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4000-01-U 

DEPARTMENT OF EDUCATION 

34 CFR Parts 668, 682, and 685 

RIN 1840-AD26 

[Docket ID ED-2018-OPE-0027] 

Student Assistance General Provisions and Federal Family 

Education Loan Program 

AGENCY: Office of Postsecondary Education, Department of 

Education. 

ACTION: Final regulations. 

SUMMARY: The Secretary establishes new Institutional 

Accountability regulations governing the William D. Ford 

Federal Direct Loan (Direct Loan) Program to revise a 

Federal standard and a process for adjudicating borrower 

defenses to repayment claims for Federal student loans 

first disbursed on or after July 1, 2020, and provide for 

actions the Secretary may take to collect from schools the 

amount of financial loss due to successful borrower defense 

to repayment loan discharges. The Department of Education 

(Department) also amends regulations regarding pre-dispute 

arbitration agreements or class action waivers as a 

condition of enrollment, and requires institutions to 

include information regarding the school's internal dispute 
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resolution and arbitration processes as part of in the 

borrower's entrance counseling. We amend the Student 

Assistance General Provisions regulations to establish the 

conditions or events that have or may have an adverse, 

material effect on an institution's financial condition and 

which warrant financial protection for the Department, 

update the definitions of terms used to calculate an 

institution's composite score to conform with changes in 

certain accounting standards, and account for leases and 

long-term debt. Finally, we amend the loan discharge 

provisions in the Direct Loan Program. 

DATES: These regulations are effective July 1, 2020. 

The incorporation by reference of certain publications 

listed in these regulations is approved by the Director of 

the Federal Register as of July 1, 2020. Implementation 

date: For the implementation dates of the included 

regulatory provisions, see the Implementation Date of These 

Regulations in SUPPLEMENTARY INFORMATION. 

FOR FURTHER INFORMATION CONTACT: For further 

information related to borrower defenses to repayment, predispute arbitration agreements, internal dispute processes, 

and guaranty agency fees, Barbara Hoblitzell at (202) 453-

7583 or by email at: Barbara.Hoblitzell@ed.gov. For 
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further information related to false certification loan 

discharge and closed school loan discharge, Brian Smith at 

(202) 453-7440 or by email at: Brian.Smith@ed.gov. For 

further information regarding financial responsibility and 

institutional accountability, John Kolotos (202) 453-7646 

or by email at: John.Kolotos@ed.gov. For information 

regarding recalculation of subsidized usage periods and 

interest accrual, Ian Foss at (202)377-3681 or by email at: 

Ian.Foss@ed.gov. 

If you use a telecommunications device for the deaf 

(TDD) or a text telephone (TTY), call the Federal Relay 

Service (FRS), toll free, at 1-800-877-8339. 

SUPPLEMENTARY INFORMATION: 

Executive Summary 

Purpose of This Regulatory Action: 

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

amended (HEA), authorizes the Secretary to specify in 

regulation which acts or omissions of an institution of 

higher education a borrower may assert as a defense to 

repayment of a Direct Loan. The regulations at 34 CFR 

685.206(c) governing defenses to repayment were first put 

in place in 1995. Those 1995 regulations specified that a 

borrower may assert as a defense to repayment “any act or 
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omission of the school attended by the student that would 

give rise to a cause of action against the school under 

applicable State law,” (the State law standard) but were 

silent on the process to assert a claim. 

In May 2015, a large nationwide school operator, filed 

for bankruptcy. The following month, the Department 

appointed a Special Master to create and oversee a process 

to provide debt relief for the borrowers associated with 

those schools, who had applied for student loan discharges 

on the basis of the Department’s authority to discharge 

student loans under 34 CFR 685.206(c). 

As a result of difficulties in application, 

interpretation of the State law standard, and the lack of a 

process for the assertion of a borrower defense claim in 

the regulations, the Department began rulemaking on the 

topic of borrower defenses to repayment. On November 1, 

2016, the Department published final regulations1

(hereinafter, “2016 final regulations”) on the topic of 

borrower defenses to repayment, which significantly 

expanded the rules regarding how borrower defense claims 

1 81 FR 75926. 
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could be originated and how they would be adjudicated. The 

2016 final regulations were developed after the completion 

of a negotiated rulemaking process and after receiving and 

considering public comments on a notice of proposed 

rulemaking. In accordance with the HEA, the 2016 final 

regulations were scheduled to go into effect on July 1, 

2017. 

On May 24, 2017, the California Association of Private 

Postsecondary Schools (CAPPS) filed a Complaint and Prayer 

for Declaratory and Injunctive Relief in the United States 

District Court for the District of Columbia (Court), 

challenging the 2016 final regulations in their entirety, 

and in particular those provisions of the regulations 

pertaining to: 1) the standard and process used by the 

Department to adjudicate borrower defense claims; 2) 

financial responsibility standards; 3) requirements that 

proprietary institutions provide warnings about their 

students’ loan repayment rates; and 4) the provisions 
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requiring that institutions refrain from using arbitration 

or class action waivers in their agreements with students.2 

In light of the pending litigation, on June 16, 2017, 

the Department published a notification of the delay of the 

effective date3 of certain provisions of the 2016 final 

regulations under section 705 of the Administrative 

Procedure Act4 (APA), until the legal challenge was resolved 

(705 Notice). Subsequently, on October 24, 2017, the 

Department issued an interim final rule (IFR) delaying the 

effective date of those provisions of the final regulations 

to July 1, 2018,5 and a notice of proposed rulemaking to 

further delay the effective date to July 1, 2019.6 On 

February 14, 2018, the Department published a final rule 

delaying the regulations' effective date until July 1, 2019 

(Final Delay Rule).7

2 Complaint and Prayer for Declaratory and Injunctive Relief, California 

Association of Private Postsecondary Schools v. DeVos, No. 17-cv-00999 

(D.D.C. May 24, 2017). 3 82 FR 27621. 4 5 USC 705. 5 82 FR 49114. 6 82 FR 49155. 7 83 FR 6458. 
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Following issuance of the 705 Notice, the plaintiffs 

in Bauer filed a complaint challenging the validity of the 

705 Notice.8 The attorneys general of eighteen States and 

the District of Columbia also filed a complaint challenging 

the validity of the 705 Notice.9 Plaintiffs in both cases 

subsequently amended their complaints to include the IFR 

and the Final Delay Rule, and these cases were consolidated 

by the Court. 

In November 2017, the Department began a negotiated 

rulemaking process. The resultant notice of proposed 

rulemaking was published on July 31, 2018 (2018 NPRM).10 

The 2018 NPRM used the pre-2016 regulations, which were in 

effect at the time the NPRM was published, as the basis for 

proposed regulatory amendments. 

The 2018 NPRM also expressly proposed to rescind the 

specific regulatory revisions or additions included in the 

2016 final regulations, which were not yet effective. 

Accordingly, the preamble of the 2018 NPRM generally 

provided comparisons between the regulations as they 

8 Complaint for Declaratory and Injunctive Relief, Bauer v. DeVos, 

No.17-cv-1330 (D.D.C. Jul. 6, 2017). 9 Massachusetts v. U.S. Dep't of Educ., No. 17-cv-01331 (D.D.C. Jul. 6, 

2017). 10 83 FR 37242. 
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existed before the 2016 final regulations, the 2016 final 

regulations, and the proposed rule. The Department 

received over 30,000 comments in response to the 2018 NPRM. 

Many commenters compared the Department’s proposed 

regulations to the 2016 final regulations, when the 2016 

final regulations differed from a proposed regulatory 

change in the 2018 NPRM. The Department also provided a 

Regulatory Impact Analysis that was based on the 

President’s FY 2018 budget request to Congress, which 

assumed the implementation of the 2016 final regulations. 

On September 12, 2018, the Court issued a Memorandum 

Opinion and Order in the consolidated matter, finding the 

challenge to the IFR was moot, declaring the 705 Notice and 

the Final Delay Rule invalid, and convening a status 

conference to consider appropriate remedies.11

Subsequently, on September 17, 2018, the Court issued 

a Memorandum Opinion and Order immediately vacating the 

Final Delay Rule and vacating the 705 Notice, but 

suspending its vacatur of the 705 Notice until 5:00 p.m. on 

October 12, 2018, to allow for renewal and briefing of 

11 Bauer, No. 17-cv-1330.
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CAPPS' motion for a preliminary injunction in CAPPS v. 

DeVos and to give the Department an opportunity to remedy 

the deficiencies with the 705 Notice.12 The Department 

decided not to issue a revised 705 notice. 

On October 12, 2018, the Court extended the suspension 

of its vacatur until noon on October 16, 2018.13 On October 

16, 2018, the Court denied CAPPS' motion for a preliminary 

injunction, ending the suspension of the vacatur.14

In the 2018 NPRM, we proposed to rescind provisions of 

the 2016 final regulations that had not yet gone into 

effect.15 However, as detailed in the Department’s Federal 

Register notice of March 19, 2019,16 as a result of the 

Court’s decision in Bauer, those regulations have now 

become effective. This change necessitates technical 

differences in the structure of this document, which 

rescinds certain provisions, and amends others, of the 2016 

final regulations that have taken effect, compared with 

that of the 2018 NPRM. 

12 Bauer, No. 17-cv-1330. 13 Minute Order (Oct. 12, 2018), Bauer, No. 17-cv-1330. 14 Memorandum Opinion and Order, CAPPS, No. 17-cv-0999 (Oct. 16, 2018). 15 See: 83 FR 37250-51. 16 84 FR 9964.
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In particular, while the 2018 NPRM technically 

proposed to amend the pre-2016 regulations (in addition to 

proposing that the 2016 regulations be rescinded), these 

final regulations, as a technical matter, amend the 2016 

final regulations which have since taken effect. Thus, we 

describe the changes to the final regulations and show them 

in the amendatory language at the end of the document based 

on the currently effective 2016 final regulations. We do 

this in order to accurately instruct the Federal Register’s 

amendments to the Code of Federal Regulations. 

With the 2016 final regulations in effect, the 

Department initially considered publishing a second NPRM 

that used those regulations as the starting point, rather 

than the pre-2016 regulations. However, given that the 

policies we proposed in the 2018 NPRM were not affected by 

the set of regulations that served as the underlying 

baseline, and that we provided a meaningful opportunity for 

the public to comment on each of the regulatory proposals 

in the NPRM and on the rescission of the 2016 final 

regulations, we determined that an additional NPRM would 

further delay the finality of the rulemaking process for 

borrowers and schools without adding meaningfully to the 

public’s participation in the process. The Department 
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addressed the provisions in these final regulations in the 

2018 NPRM and afforded the public a meaningful opportunity 

to provide comment. For these reasons, despite the 

intervening events since publication of the 2018 NPRM, we 

are proceeding with the publication of these final 

regulations. 

