and somewhat inconsistently, a successful discharge results in a transfer to the 

Secretary of claims under “applicable law,” including state law, that the student has against the school—not 

just claims for breach of contract or substantial misrepresentation. Proposal § 685.222(k).

11 See, e.g., People ex rel. Mosk v. Nat’l Research Co., 201 Cal. App. 2d 765, 772 (1962) (“[I]t would be 

impossible to draft in advance detailed plans and specifications of all acts and conduct to be prohibited . . . , 

since unfair or fraudulent business practices may run the gamut of human ingenuity and chicanery.”).

12 Allowing borrowers to invoke state law as a basis for borrower defense would not be a novelty that the 

Department would have to learn to navigate from scratch. As previously noted, borrowers currently invoke 

state law as a basis for borrower defense under existing regulations, and state law may still be a basis for 

borrower defense for loans first disbursed prior to July 1, 2017—which include millions of borrowers and 

billions of dollars in loans.
5

Proposed new subsection (e) to §685.222: 

(e) Violation of state law. The borrower has a borrower defense if the school 

engaged in any act or omission that relates to the making of the loan or the 

provision of educational services that would give rise to a cause of action against 

the school under applicable State law.

5. Remove the four-year statute of limitations on borrowers’ ability to recoup

payments

We appreciate that the Department has removed any limitations period applicable 

to the discharge of borrowers’ loans. The Department’s proposal, however, now imposes 

a four-year statute of limitations on borrowers’ ability to recoup payments already made 

on loans. In this respect, the draft rules retreat from existing regulations, which impose no 

limitations period of any kind on borrower defenses. The proposal is also inconsistent 

with the relief provided by the Corinthian Special Master, who has determined that 

complete relief—both discharge and recoupment of payments—is appropriate for school 

misconduct occurring outside of four years. The four-year time bar would also represent a 

departure from regulations governing similar contexts, like closed-school and falsecertification discharge, where there is no statute of limitations barring recoupment of 

improper collections. There is no reason why borrower defense should include a time 

limit for recoupment.

The Department’s inclusion of a discovery-rule exception for substantial 

misrepresentation is inadequate.13 Borrowers without counsel have little hope of properly 

asserting or even knowing the exception exists. Moreover, applying an objective standard 

to when a borrower should have discovered the misconduct will lead to additional 

complications that will further thwart borrower relief. As we have learned from the 

Special Master’s attempt to provide relief to Heald students, even after a school’s 

rampant misconduct has become public, an overwhelming proportion of its victims may 

not realize they have a right to relief. Imposing a four-year statute of limitations only 

further harms borrowers who have already been preyed upon.

Proposed revisions to § 685.222(c) and (d): 

(c) Breach of contract by the school. The borrower has a borrower defense if the 

school the borrower received a Direct Loan to attend failed to perform its 

obligations under the terms of a contract with the student. A borrower may assert 

a defense to repayment of amounts owed to the Secretaryborrower defense under 

this paragraph (c) at any time after the breach by the school of its contract with 

the student. A borrower may assert a claim to recover amounts previously 

 

13 Proposal § 685.222(d).
6

collected by the Secretary under this paragraph (c) not later than four years after 

the breach by the school of its contract with the student.

(d) Substantial misrepresentation by the school. (1) The borrower has a borrower 

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

or person with whom the school has an agreement to provide educational 

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

made a substantial misrepresentation in accordance with 34 CFR part 668, subpart 

F, that the borrower reasonably relied on when the borrower decided to attend, or 

to continue attending, the school. A borrower may assert a defense to repayment 

of amounts owed to the Secretaryborrower defense under this paragraph (d) of

amounts owed to the Secretary at any time. A borrower may assert a claim under 

this paragraph (d) to recover funds previously collected by the Secretary not later 

than four years after the borrower discovers, or reasonably could have discovered, 

the facts constituting the substantial misrepresentation.

6. Clarify that the closed-school process is available when a school has ceased to 

provide educational instruction in all programs

We wholeheartedly applaud the Department’s proposal to include an automatic, 

group discharge process for closed schools.14 However, we are concerned that the 

Department criteria for “closed schools” are too narrow, since the Department does not 

consider a school closed if (a) it has provided “financial protection,” or (b) there is an 

“appropriate entity from which . . . [to] recover . . . .”