Additionally, after further consideration, we are 

keeping many of the regulatory changes that were included 

in the 2016 final regulations. Some of the revisions 

proposed in the 2018 NPRM are essentially the same as, or 

similar to, the revisions made by the Department in the 

2016 final regulations, which are currently in effect. The 

Department is not rescinding or further amending the 

following regulations in title 34 of the Code of Federal 

Regulations, even to the extent we proposed changes to 

those regulations in the 2018 NPRM: 

• 668.94 (Limitation), 

• 682.202(b) (Permissible charges by lenders to 

borrowers), 

• 682.211(i)(7) (Forbearance), 

• 682.405(b)(4)(ii) (Loan rehabilitation agreement), 

• 682.410(b)(4) and (b)(6)(viii) (Fiscal, 

administrative, and enforcement requirements), and 

• 685.200 (Borrower eligibility). 
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The Department also did not propose to rescind in the 

2018 NPRM, and is not rescinding here, 34 CFR 685.223, 

which concerns the severability of any provision of subpart 

B in part 685 of title 34 of the Code of Federal 

Regulations; 34 CFR 685.310, which concerns the 

severability of any provision of subpart C in part 685 of 

title 34 of the Code of Federal Regulations; or 34 CFR 

668.176, which concerns the severability of any provision 

of subpart L in part 668 of title 34 of the Code of Federal 

Regulations. If any provision of subparts B or C in part 

685, subpart L in part 668, or their application to any 

person, act, or practice is at some point held invalid by a 

court, the remainder of the subpart or the application of 

its provisions to any person, act, or practice is not 

affected. 

While the negotiated rulemaking committee that 

considered the draft regulations on these topics during 

2017-2018 did not reach consensus, these final regulations 

reflect the results of those negotiations and respond to 

the public comments received on the regulatory proposals in 

the 2018 NPRM. The regulations are intended to: 
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• Provide students with a balanced, meaningful borrower 

defense to repayment claims process that relies on a 

single, Federal standard; 

• Grant borrower defense to repayment loan discharges 

that are adjudicated equitably, swiftly, carefully, 

and fairly; 

• Encourage students to directly seek remedies from 

schools when acts or omissions by the school, 

including those that do not support a borrower defense 

to repayment claim, fail to provide a student access 

to the educational or job placement opportunities 

promised, or otherwise cause harm to students; 

• Ensure that schools, rather than taxpayers, bear the 

burden of billions of dollars in losses from approvals 

of borrower defense to repayment loan discharges; 

• Establish that the Department has a complete record to 

review in adjudicating claims by allowing schools to 

respond to borrower defense to repayment claims and 

provide evidence to support their responses; 

• Discourage schools from committing fraud or other acts 

or omissions that constitute misrepresentation; 

• Encourage closing institutions to engage in orderly 

teach-outs rather than closing precipitously; 
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• Enable the Department to properly evaluate 

institutional financial risk in order to protect 

students and taxpayers; 

• Eliminate the inclusion of lawsuits as a trigger for 

letter of credit requirements until those lawsuits are 

settled or adjudicated and a monetary value can be 

accurately assigned to them; 

• Provide students with additional time to qualify for a 

closed school loan discharge and protect students who 

elect this option at the start of a teach-out, even if 

the teach-out exceeds the length of the regular 

lookback period; 

• Adjust triggers for Letters of Credit to reflect 

actual, rather than potential, liabilities; and 

• Reduce the strain on the government, and the delay to 

borrowers in adjudicated valid claims, due to large 

numbers of borrower defense to repayment applications. 

Summary of the Major Provisions of This Regulatory 

Action: For the Direct Loan Program, the final regulations: 

• Establish a revised Federal standard for borrower 

defenses to repayment asserted by borrowers with loans 

first disbursed on or after July 1, 2020; 
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• Revise the process for the assertion and resolution of 

borrower defense to repayment claims for loans first 

disbursed on or after July 1, 2020; 

• Provide schools and borrowers with opportunities to 

provide evidence and arguments when a defense to 

repayment application has been filed and to provide an 

opportunity for each side to respond to the other's 

submissions, so that the Department can review a full 

record as part of the adjudication process; 

• Require a borrower applying for a borrower defense to 

repayment loan discharge to supply documentation that 

affirms the financial harm to the borrower is not the 

result of the borrower's workplace performance, 

disqualification for a job for reasons unrelated to 

the education received, or a personal decision to work 

less than full-time or not at all; 

• Revise the time limit for the Secretary to initiate an 

action to collect from the responsible school the 

amount of any loans first disbursed on or after July 

1, 2020, that are discharged based on a successful 

borrower defense to repayment claim for which the 

school is liable; 
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• Modify the remedial actions the Secretary may take to 

collect from the responsible school the amount of any 

loans discharged to include those based on a 

successful borrower defense to repayment claim for 

which the school is liable; and 

• Expand institutional responsibility and financial 

liability for losses incurred by the Secretary for the 

repayment of loan amounts discharged by the Secretary 

based on a borrower defense to repayment discharge. 

The final regulations for the Direct Loan Program also 

include many of the same or similar provisions as the 2016 

regulations, which are currently in effect. For example, 

both the 2016 regulations and these final regulations: 

• Require a preponderance of the evidence standard for 

borrower defense to repayment claims; 

• Provide that a violation by a school of an eligibility 

or compliance requirement in the HEA or its 

implementing regulations is not a basis for a borrower 

defense to repayment unless the violation would 

otherwise constitute a basis under the respective 

regulations; 
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• Allow the same universe of people to file a borrower 

defense to repayment claim, as the definition of 

“borrower” in the 2016 final regulations is the same 

as the definition of “borrower” in these final 

regulations; 

• Provide a borrower defense to repayment process for 

both Direct Loans and Direct Consolidation Loans; 

• Allow the Secretary to determine the order in which 

objections will be considered, if a borrower asserts 

both a borrower defense to repayment and other 

objections; 

• Require the borrower to provide evidence that supports 

the borrower defense to repayment; 

• Automatically grant forbearance on the loan for which 

a borrower defense to repayment has been asserted, if 

the borrower is not in default on the loan, unless the 

borrower declines such forbearance; 

• Require the borrower to cooperate with the Secretary 

in the borrower defense to repayment proceeding; and 

• Transfer the borrower’s right of recovery against 

third parties to the Secretary. 
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The final regulations also revise the Student 

Assistance General Provisions regulations to: 

• Provide that schools that require Federal student loan 

borrowers to sign pre-dispute arbitration agreements 

or class action waivers as a condition of enrollment 

to make a plain language disclosure of those 

requirements to prospective and enrolled students and 

place that disclosure on their website where 

information regarding admission, tuition, and fees is 

presented; and 

• Provide that schools that require Federal student loan 

borrowers to sign pre-dispute arbitration agreements 

or class action waivers as a condition of enrollment 

to include information in the borrower's entrance 

counseling regarding the school's internal dispute and 

arbitration processes. 

The final regulations also: 

• Amend the financial responsibility provisions with 

regard to the conditions or events that have or may 

have an adverse material effect on an institution's 

financial condition, and which warrant financial 

protection for students and the Department; 
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• Update composite score calculations to reflect certain 

recent changes in Financial Accounting Standards Board 

(FASB) accounting standards; 

• Update the definitions of terms used to describe the 

calculation of the composite score, including leases 

and long-term debt; 

• Revise the Direct Loan program's closed school 

discharge regulations to extend the time period for a 

borrower to qualify for a closed school discharge to 

180 days; 

• Revise the Direct Loan program’s closed school loan 

discharge regulations to specify that if offered a 

teach-out opportunity, the borrower may select that 

opportunity or may decline it at the beginning of the 

teach-out, but if the borrower accepts it, he or she 

will still qualify for a closed school discharge only 

if the school fails to meet the material terms of the 

teach-out plan or agreement approved by the school’s 

accrediting agency and, if applicable, the school’s 

State authorizing agency; 

• Affirm that in instances in which a teach-out plan is 

longer than 180 days, a borrower who declines the 

teach-out opportunity and does not transfer credits to 
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complete a comparable program, continues to qualify, 

under the exceptional circumstances provision, for a 

closed school loan discharge; 

• Modify the conditions under which a Direct Loan 

borrower may qualify for a false certification 

discharge by specifying that the borrower will not 

qualify for a false certification discharge based on 

not having a high school diploma in cases when the 

borrower could not reasonably provide the school a 

high school diploma and has not met the alternative 

eligibility requirements, but provided a written 

attestation, under penalty of perjury, to the school 

that the borrower had a high school diploma; and 

• Require institutions to accept responsibility for the 

repayment of amounts discharged by the Secretary 

pursuant to the borrower defense to repayment, closed 

school discharge, false certification discharge, and 

unpaid refund discharge regulations. 

• Prohibit guaranty agencies from charging collection 

costs to a defaulted borrower who enters into a 

repayment agreement with the guaranty agency within 60 

days of receiving notice of default from the agency. 
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Timing, Comments and Changes: 

On July 31, 2018, the Secretary published a notice of 

proposed rulemaking (NPRM) for these parts in the Federal 

Register.17 The final regulations contain changes from the 

NPRM, which are fully explained in the Analysis of Comments 

and Changes section of this document. 

Implementation Date of These Regulations: Section 

482(c) of the HEA requires that regulations affecting 

programs under title IV of the HEA be published in final 

form by November 1, prior to the start of the award year 

(July 1) to which they apply. However, that section also 

permits the Secretary to designate any regulation as one 

that an entity subject to the regulations may choose to 

implement earlier with conditions for early implementation. 

 The Secretary is exercising her authority under 

section 482(c) of the HEA to designate the following new 

regulations at title 34 of the Code of Federal Regulations 

included in this document for early implementation 

beginning on [INSERT DATE OF PUBLICATION IN FEDERAL 

17 83 FR 37242.
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REGISTER], at the discretion of each institution, or each 

lender, as appropriate: 

(1) Section 668.172(d). 

(2) Appendix A to Subpart L of Part 668. 

(3) Appendix B to Subpart L of Part 668. 

 The Secretary has not designated any of the remaining 

provisions in these final regulations for early 

implementation. Therefore, the remaining final regulations 

included in this document are effective July 1, 2020. 

Incorporation by Reference. In § 668.172(d) of these 

final regulations, we reference the following accounting 

standard: Financial Accounting Standards Board (FASB) 

Accounting Standards Update (ASU) 2016-02, Leases (Topic 

842). 

FASB issued ASU 2016-02 to increase transparency and 

comparability among organizations by recognizing lease 

assets and lease liabilities on the balance sheet and 

disclosing key information about leasing arrangements. 

This standard is available at www.fasb.org, registration 

required. 

Public Comment. In response to our invitation in the 

July 31, 2018, NPRM, more than 38,450 parties submitted 

comments on the proposed regulations, which included 
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comments also relevant to the 2016 regulations, the 

implementation of which had been delayed. 

We discuss substantive issues under the sections of 

the proposed regulations to which they pertain. Generally, 

we do not address technical or other minor changes or 

recommendations that are out of the scope of this 

regulatory action or that would require statutory changes 

in the preamble. 

Analysis of Comments and Changes: 

An analysis of the comments and of any changes in the 

regulations since publication of the 2018 NPRM follows. 

BORROWER DEFENSES - GENERAL (Section 685.206) 

Comments: Many commenters supported the Department's 

proposals to improve the borrower defense to repayment 

regulations. These commenters asserted that the proposed 

regulations would provide the necessary accountability in 

the system to prevent fraud, while giving borrowers a path 

to a more expedient resolution of complaints through 

arbitration or a school’s internal dispute processes. 

Some commenters claim that the regulations demonstrate 

government overreach by creating regulations that would add 

billions of dollars to Federal spending. 
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Discussion: We appreciate the comments in support of 

the proposed borrower defense to repayment regulations. 

We disagree with commenters who state that these 

regulations represent government overreach. Section 455(h) 

of the HEA authorizes the Secretary to specify in 

regulation which acts or omissions of an institution of 

higher education a borrower may assert as a defense to 

repayment of a Direct Loan. Section 455(h) of the HEA 

states: “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.” 

The Department is not creating a new borrower defense 

to repayment program but rather is revising the terms under 

which a borrower may assert a defense to repayment of a 

loan, for loans first disbursed on or after July 1, 2020, 

which is the anticipated effective date of these 

regulations. The Department believes that these 
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regulations strike an appropriate balance between 

attempting to correct aspects of the 2016 final 

regulations, that people criticized as federal government 

overreach, and the interests of students, institutions, and 

the Federal government. 

The Department acknowledges that the 2016 final 

regulations anticipated that taxpayers would bear a great 

expense and seeks to cabin that burden through these final 

regulations. The Department generally seeks to decrease 

costs to Federal taxpayers and decrease Federal spending 

through these final regulations. These costs are more fully 

outlined through the Regulatory Impact Assessment section 

to follow 

 Changes: None. 

Comments: One group of commenters supported the 

regulations for providing a better balance between relief 

for borrowers and due process for schools by providing both 

parties with an equal opportunity to provide evidence and 

arguments and to review and respond to evidence. These 

commenters acknowledged that balance is essential to a fair 

process. They expressed concern, however, that the 

pendulum has shifted too far once again and asserted that 
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in comparison to the 2016 final regulations, the proposed 

regulations, which elevated the evidentiary standard to 

clear and convincing, make it too difficult for borrowers 

to obtain relief. 

Other commenters generally opposed the Department’s 

proposed rules concerning the borrower defense to 

repayment. One commenter suggested that the proposed rules 

would effectively block relief for the vast majority of 

borrowers, while shielding institutions from accountability 

for their misconduct. 

Another group of commenters contended that the NPRM 

favors predatory institutions over students, doing so based 

upon unsupported assertions and hypotheticals that ignore 

and distort data and evidence. 

Discussion: We appreciate the commenters’ concern 

that, in attempting to strike a balance, the pendulum may 

have swung too far, making it more difficult for harmed 

borrowers to receive relief. Similarly, the Department 

appreciates the commenters’ recognition that the proposed 

regulations better balance the rights of students and 

institutions alike. In the sections below, we discuss 

changes we have made in the final regulations to achieve 
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the balance and fairness commenters from all perspectives 

encouraged. 

For example, and as described below, under the final 

regulations, borrowers will be required to demonstrate a 

misrepresentation by a preponderance of the evidence 

instead of the clear and convincing evidence proposed 

alternative standard that was included in the 2018 NPRM. 

We disagree with commenters who contend that the 

proposed rules would have blocked relief to borrowers who 

were victimized by bad actors. Nevertheless, we have 

revised the rules to provide a fairer and more equitable 

process for borrowers to seek relief when institutions 

have committed acts or omissions that constitute a 

misrepresentation and cause financial harm to students. 

The Department, in turn, has a process to recover the 

losses the Department sustains from institutions as a 

result of granting borrower defense to repayment 

discharges. This process is outlined in subpart G of Part 

668, of Title 34 of the Code of Federal Regulations. 

We also disagree with commenters that the proposed 

rules indicate that the Department sides with institutions 

over students, and notes that those commenters used 

unsupported assertions and hypothetical examples to support 
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their comments. We disagree that the proposed regulations 

would have shielded bad actors from being held accountable 

for their actions. These final regulations send a clear 

and unequivocal message that institutions need to be 

truthful in their communications with prospective and 

enrolled students. 

Throughout this document, as in the 2018 NPRM, we 

explain the reasons and rationales for these final 

regulations using data and real-world examples, while 

drawing upon the Department’s experience since the 

publishing of the 2016 final regulations. The Department 

remains committed to protecting borrowers and taxpayers 

from institutions engaging in predatory behavior — 

regardless of whether those institutions are propriety, 

non-profit, selective, or open enrollment — which includes 

misrepresenting an institution’s admissions standards and 

selectivity. The proposed and final regulations also 

ensure that schools are accountable to taxpayers for losses 

from the appropriate approval of borrower defense to 

repayment claims. Borrowers continue to have a meaningful 

avenue to seek a discharge from the Department, and nothing 

in these rules burdens a student’s ability to access 

consumer protection remedies at the State level. 
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be published in the Federal Register. 

29 

Changes: None. 

Comments: Several commenters expressed dismay at the 

Department’s 30-day timetable, which the commenters 

characterized as accelerated, for considering comments and 

publishing a final rule. These commenters felt that a 

“rush to regulate” had resulted in a public comment period 

that did not give the public enough time to fully consider 

the proposals and a timeline that did not afford the 

Department enough time to develop an effective, costefficient rule. Another commenter also asserted that we 

were following a hastened review schedule and were 

inappropriately allowing only a 30-day comment period on an 

NPRM that the commenter asserts was riddled with 

inaccuracies. The commenter said that, while the APA 

requires a minimum of 30 days for public comment during 

rulemaking,18 a longer period was needed in this instance to 

allow affected parties to provide meaningful comment and 

information to the Department. The commenter noted that 

the Administrative Conference of the United States 

recommends a 60-day comment period when a rule is 

18 5 USC § 553(d). 
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30 

economically significant and argued that this 

recommendation is appropriate in this case due to the vast 

number of individuals affected by a regulation that 

modifies the Department’s responsibilities for over $1 

trillion in outstanding loans. 

Discussion: We disagree with the commenters who 

contend that the Department's timetable for developing 

borrower defense to repayment regulations did not give the 

public enough time to fully consider the proposals. The 

30-day public comment period provided sufficient time for 

interested parties to submit comments, particularly given 

that prior to issuing the proposed regulations, the 

Department conducted two public hearings and three 

negotiated rulemaking sessions, where stakeholders and 

members of the public had an opportunity to weigh in on the 

issues at hand. The Department also posted the 2018 NPRM 

on its website several days before publication in the 

Federal Register, providing stakeholders additional time to 

view the proposed regulations and consider their viewpoints 

on the NPRM. Further, the Department received over 30,000 

comments, many representing large constituencies. The 

large number of comments received indicates that the public 

had adequate time to comment on the Department’s proposals. 
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be published in the Federal Register. 

31 

Additionally, the 30-day period referenced in 5 USC 

553(d) refers to the period of time between the publication 

of a substantive rule and its effective date and not the 

amount of time necessary for public comment. The 

applicable case law, interpreting the APA, specifies that 

comment periods should not be less than 30 days to provide 

adequate opportunity to comment. 

With respect to the comment concerning inaccuracies in 

the NPRM, we address those concerns in response to comments 

summarized below. 

Changes: None. 

Comments: Another group of commenters offered their 

full support for our efforts to assist students in 

addressing wrongs perpetrated against them by schools that 

acted fraudulently or made a misrepresentation with respect 

to their educational services. The commenters asserted 

that, when students are defrauded, they need to have the 

means to remedy the situation. According to these 

commenters, colleges routinely overpromise and underdeliver 

for their students and must be held accountable to their 

students for their failures. These commenters recommended 

the Department proactively use the many tools already at 
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32 

its disposal to uniformly pursue schools throughout each 

sector of higher education that are not serving their 

students well rather than rely on the borrower defense to 

repayment regulations, which necessarily provide after-thefact relief for borrowers. The commenters asserted that 

addressing a problem before it becomes a borrower defense 

to repayment issue should be the first priority, thus 

saving current and future students from harm. Another 

group of commenters offered a similar suggestion and 

proposed that the Department examine the effectiveness of 

its gatekeeping obligations under title IV of the HEA as 

well as the nature of its relationship with accrediting 

agencies and States, to prevent participation by bad actors 

in the title IV programs. 

 Another group of commenters who generally supported 

the proposed regulations noted areas of concern or 

disagreement. They suggested that we amend the regulations 

to provide a “material benefit” to schools that do not have 

a history of meritorious borrower defense to repayment 

claims. These commenters also propose that the regulations 

address the “moral hazard” created by giving students an 

opportunity to receive an education and raise alleged 

misrepresentations to avoid paying for that education after 
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33 

they complete their education. These commenters would like 

the Department to mitigate the proliferation of “scam 

artists” and opportunists who advertise their ability to 

obtain, on behalf of a borrower, “student loan 

forgiveness”. They also would like to discourage attorneys 

from exploiting students through the Department’s 

procedural rules, while harming the higher education sector 

and the taxpayers in the process. 