15 In some situations, a school may 

clearly have ceased to provide educational instruction, such that an automatic, group 

discharge process is appropriate, yet the school would not be considered “closed” under 

the Department’s proposal. For example, would a school liquidating in bankruptcy not be 

considered “closed” because there is an estate for the Secretary to recover against?16 This 

would be an absurd result that could delay relief to students for months, if not years, until 

bankruptcy proceedings wind down. We urge the Department to employ a definition of

“closed school” consistent with the closed-school discharge rules.17

Proposed revisions to §685.222(g):

(g) Procedures for group discharge borrower defense claims 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 defense claim is made 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 based on borrower defense claims made under this section, and for which 

 

14 Proposal §685.222(g).

15 Id.

16 See generally 11 U.S.C. § 541(a) (“The commencement of a [bankruptcy] case . . . creates an estate.”)

17 34 C.F.R. § 685.214.
7

there is not appropriate entity from which the Secretary can otherwise recover 

such losses ceased to provide educational instruction in all programs.

7. Individual borrowers should not have to show actual reliance because the 

definition of “substantial misrepresentation” already incorporates the 

appropriate reliance standard 

The Department’s reliance standard for the individualized process is too narrow and 

excludes victimized borrowers. The Department’s proposal now requires that the 

borrower must have “reasonably relied” on a school’s substantial misrepresentation—as 

opposed to having merely, and subjectively, “relied” on the misrepresentation, as in the 

Department’s prior proposal.18 But neither of these standards is necessary because the 

Department’s own definition of “substantial misrepresentation” already sufficiently 

captures the appropriate objective reliance standard: “any misrepresentation to a person 

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

detriment.”

19 This definition is consistent with the unfair and deceptive trade practice 

laws in many states. It is unreasonable to require individuals to establish additional 

reliance beyond this.

Proposed revision to § 685.222(d):

(d) Substantial misrepresentation by the school. (1) The borrower has a borrower 

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

or person with whom the school has an agreement to provide educational 

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

made a substantial misrepresentation in accordance with 34 CFR part 668, subpart 

F, that the borrower reasonably relied on when the borrower decided to attend, or 

to continue attending, the school. . . . 

8. Prohibit the Department from recouping from public funds established for 

students

Under the Department’s proposal, if a borrower defense is granted, the borrower’s 

right to collect against a public fund is automatically transferred to the Secretary.20 In 

states that have established student tuition recovery funds for the exclusive benefit of 

students defrauded by their schools, the Department’s proposal is an affront to state 

sovereignty. For example, California maintains the Student Tuition Recovery Fund, 

which “exists to relieve or mitigate economic losses suffered by a student “

21 and is a last 

 

18 Proposal § 685.222(c).

19 Proposal § 668.71(c) (emphasis added).

20 Proposal § 685.222(k).

21 5 CCR § 76020 (emphasis added).
8

resort for students who have exhausted other means of recovery.22 Its purpose is not to 

serve as a backstop for the federal government to seek reimbursement for losses on its 

own student-relief programs due to bad actors in the Title IV program. In effect, the 

Department’s proposal preempts state law by overriding a state action to establish funds 

that help only students.

Proposed revisions to § 685.222(k):

(k) Transfer to the Secretary of the borrower’s right of recovery against third 

parties. (1) Upon the granting of any relief under this section, the borrower is 

deemed to have assigned to, and relinquished in favor of, the Secretary any right 

to a loan refund (upcorresponding to the amount discharged of relief granted 

under this section) 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, including the portion of a public fund that 

represents funds received from a private party which shall not include any portion 

of a state tuition recovery fund.

* * *

We appreciate the opportunity to share these concerns with the Department and 

fellow members of the negotiated-rulemaking committee.

 

22 See, e.g., http://www.bppe.ca.gov/students/guide.shtml (STRF is for students “who have exhausted all 

other possible ways to recover lost tuition expenses”); 

http://www.bppe.ca.gov/students/corinthian_colleges.shtml (instructing defrauded students to first apply for 

federal recovery, and that STRF “exists to reimburse as appropriate any prepaid tuition that you are 

otherwise unable to recover”).