Discussion: We agree with commenters who suggest that 

a better approach is to stop misrepresentation before it 

starts, rather than providing remedies after the student 

has already incurred debt and expended time and energy in a 

program that does not deliver what it promised. We also 

agree the Department should proactively use the many tools 

already at its disposal such as program reviews and 

findings from those reviews to pursue schools throughout 

each sector of higher education that are not serving their 

students well. The Department devotes significant 

resources to the oversight of title IV participants and 

makes every effort to work with accrediting agencies and 

States to identify problems early, including identifying 

schools that should be prevented from participating in 

title IV programs altogether. The Department recognizes 
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34 

accrediting agencies, and only recognized accrediting 

agencies may accredit institutions so that the 

institutions may receive Federal student aid.19 The 

Department of Education’s Program Compliance Office has a 

School Eligibility Service Group that examines, analyzes, 

and makes determinations on the initial and renewal 

eligibility applications submitted by schools for 

participation in Federal student aid programs.20 This 

Office also performs financial analyses, monitors financial 

condition, and works with state agencies and accrediting 

agencies.21 The Office monitors schools and their agents, 

through on-site and off-site reviews and analysis of 

various reports, to provide early warnings of program 

compliance problems so that appropriate actions may be 

taken.22

We do not believe it is necessary or appropriate, nor 

does the Department possess the legal authority, to provide 

“material benefit” to schools that follow the law and, 

19 20 USC § 1001, et seq.; 34 CFR 600.2; 34 CFR 600.20; 34 CFR 668.13. 20 U.S. Dep’t of Educ., Office of Federal Student Aid, Principal Office 

Functional Statements, available at

https://www2.ed.gov/about/offices/list/om/fs_po/fsa/program.html. 21 Id. 22 Id. 
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35 

therefore, do not have a history of meritorious borrower 

defense to repayment claims. The Department expects that 

all schools, in every sector, will engage in a forthright 

and honest manner with their prospective and enrolled 

students and, therefore, the Department has the discretion 

to impose certain consequences upon schools who commit 

certain types of misrepresentations, even if an institution 

has previously provided accurate information to students. 

We agree that a borrower defense to repayment 

regulation that is poorly constructed, under the statute, 

may create a “moral hazard” by giving students an 

opportunity to complete their education and raise alleged 

misrepresentations to avoid paying for that education. 

These regulations, however, include a process by which the 

Department receives information from both a borrower and 

the school. The Department will evaluate whether a 

borrower defense to repayment claim is meritorious, and the 

borrower will receive a discharge only if the borrower 

demonstrates, by a preponderance of the evidence, that the 

institution made a misrepresentation. 

We share the concern of commenters regarding the 

proliferation of people described by the commenter as “scam 

artists” and opportunists who disingenuously advertise 
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36 

“student loan forgiveness” and of some plaintiff’s 

attorneys, and others, who seek to exploit borrowers. The 

Department, along with the Consumer Financial Protection 

Bureau (CFPB) and the Federal Trade Commission (FTC), 

receive and investigate consumer complaints regarding 

student loan scams. Those investigative functions are 

unchanged by these regulations. State consumer protection 

agencies and laws also help borrowers in this regard. 

Given these additional protections, the Department 

maintains that these final regulations strike the right 

balance between consumer protection and due process. 

The Department also seeks to prevent borrower defense 

claims before they arise by disseminating information about 

various institutions that will help students make informed 

decisions based upon accurate data. As stated here and 

throughout the rest of these final regulations, the 

Department believes that schools and the Federal government 

each play a role in helping students make informed choices 

when considering the pursuit of postsecondary education. 

We are also aware that research has shown that students 

across the socioeconomic spectrum receive insufficient and 

impersonal guidance about colleges from their high 
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37 

schools.23 Evidence also indicates that school selection is 

critically important to students’ postsecondary success, 

given that students are more likely to persist to 

completion or degree attainment if they attend a wellmatched institution.24 Similarly, research has shown that a 

student’s choice of major or program may be even more 

important than his or her choice of institution in 

determining long-term career and earnings outcomes.25 The 

Department has created online tools, like the College 

Scorecard26 and College Navigator27, that provide objective 

data across a range of institutional attributes to enable 

prospective students and their families to weigh their 

23 Alexandria Walton Radford, Top Student, Top School?: How Social Class 

Shapes Where Valedictorians Go to College, University of Chicago Press, 

(2013).

24 Audrey Light & Wayne Strayer, Determinants of College Completion: 

School Quality or Student Ability?, 35 J. of Human Res. 299-332 (2000). 25 See: Holzer, Harry J. and Sandy Baum, Making College Work: Pathways 

to Success for Disadvantaged Students (Washington, D.C.: Brookings 

Institution Press, 2017); Carnevale, Anthony, et al,., “Learning While 

Earning: The New Normal,” Center on Education and the Workforce, 

Georgetown University, 2015, 1gyhoq479ufd3yna29x7ubjn-wpengine.netdnassl.com/wp-content/uploads/Working-Learners-Report.pdf; Schneider, 

Mark, “Are Graduates from Public Universities Gainfully Employed? 

Analyzing Student Loan Debt and Gainful Employment,” American 

Enterprise Institute, 2014, www.aei.org/publication/are-graduates-frompublic-universities-gainfully-employed-analyzing-student-loan-debt-andgainful-employment/. 26 U.S. Dep’t of Educ., College Scorecard, available at 

https://collegescorecard.ed.gov/. 27 U.S. Dep’t of Educ., College Navigator, available at 

https://nces.ed.gov/collegenavigator/. 
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38 

options based upon the characteristics that they deem most 

important to their decision-making. While we know that 

millions of users access these tools each year, we have 

limited evidence on these tools’ potential for impact on 

college-related decisions and outcomes. Moreover, we 

recognize that some students may be overwhelmed by the 

process of parsing through the volumes of information on 

potential postsecondary options and have worked to 

streamline data sources through the College Scorecard and 

College Navigator to make it easier for users to focus on 

the criteria they deem most important. Nonetheless, we 

believe that, “armed with detailed, relevant information on 

financial costs and benefits, students can more fairly 

evaluate the tradeoffs of attending a certain institution 

and understand the financial implications of their 

decisions.”28 

28 Exec. Office of the U.S. President, Using Federal Data to Measure and 

Improve the Performance of U.S. Institutions of Higher Education (rev. 

Jan. 2017), available at

https://collegescorecard.ed.gov/assets/UsingFederalDataToMeasureAndImpr

ovePerformance.pdf. 
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39 

The Department has announced its intent to expand the 

College Scorecard to provide program level outcomes data 

for all title IV programs, which is the first time such 

data will be made available to institutions or consumers.29 

We believe that program-level data will be more useful to 

students than institution-level data. The Department’s new 

MyStudentAid application allows the Department to provide 

more information to students who are completing their Free 

Application for Federal Student Aid (FAFSA) form online or 

interacting with the Department’s Federal Student Aid 

office. Accordingly, we can ensure that more students are 

presented with useful information about the institutions 

included on their FAFSA application in a format that is 

user-friendly and does not require them to conduct an 

extensive search. Such information will help students 

become more informed consumers and, thus, be less likely to 

be deceived by an institution that provides information 

29 See U.S. Dep’t of Education, Secretary Devos Delivers on Promise to 

Expand College Scorecard, Provide Meaningful Information to Students on 

Education Options and Outcomes, available at

https://www.ed.gov/news/press-releases/secretary-devos-deliverspromise-expand-college-scorecard-provide-meaningful-informationstudents-education-options-and-outcomes (May 21, 2019); See also: 84 FR 

31392, 31408. 
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40 

contradictory to the information that the Department makes 

available. 

Changes: None. 

Comments: Many commenters did not support the proposed 

regulations, asserting that the proposed rule would 

undermine Congressional intent and shortchange students to 

benefit corporations with a history of fraud and abuse. 

These commenters assert that the 2018 NPRM contained errors 

and logical flaws and was colored throughout by a 

disturbingly cynical attitude about students, along with a 

naively charitable view of school owners and investors. 

They argued that the notion that borrower complaints of 

fraud result from poor choices in the marketplace and that 

information will cure the problem has been rejected by 

research and analysis and is not supported by the 

structure, text, or legislative history of the HEA. They 

further assert that the legislative history does not blame 

students for poor choices and recognizes that schools and 

the government have a role in helping students avoid poorvalue programs. They predicted that the Department’s 

proposed rule would have significant, negative implications 

for both defrauded borrowers and taxpayers. Another 

commenter predicted that the effect of proposed regulations 
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41 

would be to depress the percentage of tertiary-trained 

Americans and increase the rate of borrower bankruptcy 

filings. This commenter further asserted that the proposed 

regulations would lower the value of education in the U.S. 

and cause schools to treat students as economic pawns to be 

matriculated for profit motives over educational ones. 

Some commenters stated that any time limitation should 

be waived in cases where borrowers could produce new 

evidence to assert a claim or reopen a decision. 

Another commenter asserted that the 2016 final 

regulations benefit Latino and African American students, 

who are disproportionately concentrated in for-profit 

colleges and harmed by predatory conduct. This commenter 

urged the Department to retain the 2016 final regulations. 

Many of the commenters who did not support the 

proposed changes urged the Department to withdraw the 2018 

NPRM and allow for the full implementation of the borrower 

defense regulations published in 2016. 

 Discussion: We appreciate the concerns raised by the 

commenters. Our goal in the NPRM and in these final 

regulations is to balance the interests of students with 

those of taxpayers. We need to ensure, for instance, that 

borrowers receiving relief have claims supported by 
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42 

evidence and to protect the taxpayer dollars that fund the 

Direct Loan Program. The Department does not agree that 

the NPRM portrays students or their behaviors in a negative 

manner or is overly charitable to schools and their 

investors. 

To the contrary, we believe that students have the 

capacity to make reasoned decisions and that they should be 

empowered by information and shared accountability 

expectations. Students are not passive victims; they take 

an active role in making informed decisions. We describe 

in our response to comments, throughout this document, how 

we intend to support students and families in making 

informed decisions by disseminating information that will 

help students better evaluate their options.30

We disagree with commenters that the proposed 

regulations do not align with the HEA or Congressional 

intent. Through section 455(h) of the HEA, 20 USC 

1087e(h), Congress specifically provided the Department 

with the authority “to specify in regulations which acts or 

30 See, e.g., U.S. Dep’t of Educ., College Scorecard, available at 

https://collegescorecard.ed.gov/; U.S. Dep’t of Educ., College 

Navigator, available at https://nces.ed.gov/collegenavigator/. 
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be published in the Federal Register. 

43 

omissions of an institution of higher education a borrower 

may assert as a defense to repayment of a loan made under 

[the Direct Loan Program].” The proposed regulations, and 

these final regulations, represent the Department’s 

exercise of this authority, as intended by Congress. We 

believe that there must be a fair and balanced process for 

the Department to evaluate whether a borrower, as a result 

of a school’s act or omission, may be relieved of his or 

her obligation to repay a Federal student loan as 

contemplated by the statute. We disagree with the 

commenters that our approach prioritizes schools over 

students and believe the approach is justified by the 

Department’s obligation to balance the interests of the 

Federal taxpayers with its responsibility to student 

borrowers under section 455(h) of the HEA. 
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44 

We believe we have reached a result in these final 

regulations that strikes the best possible balance between 

the different interests at hand. More details on the 

projected impact of these final regulations are included in 

the Regulatory Impact Analysis section of this Preamble. 

Further, we discuss in the sections that follow the changes 

we have made in the final regulations to achieve the 

balance and fairness commenters from all perspectives 

encouraged. 

We believe that these final regulations will increase 

and not lower the value of education in the United States 

and do not see how these final regulations would depress 

the number of students attending an institution of higher 

education. These final regulations establish clear 

expectations for schools in their dealings with students, 

and greater certainty provides an economic incentive for 

schools to flourish and provide better and more diverse 

opportunities for students. Borrowers are consumers and 

their choices will impact which schools are most desirable 

for particular careers and professions. While the 

Department cannot regulate the motives of schools, it can, 

and will, hold schools accountable for their acts and 

omissions. 
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45 

Borrowers who are the victims of a misrepresentation 

by a deceitful institution will be able to obtain relief 

under these final regulations, after the Department has had 

the opportunity to weigh information and evidence from all 

sides, as discussed further below. 

The Department asserts that these final regulations 

will benefit, not harm, all students, including Latino and 

African American students. These final regulations will 

provide more information to students regarding their 

borrower defense claims than the 2016 final regulations 

and allow students to fully flesh out their claims, as the 

process in these regulations more clearly provides a school 

with an opportunity to provide responses and information as 

to a borrower’s borrower defense application, requires that 

the applicant receives a copy of any response that the 

school submits, and clearly establishes that the applicant 

has an opportunity to reply to the school’s response. 

In contrast, the 2016 final regulations allow a school 

to submit a response, but did not clearly afford a student 

the opportunity to reply to the response.31 Additionally, 

31 34 CFR 685.206(e)(3).
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46 

under the 2016 final regulations, a student has to request 

that the Department identify the records that the 

Department considers relevant to the borrower defense to 

repayment claim, and the Department will only provide the 

borrower “any of the identified records upon reasonable 

request of the borrower.”32 

These final regulations, however, guarantee that the 

student will have a copy of the school’s response and all 

the documents that the Department considers in adjudicating 

the borrower defense to repayment claim. Accordingly, 

these final regulations provide a more transparent process 

and afford due process for all borrowers no matter where 

they enroll in college and irrespective of race, religion, 

national origin, gender, or any other status or category. 

For the reasons detailed throughout the preamble to 

these final regulations, we determined that withdrawing the 

2018 NPRM and leaving the 2016 final regulations in place 

was not the best long-term approach. The Department has 

decided instead to take an approach that applies the 2016 

final regulations and these final regulations to applicable 

32 Id. 
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47 

time periods. The 2016 final regulations, thus, will apply 

to loans first disbursed on or after July 1, 2017 and 

before July 1, 2020, and these final regulations will apply 

to loans first disbursed on or after July 1, 2020. We 

describe our changes to each provision of those regulations 

in detail in the pertinent section of the preamble. 
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48 

Changes: As explained more fully below, the 

Department revises the proposed regulations to allow the 

Secretary to extend the limitations period when a borrower 

may assert a defense to repayment or may reopen the 

borrower’s defense to repayment application to consider 

evidence that was not previously considered in two 

exceptional circumstances (relating to a final, non-default 

judgment on the merits by a State or Federal Court that has 

not been appealed or that is not subject to further appeal 

or a final decision by a duly appointed arbitrator or 

arbitration panel) as described in 34 CFR 685.206(e)(7). 

We also add a new paragraph (d) in section 685.206 and 

language to section 685.222 and Appendix A to subpart B of 

part 685 to clarify that the 2016 final regulations apply 

to loans first disbursed on or after July 1, 2017 and 

before July 1, 2020. These final regulations will apply to 

loans first disbursed on or after July 1, 2020. 

Comments: Some commenters expressed concern and 

confusion about the structure of the 2018 NPRM, 

particularly the regulations the Department used as the 

starting point for the preamble discussion and amendatory 

language as well as the baseline used for the Regulatory 

Impact Analysis. They asserted that using the pre-2016 
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49 

regulations as the basis for the amendatory language raises 

issues under the APA. They also stated that using the 2019 

President's Budget Request as the baseline for the 

Regulatory Impact Analysis, raises issues under the APA in 

part because the President’s Budget Request assumed the 

implementation of the 2016 final regulations. 

Discussion: We welcome the opportunity to provide 

additional clarification about the structure of the 2018 

NPRM and the reasons for the structure. First, with 

respect to the amendatory language, the Federal Register

requires amendatory language to be drafted as amendments to 

the currently effective text of the Code of Federal 

Regulations.33 For that reason, because the effective date 

of the 2016 final regulations was delayed, our amendatory 

language in the 2018 NPRM was drafted to reflect changes to 

the pre-2016 regulatory text. In the preamble, to properly 

fulfill our obligations under the APA, we discussed our 

proposed changes as related to both the pre-2016 regulatory 

text and the 2016 final regulations. 

33 See 1 CFR part 21. “Each agency that prepares a document that is 

subject to codification shall draft it as an amendment to the Code of 

Federal Regulations...”. 1 CFR 21.1.
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50 

In the Regulatory Impact Analysis (RIA) section of 

this document, we discuss in detail why we were required to 

use the President’s 2019 Budget Request as the baseline for 

the RIA in the 2018 NPRM. 

Changes: None. 

BORROWER DEFENSES – CLAIMS (Section 685.206) 

Affirmative and Defensive Claims 

Comments: Many commenters, and groups of commenters, 

advocated for the inclusion in the final regulations of 

affirmative borrower defense claims, meaning claims 

asserted before a borrower has defaulted on a Federal 

student loan. These commenters objected to the proposal 

that would have limited the Department’s consideration of 

borrower defense claims to those asserted as a defense in 

collection proceedings. The commenters noted that limiting 

the consideration of borrower defense claims to defensive 

claims might encourage some borrowers to default on their 

loans to become eligible to file a claim. 

Commenters representing military personnel and 

veterans noted that limiting borrower defense claims to 

defaulted borrowers would fail to recognize the significant 
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51 

risk such a limit would place on service members, veterans, 

and their dependent family members. The commenters 

requested clear and reasonable protections from schools 

with predatory practices and misleading promises. These 

commenters noted that many jobs held by service members, 

veterans, spouses, and their adult children require 

government security clearances. Defaulting on a student 

loan could result in denial or loss of clearance and, 

therefore, a loss of employment. In such instances, the 

commenters asserted that the proposed regulations would 

increase the likelihood of devastating and, potentially, 

cascading consequences for military and veteran families. 

Some commenters, who supported the inclusion of both 

affirmative and defensive claims, did so with a caveat that 

these claims should be combined with a requirement that the 

claim be supported by clear and convincing evidence, rather 

than a preponderance of the evidence. One commenter, who 

supported the inclusion of affirmative claims, did so with 

a caveat that these claims should be supported by evidence 

that is beyond a reasonable doubt. 

One commenter suggested that borrowers whose loan 

payments are current should be afforded priority over 

borrowers in default in the adjudication process. 
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52 

In opposing the proposal to only allow consideration 

of defensive claims, several commenters rejected the 

Department’s assertion that we did not accept affirmative 

borrower defense to repayment claims prior to 2015 and 

alleged that the Department’s explanation for proposing 

that the final regulation only allow for the consideration 

of defensive claims was insufficient. Another commenter 

who supported the inclusion of affirmative claims provided 

evidence that the Department considered borrower defense 

claims before the borrower was in default prior to 2015. 

A number of commenters, however, supported the 

proposal to consider only defensive claims. One such 

commenter stated that the regulation was intended to only 

address claims raised in debt collection actions. Another 

commenter argued that the proposal to accept both 

affirmative and defensive claims exceeds the statutory 

authority conferred upon the Department by the HEA and that 

any such change can only be addressed by Congressional 

action. This commenter stated that it shared the concern 

raised by the Department in the NPRM that allowing 

consideration of affirmative claims would make it 

relatively easy for a borrower to apply for relief, even if 

the borrower had suffered no financial harm, resulting in a 
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53 

significant burden on the Department and institutions to 

address numerous unjustified claims. This commenter also 

contended that if the Department allows affirmative claims, 

borrowers would have nothing to lose by filing for loan 

relief. 

Discussion: In the 2018 NPRM, the Department 

explained that we were seeking public comment as to whether 

we should only allow defensive claims, as opposed to both 

affirmative and defensive claims.34 The Department stated 

that it believed that accepting defensive claims, and not 

affirmative claims, might better balance the competing 

interests of the Federal taxpayer and of borrowers. The 

Department sought comment on how it could continue to 

accept and review affirmative claims, but at the same time 

discourage borrowers from submitting unjustified claims. 

After consideration of the public comments received in 

response to the NPRM, the Department agrees that it is 

appropriate to accept both affirmative and defensive 

claims. The Department understands the concerns raised by 

the commenters who argued that allowing only defensive 

34 83 FR 37253 – 37254.
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54 

claims may provide borrowers with an incentive to default, 

which, in turn, would have negative consequences for the 

borrower. In addition, we are concerned about the 

potential negative impacts on military servicemembers, 

their families, and borrowers, in general, which could 

result from increased instances of loan default triggered 

by borrower efforts to become eligible to assert defensive 

claims. 

The Department acknowledges that the Department did 

accept affirmative borrower defense in limited 

circumstances before 2015. However, the Department’s 

interpretation of the existing regulation has been that it 

was meant to serve primarily as a means for a borrower to 

assert a defense to repayment during the course of a 

collection proceeding. After further review of the 

information submitted by commenters and our own records, 

the Department acknowledges that throughout the history of 

the existing borrower defense repayment regulation, the 

Department has approved a small number of affirmative 

borrower defense to repayment requests. 

The Department’s representation of its history of 

approving borrower defense to repayment loan relief in the 

NPRM was included as background to our explanations and 
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55 

reasoned bases for two alternative proposals. With these 

alternatives, we gave the public notice and opportunity to 

provide feedback on whether the Department should 

distinguish between affirmative and defensive borrower 

defense to repayment claims. 

As intended by the APA, the Department provided 

sufficient notice and the public provided comments, and the 

Department weighed such comments and has decided to allow 

the consideration of both affirmative claims and defensive 

claims in these final regulations. However, as explained 

further in this preamble at Borrower Defenses – Limitations 

Period for Filing a Borrower Defense Claim, we are 

establishing a three-year limitations period, that begins 

to run when the student leaves the school, for all defense 

to repayment claims under the new standard. 

The Department continues to be concerned about the 

burden to the Department and the taxpayer from a large 

volume of claims. However, as explained later in this 

document, the Department does not believe that a different 

evidentiary standard for affirmative claims versus 

defensive claims is appropriate. Different evidentiary 

standards might lead to inconsistency in the Department’s 

adjudication of factually similar borrower defense claims, 
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56 

but for the timing of a borrower’s application and loan 

status. Similarly, the Department does not agree that 

priority in adjudication should be given to borrowers whose 

loan payments are current over borrowers whose loans are in 

default. The Department believes it is appropriate for a 

borrower to have his or her claim adjudicated based upon 

the facts underlying his or her application, rather than 

repayment status. We also believe that the standard we 

adopt in these final regulations is properly calibrated to 

allow borrower defense relief only where it is merited, and 

not to open the door to a large volume of unjustified 

claims. 

 The Department disagrees with the commenters who 

stated that the consideration of affirmative claims is 

outside of the Department’s statutory authority or the 

purpose of the borrower defense regulations. We stated in 

the NPRM that the proposal to consider only defensive 

claims was within the Department’s authority under section 

455(h) of the HEA.35 However, by such a statement the 

Department did not imply that it does not have the 

35 83 FR 37253 – 37254.
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57 

authority to consider affirmative claims and, in fact, by 

proposing that borrowers could submit affirmative claims on 

loans first disbursed before the effective date of the 

final regulations, clearly indicated that it does have such 

authority. 

The Department has broad statutory authority to make, 

promulgate, issue, rescind, and amend regulations governing 

the manner of, operations of, and governing of the 

applicable programs administered by the Department and 

functions of the Department.36 Further, by providing that 

the Department may regulate borrowers’ assertion of 

borrower defenses to repayment, section 455(h) of the HEA 

grants the Department the authority to not only identify 

borrower causes of action that may be recognized as 

defenses to repayment, but also to establish the procedures 

for receipt and adjudication of borrower claims--including 

the type of proceeding through which the Department may 

consider such a claim. This regulatory scheme reflects the 

Department’s history in considering borrower defense 

claims, whether prior to 2015, as pointed out by some 

36 See 20 USC 1221e-3. 
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58 

commenters, or after 2015. Accordingly, the Department 

does not agree that congressional action is necessary for 

the Department’s consideration of affirmative claims. 

Changes: We are adding §685.206(e) to provide, with 

regard to loans first disbursed on or after July 1, 2020, 

that borrowers may submit a defense to repayment claim, 

both on affirmative and defensive bases, as long as the 

claim is submitted within three years from the date the 

borrower is no longer enrolled at the institution. 

Application 

Comments: Some commenters supported the proposed 

regulatory provisions which would require the borrower to 

specify the misrepresentation being asserted for the 

defense to repayment, certify the claim under penalty of 

perjury, list how much financial harm was incurred, and 

acknowledge that if they receive a full discharge of the 

loan, the school may refuse to provide an official 

transcript. These commenters believe these requirements 

will reduce the number of unsubstantiated claims. 
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One commenter suggested that the application also 

require borrowers to provide their grade point average 

(GPA) at the time of their termination or leaving the 

school and to state, if they failed the academic program, 

why they failed. 

One commenter suggested the Department start a process 

to consumer test the application, with input from other 

Federal agencies, to ensure that students of all 

institutional levels are able to comprehend and complete 

the application. 

Several commenters objected to a proposed requirement 

that borrowers making a defense to repayment claim provide 

personal information, including confirmation of the 

“borrower’s ability to pass a drug test, satisfy criminal 

history or driving record requirements, and meet any health 

qualifications.” The commenters asserted that this would 

effectively require borrowers to waive their right to 

privacy and treats the borrower like a criminal, not an 

injured party. One of these commenters argued that these 

requirements are irrelevant to the question of school 

misconduct and are clearly intended to dissuade borrowers 

from asserting claims of fraud. 
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Discussion: The Department thanks the commenters who 

supported the proposed regulations pertaining to the 

application. We believe the proposed regulation set forth 

clear borrower defense to repayment application 

requirements that would allow a borrower to understand and 

provide the information needed for the Department to 

accurately evaluate the borrower’s claim. As proposed in 

the NPRM, this application requires the borrower to sign a 

waiver permitting the institution to provide the Department 

with items from the borrower’s education record relevant to 

the defense to repayment claim. Such a waiver gives the 

borrower notice that the school may release information 

from the borrower’s education records to the Department. 

We do not agree that it is appropriate to require that 

a borrower, submitting a borrower defense claim, include 

their GPA or other information regarding their success or 

failure in any course or program. The Department does not 

view that information as dispositive as to whether the 

borrower was harmed by a misrepresentation or an omission 

by the school. Including this information, however, could 

have an impact on determining the harm suffered by a 

student as a result of a misrepresentation. In considering 

the harm the student suffered as a result of an 
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institution's misrepresentation, the Department must 

ascertain how much of that harm is the fault of the 

institution and how much of it is the result of a student’s 

choices, behaviors, aspirations, and motivations. 

The Department does not adopt the commenter’s 

suggestion regarding consumer testing the borrower defense 

application. The Department has significant experience 

developing and publishing applications similar to the one 

required in these final regulations and will rely on that 

experience in creating an appropriate and effective 

application for this purpose. We disagree with the 

commenters who objected to the proposed requirement that 

borrowers supply information relevant to assessing the 

borrower’s allegation of harm as a violation of borrowers’ 

privacy rights. Under the Privacy Act, an agency may 

“maintain in its records only such information about an 

individual as is relevant and necessary to the accomplish a 

purpose of the agency required to be accomplished by 

statute. . .”37 While the information relevant to assessing 

the borrower’s allegation of harm may be private, it is 

37 5 USC 552a(e)(1).
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also necessary for the Department to have it in order to 

carry out its purposes. We will maintain the borrower’s 

privacy, except for the limited purpose of resolving the 

borrower’s claim. 

As explained earlier, the HEA provides the Department 

with the authority to establish regulations on all aspects 

of the borrower defense to repayment process, including how 

relief should be provided and determined. It is relevant 

to the Department’s determination of relief to require a 

borrower to provide a complete picture of the financial 

harm caused by a school’s misrepresentation, by providing 

information such as: whether the borrower failed to 

actively pursue employment if he or she is a recent 

graduate; whether the borrower was terminated or removed 

from a job position as a result of job performance issues; 

or whether the borrower failed to meet other job 

qualifications for reasons unrelated to the school’s 

misrepresentation. 

With respect to the borrower’s attempts to pursue 

employment, the Department revised the final regulations to 

clarify what the Department expects the borrower to provide 

as part of the application. The borrower should provide 

documentation that the borrower actively pursued employment 
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in the field for which the borrower’s education prepared 

the borrower. Examples of this documentation include but 

are not limited to: job application confirmation emails; 

correspondence with potential employers; registration at 

job fairs; enrolling with a job recruiter; and attendance 

at a resume workshop. Failure to provide such information 

could result in a presumption that the borrower failed to 

actively pursue employment in the field. The Department 

would like borrowers to have notice of what documentation 

the Department expects in support of an application for a 

borrower defense to repayment and what the consequences of 

failing to provide such documentation will be. The 

Department must rely on the borrower to supply such 

information, as the Department will not be aware of any 

attempts the borrower has made to seek employment. Such 

documentation will help support the relief that a borrower 

receives. 

While such information about pursuing employment may 

not be related to whether a school made a 

misrepresentation, as defined in these final regulations, 

it does relate directly to whether the borrower was 

financially harmed by the institution, as required by the 

standard for a borrower defense claim. Information on 
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intervening causes of a borrower’s circumstances that 

cannot be said to be even related to a borrower’s 

education, much less the misrepresentation at issue, will 

be relevant to the Department’s assessment of the amount of 

relief to provide to the borrower as a result of the harm 

that has been caused by the misrepresentation. 

With regards to criminal history, we carefully 

reviewed the public comments . We do not adopt the 

commenters’ logic that such a provision would treat 

borrowers like criminals, require borrowers to waive their 

right to privacy, or that these questions are “clearly 

intended” to dissuade borrowers from asserting borrower 

defense claims. However, after our review, the Department 

decided that the inclusion of the “criminal record” 

language is contrary to the Department’s priorities and 

does not properly support individuals who are attempting to 

transition out of the criminal justice system through 

higher education, job training, or other career pathways. 

Despite this change, the Department believes that 

requiring borrowers to provide a complete picture of the 

financial harm caused by a school’s misrepresentation--

including whether unrelated factors may have contributed to 

the borrower’s financial circumstances--is appropriate to 
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help the Department satisfy its fiduciary responsibility to 

taxpayers and to provide just relief for borrowers. 

Changes: The Department revised the regulations about 

the documentation the borrower should provide as part of 

the borrower defense to repayment application. The 

borrower still must provide documentation that the borrower 

actively pursued employment in the field for which the 

borrower’s education prepared the borrower. The Department 

will presume that the borrower failed to actively pursue 

such employment, if the borrower fails to provide such 

documentation. As explained below, the Department also is 

revising § 685.206(e)(8) to clarify the borrower defense to 

repayment application will state that the Secretary will 

grant forbearance while the application is pending and will 

notify the borrower of the option to decline forbearance. 

The Department removes “criminal history or” from § 

685.206(e)(8)(v). 
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Definition of “Borrower” 

Comments: A group of commenters recommended that the 

proposed regulatory language in the 2018 NPRM at 

§685.206(d)(1)(i), define “borrower” to include the student 

on whose behalf a parent borrowed Federal funds. The 

purpose of this inclusion is to specifically address 

whether a parent borrower may raise a defense to repayment 

claim. 

Discussion: The Department regrets the omission of 

parent borrowers from the borrower defense provisions in 

the 2018 NPRM. We have amended the definition to reflect 

the approach taken in the 2016 final regulations, so that a 

parent borrower may raise a defense to repayment claim 

based on a misrepresentation or omission made to the parent 

or to the student on whose behalf the parent borrowed 

Federal funds. In the final regulations, 

§685.206(e)(1)(ii) mirrors §685.222(a)(4), the definition 

applicable for loans first disbursed on or after July 1, 

2017 and before July 1, 2020, which provides that the term 

“borrower” includes the student who attended the 

institution, any endorsers, or the student on whose behalf 

a parent borrowed. 
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Changes: The definition of “borrower” in 

§685.206(e)(1)(ii) now includes both the borrower and, in 

the case of a Direct PLUS Loan, any endorsers, and for a 

Direct PLUS Loan made to a parent, the student on whose 

behalf the parent borrowed. 

Definition of Direct Loan 

Comments: None. 

Discussion: The Department would like to clarify that 

“Direct Loan” in § 685.206(e) means a Direct Unsubsidized 

Loan, a Direct Subsidized Loan, or a Direct PLUS Loan. 

With respect to both the pre-2016 final regulations and 

2016 final regulations, the Department interprets “Direct 

Loan” to mean a Direct Unsubsidized Loan, a Direct 

Subsidized Loan, or a Direct PLUS Loan in §§ 685.206(c), 

685.206(d), and 685.222. These final regulations clarify 

that “Direct Loan” continues to have the same meaning as in 

the pre-2016 final regulations and 2016 final regulations. 
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Changes: The Department expressly defines a Direct 

Loan in § 685.206(e)(1)(i) as a Direct Unsubsidized Loan, a 

Direct Subsidized Loan, or a Direct PLUS Loan. 

Group Claims: Support for Revisions 

Comments: Several commenters supported the 

Department’s proposal to eliminate the group claim process 

for borrower defense claims. They expressed concern that 

allowing for group claims would incentivize attorneys and 

advocacy groups to file claims on behalf of a class of 

students. One commenter asserted that outside actors could 

attempt to monetize borrower defense claims to their own 

benefits, especially if the Department were to accept group 

claims. However, the commenter noted that there are 

options that the Department could consider to limit this 

possibility as an alternative to disallowing group claims 

entirely. 
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69 

Discussion: The Department thanks the commenters for 

their support of the regulations that require individuals 

to assert borrower defense claims. To an extent, we 

understand the commenters’ concerns about, and have already 

become aware of evidence of, outside actors attempting to 

personally gain from the bad acts of institutions as well 

as unfounded allegations. The evidence standard and the 

fact-based determination of the borrower’s harm and 

resulting reliance requirements in the federal standard in 

these regulations for loans first disbursed after July 1, 

2020, necessitates that each claim be adjudicated 

separately. While, depending on the circumstances, 

borrower defense claims brought under those other standards 

might be amenable to a group process or for expedited 

processing if there are similar facts and claims among a 

number of borrowers, the new federal standard envisions a 

more fact-specific inquiry. As a result, the Department no 

longer believes that a group process is appropriate. 

Changes: None. 

Group Claims: Opposition to Revisions 

Comments: Many commenters encouraged the Department 

to include a process in the final regulations for group 

claims. These commenters noted that students who were at 
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70 

the same school at the same time, who were subject to the 

same misrepresentation, could expect their claims to be 

adjudicated more expeditiously, if considered as a group. 

Some commenters were not persuaded by the Department’s 

assertion in the 2018 NPRM that a group claim process 

places an extraordinary burden on both the Department and 

the Federal taxpayer, given that the 2016 final defense 

regulations asserted that a group adjudication process with 

common facts and claims would conserve the Department’s 

administrative resources. These commenters further noted 

that no undue burden would be placed on the taxpayer so 

long as the Department is holding institutions financially 

accountable. 

Some commenters suggested that when the Department 

knows that a school engaged in misrepresentation to a group 

of students, debt relief should be granted to all of them. 

The commenters further recommended that the regulation 

require the Department to process any relevant and 

substantiated information in its possession in the same 

manner as a Freedom of Information Act (FOIA) request and 

make that information, to the extent permitted by law, 

available to the borrower and the school. 
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The commenters suggested that the Department consider 

significant and plausible allegations of misrepresentation 

by multiple borrowers sufficient impetus to launch its own 

investigation, the outcome of which may be used to 

substantiate pending borrower defense claims and enable 

such claims to move to the determination of harm phase. 

They assert that the Department could use compliance 

determinations by the Department, or other oversight 

bodies, as an alternative to a group process that would 

alleviate some of the burden associated with examining 

individual claims and focus such reviews on harm to 

borrowers rather than institutional intent, without 

curtailing due process rights for schools. 

Another commenter noted that allowing for group claims 

would strengthen the usefulness of the regulation as an 

accountability measure, as schools would know that efforts 

to defraud students could result in large groups of 

students being given relief, with the associated financial 

impact on the school. 

A commenter cited Federal Trade Commission v. 

BlueHippo Funding, LLC, 762 F.3d 238 (2nd Cir. 2014) for 

the proposition that consumer protection agencies need not 

show that each consumer individually relied on a 
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misrepresentation. Similarly, another commenter stated a 

limitation on group claims will limit access to relief 

exclusively to students who have the financial resources to 

obtain legal representation. 

One commenter stated that a ban on group claims places 

undue burden on individuals who have been defrauded where 

there is widespread evidence of mistreatment. 

Other commenters who supported the inclusion of group 

claims noted that, while the proposed regulations make 

explicit that the Department has the authority to 

automatically discharge loans on behalf of a group of 

defrauded borrowers, the regulations do not include 

guidance to ensure that this authority is exercised by the 

Secretary. 

These commenters also advocated including a process in 

the final regulations that would enable State attorneys 

general (AGs) to petition the Department to provide 

automatic group loan discharges to students based on the 

findings of an AG’s investigation. Another commenter also 

advocated for the rule to permit third parties, such as 

state AGs or legal aid organizations, to file group claims 

when they possess evidence of widespread misconduct. 
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One commenter suggested that group discharges should 

include borrower defense claimants’ private loans and 

Federal Family Education Loan (FFEL) Program loans. 

Discussion: After careful consideration of the 

comments, the Department retains its position that it is 

unnecessary to provide a process for group borrower defense 

claims. 

 In 2016, the Department decided that a group process 

would conserve the Department’s administrative resources. 

However, the standard for a borrower defense claim and the 

process that we are adopting in these final regulations is 

much different from the standard and process in the 2016 

final regulations. 

Determinations under these final rules will be highly 

reliant upon evidence specific to individual borrowers, 

which requires the Department to reconsider its previous 

burden calculation. Under these final regulations, a school 

engaging in misrepresentation alone will not be sufficient 

for a successful claim. Relief will be granted based upon a 

borrower’s ability to demonstrate that institutions made 

misrepresentations with knowledge of its false, misleading, 

or deceptive nature or with reckless disregard and to 

provide evidence of financial harm. This evidentiary 
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determination and harm analysis require that the Department 

consider each borrower claim independently and on a caseby-case basis. 

The Department declines to accept the commenter’s 

recommendation to process relevant and substantiated 

information in the same manner as a FOIA request. The 

purpose of the FOIA process is to allow the release of 

information for the public. Information submitted for a 

borrower defense claim is provided to the Department, and 

it is unclear how the FOIA process could be applicable to 

the process created by these final regulations. While the 

Department welcomes information from the borrower and 

encourages the submission of such information, the process 

outlined in these final regulations allows for sufficient 

access to the required information and documentation for 

the concerned parties to a claim. 

While the Department shares and understands the 

concerns that commenters expressed regarding the 

expeditious resolution of borrower claims, we believe it is 

prudent to balance the need for speedy recovery for 

students against the need to properly resolve each claim on 

the merits and provide relief in relation to the claimant’s 

harm. To make this determination, it is necessary to have 
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a completed application from each individual borrower, to 

consider information from both the borrower and the 

institution, and to examine the facts and circumstances of 

each borrower’s individual situation. 

Additionally, the Department does not believe that the 

elimination of group claims reduces the usefulness of the 

regulation as an accountability measure. Schools are still 

subject to the consequences of their misrepresentation and, 

if necessary, the Secretary retains the discretion to 

establish facts regarding misrepresentation claims put 

forward by a group of borrowers. 

The Department does not agree that it is too 

burdensome for a borrower to submit an individual 

application to provide evidentiary details in order to 

receive consideration for a full or partial loan discharge 

or that a borrower must retain legal services in order to 

file a successful claim. Considering that a student had to 

sign a Master Promissory Note – a complicated legal 

document – as well as other documents in order to obtain a 

student loan, we have determined that the burden upon 

students to provide documentation and to complete an 

application is appropriate. In order to properly review 

the borrower’s allegations and calculate the level of 
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relief to which a student is entitled, based on the need to 

balance the interests of borrowers and taxpayers, the 

Department must collect information from borrowers through 

an application form. 

Further, presuming reliance on the part of the 

students would not properly balance the Department’s 

responsibilities to protect students as well as taxpayer 

dollars. 

We appreciate, but do not adopt, the suggestions 

regarding the Department’s consideration of allegations 

from multiple borrowers as an impetus to launch an 

investigation (though certainly such allegations could 

trigger an investigation) and the use of compliance 

determinations, by the Department or other oversight body, 

as an alternative to the group process. The Department 

believes that the most appropriate and fairest method of 

determining if a student was subject to a 

misrepresentation, relied on that misrepresentation, and 

was subsequently harmed by it, is through the individual 

claim process in these final regulations. 

Regarding any evidence from audits, program reviews, 

or investigations, the Department may, at the Secretary’s 

discretion, determine if it is warranted and more efficient 
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to establish facts regarding claims of misrepresentation 

put forth by a group. 

The Department rejects the commenter’s suggestion to 

include regulatory language to ensure that the authority 

extended to the Secretary to automatically discharge loans 

on behalf of a group is exercised. Even if the Department 

determines that it is more efficient to establish facts 

regarding claims of misrepresentation put forth by a group 

of borrowers, the Secretary will still need to determine 

that the borrower was harmed as a result of a decision 

based upon a misrepresentation. 

While we reject the suggestion of a process for State 

AG or legal aid organization petitions, the Secretary may 

determine that evidence of widespread misconduct, obtained 

by State AGs or legal aid organizations, merit a broader 

review of a school’s actions in order to establish facts 

regarding misrepresentation to a group of borrowers. 

However, the Department has an obligation to taxpayers to 

independently assess the strength of each borrower defense 

claim. Consequently, we will not be compelled to take 

action at the recommendation or petition of a State AG, 

especially if those allegations have not resulted in a 

judgment on the merits in an impartial court of law, nor 
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will the Department automatically treat State AG 

submissions as group claims. Instead, if a State AG has 

concerns about a particular institution, we would recommend 

that it work with their State agencies responsible for 

authorizing and regulating institutions. Those entities 

are a crucial part of the regulatory triad, which includes 

the Department, State authorizing agencies, and 

accreditors, and have the right and responsibility to 

enforce applicable State laws. 

The Department does not have the authority to 

discharge private student loans or FFEL loans for borrowers 

who assert borrower defense to repayment claims with 

respect to their Direct loans. Section 455(h) of the HEA 

specifically provides that a borrower may assert a borrower 

defense to repayment to “a loan made under this part,” 

referring to the Direct Loan Program. Private loans are 

not part of the Direct Loan Program and thus may not be 

discharged under the Department’s borrower defense process 

by statute. Similarly, FFEL loans are made under the FFEL 

Program, and not the Direct Loan Program. As a result, a 

FFEL loan also cannot be discharged through the Direct Loan 

borrower defense process, unless the FFEL loan has 

consolidated into a Direct Consolidation Loan under 34 CFR 
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685.220. In that situation, the FFEL loan would be paid 

off with the proceeds of the Direct Consolidation Loan, and 

the borrower’s Direct Consolidation Loan – as a loan made 

under the Direct Loan Program – would allow the borrower to 

apply for relief through the borrower defense process. 

Unless consolidated into a Direct Consolidation Loan, as 

described in 34 CFR 685.200, Private and FFEL loan funds 

are provided by lenders other than the Department and 

cannot be discharged through the Direct Loan Program’s 

regulatory or statutory provisions that apply to the Direct 

Loan Program. 

The Department notes that the group process from the 

2016 final regulations, at 34 CFR 685.222(f), will still be 

available for loans first disbursed on or after July 1, 

2017, and before July 1, 2020. 

Changes: None. 

Unsubstantiated Claims 

Comments: One commenter stated that the Department’s 

concern regarding the receipt of many frivolous claims is 

unfounded, wrong-headed, and not supported by research or 

complaints from dissatisfied consumers. Another commenter 

noted that in the NPRM, we stated that there was 

insufficient information to know whether the fear of 
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frivolous claims was legitimate. The commenter also 

referred to the Department’s position in the preamble to 

the 2016 final regulations, where we held that defense to 

repayment proceedings will be not be used by borrowers to 

raise frivolous claims. 

Referring to consumer products research, a commenter 

asserted that the Department’s concern regarding frivolous 

claims ignores good-government practices followed by peer 

agencies like the Veterans Administration, such as 

publishing complaints against schools, and does not reflect 

the overarching goals of the HEA. 

A group of commenters objected to the actions taken to 

mitigate frivolous claims. These commenters expressed a 

need to balance student protections with expectations of 

student responsibility, suggesting that the rule must 

emphasize that students have a right to accurate, complete, 

and clear information so that they can make sound 

decisions. The commenters also asserted that students 

should not be abandoned to the principle of caveat emptor

and that the higher education community should work with 

students to avoid bad choices that result in lost time and 

opportunities. 
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Another group of commenters expressed concern that 

those who are ideologically opposed to the existence of 

privately owned and operated schools may file frivolous 

claims as a means of harassing schools and harming the 

schools’ reputations, before the claims could be 

adjudicated by the Department. These commenters encouraged 

the Department to establish a balanced adjudication process 

that includes procedural protections that provide for the 

quick dismissal of frivolous or unsubstantiated claims. 

Discussion: The Department agrees with the commenters 

that the defense to repayment regulations must provide 

student protections and not endorse a caveat emptor 

approach, while encouraging fiscal responsibility for 

students and the Department. As a policy matter, we do not 

believe that, in practice, the 2016 final regulations will 

effectively prevent unsubstantiated claims, which is why 

these final regulations are drafted to build-in further 

deterrents. 

The Department does not possess an official definition 

of “frivolous” or “unsubstantiated” claims. In typical 

usage, however, a frivolous claim is one with little or no 
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weight or not worthy of serious consideration.38 We use the 

term, here, to describe claims provided by borrowers that 

allege misrepresentations that actually did not occur, 

that seek discharge from private rather than Federal loans, 

or that seek relief from a school not associated with any 

of the borrower’s current underlying loans. 

Although we understand that some commenters may 

disagree with our approach, the Department’s policy seeks 

to balance the needs of borrowers to have their claims 

resolved expeditiously against the needs of the Department 

to resolve claims fairly and efficiently without 

overburdening the Department, institutions that are 

operating and serving students, or taxpayers. 

The Department has examined the issue of 

unsubstantiated claims and has concluded that it remains a 

concern in terms of costs, burden, and delays. Processing 

38 Webster’s Dictionary defines frivolous as: “of little weight or 

importance; having no sound basis; lacking in seriousness.” MerriamWebster Online Dictionary, https://www.merriamwebster.com/dictionary/frivolous?src=search-dict-hed. Black’s Law 

Dictionary defines “frivolous” as when an answer or plea is “clearly 

insufficient on its face, and does not controvert the material points 

of the opposite pleading, and is presumably interposed for mere 

purposes of delay or to embarrass the plaintiff.” 

https://thelawdictionary.org/frivolous/. The Supreme Court has held 

that a complaint is frivolous when it lacks “an arguable basis either 

in law or in fact.” Neitzke v. Williams, 490 U.S. 319 (1989). 
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unsubstantiated claims would place an administrative burden 

on the Department. Defending against unsubstantiated 

claims would be costly to all institutions, particularly 

smaller institutions. The Department has processed only a 

small percentage of the claims filed thus far. Of those, 

around 9,000 applications have been denied as 

unsubstantiated for reasons that include, but are not 

limited to, the following: 1) borrowers who attended the 

institution, but not during the time period that the 

institution made the alleged misrepresentation; 2) the 

borrower submitted the claim without any supporting 

evidence; and 3) on its face, the claim lacks any legal or 

factual basis for relief. This high number of 

unsubstantiated claims, as a practical matter, strains 

Department resources and delays relief to borrowers who 

have meritorious claims. 

The Department finds that the comment regarding 

consumer products research and borrower defense claims does 

not make explicit why such a comparison is an apples-toapples comparison. It is not apparent from the commenter’s 

argument that, in fact, they are. 

The Department believes that by taking seriously its 

dual responsibilities to students and taxpayers, we are 
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employing good-government practices in accordance with our 

statutory and regulatory responsibilities. 

Contrary to some commenters’ suggestions, the 

Department believes that the regulation appropriately 

emphasizes disclosure insofar as students, who are 

themselves taxpayers, have a right to accurate, complete, 

and clear information that will enable them to make sound 

decisions. 

The Department further believes that requiring 

borrowers to sign an application claim under penalty of 

perjury will help deter unsubstantiated claims, as will the 

opportunity for institutions to respond to such claims, 

including by providing relevant documents from the 

student’s academic and financial aid records. 

The Department reserves the ability to take action 

against borrowers who perjure themselves in filing a 

substantially inaccurate claim. 

We acknowledge that there is a risk that 

unsubstantiated claims could be filed in large numbers to 

target institutions for the purpose of damaging their 

reputations before the Department can adjudicate the claims 

as unsubstantiated. Indeed, we are aware of firms and 
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85 

advocacy groups that are engaging in such coordinated 

efforts against certain institutions. 

Nevertheless, by allowing institutions to respond in 

the adjudication process to all claims – substantiated and 

unsubstantiated — asserted against them as part of the 

adjudication process, the Department will be able to 

mitigate this risk for institutions and make informed 

decisions on individual claims. 

Changes: None. 

Retroactive Standards and Bases for Claims 

Comments: Several commenters also advocated that 

borrowers whose loans were disbursed prior to July 1, 2019, 

should be allowed to initiate both affirmative and 

defensive borrower defense claims. 

These commenters assert that this is especially 

important when a claim has failed under the current State 

law standard. The commenters argue that, as a matter of 

equity, those borrowers should be permitted to refile a 

claim under the Federal standard. 
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86 

Discussion: The date of loan disbursement determines 

which standard applies to the borrower defense claim. For 

loans first disbursed on or after July 1, 2020, these final 

regulations include opportunities for borrowers to make 

both affirmative and defensive claims under a Federal 

standard within the three-year limitations period. 

Likewise, for loans disbursed on or after July 1, 2017 

and before July 1, 2020, borrowers may assert both 

affirmative and defensive claims, but pursuant to the 2016 

final regulations. Borrowers of loans first disbursed 

prior to July 1, 2017, may assert a defense to repayment 

under the State law standard set forth in 685.206(c). 

Neither these final regulations nor the 2016 final 

regulations provide a borrower whose loans were disbursed 

when the State law standard was in effect the ability to 

refile a borrower defense claim under a later-effective 

Federal standard, unless the loans were consolidated after 

July 1, 2020. 

Changes: None. 

BORROWER DEFENSES – FEDERAL STANDARD (Section 685.206) 

Comments: Several commenters supported the 

establishment of a Federal standard for borrower defense to 

repayment claims, noting that a Federal standard would 
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87 

provide clarity and consistency and enhance Department 

officials’ ability to work with schools to prioritize the 

delivery of quality education to students. 

Several commenters asserted that the proposed Federal 

standard makes it substantially more difficult for 

defrauded borrowers to assert a claim. The commenters 

argue that by eliminating the State law standard, and 

excluding final judgments made by Federal or State courts 

against a school from the list of acceptable defenses, the 

Department effectively nullifies State consumer protection 

laws and requires a borrower who successfully sues their 

school for fraud in a State court to continue repaying 

loans used to attend the school while the school continues 

to reap the benefit of the borrower’s Federal student aid. 

Several commenters suggested that the Department 

establish the Federal standard as a floor and allow 

borrowers who choose to do so to assert claims based on a 

State standard. 

Other commenters asserted that any Federal standard 

should not limit the rights a borrower has in his or her 

own State. The commenters opined that States should have 

the right to protect their own consumers and ensure the 

quality of schools licensed to operate in their States. 
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Several other commenters agreed, noting that the proposed 

standard would destroy the working relationship between the 

Federal government and States’ attorneys general by 

limiting their role in protecting borrowers. 

Another commenter stated that there is no good basis 

for expanding the reach of the Federal government and 

supplanting State laws with Federal regulations. 

Discussion: We appreciate the support for adopting a 

Federal standard and agree that a Federal standard provides 

consistency. 

Section 455(h) of the HEA expressly states: 

“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.” 

(Emphasis added). Congress did not require the Secretary 

to use State law as the basis for asserting a defense to 

repayment of a loan. Instead, Congress expressly required 

the Secretary to specify in regulations which acts or 

omissions constitute a borrower defense to repayment. Loans 

under title IV are a Federal asset, which means that the 

Secretary must maintain the authority to make 
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89 

determinations about when and how a student loan should be 

discharged. 

The Department disagrees now, as it did in 

promulgating the 2016 final regulations, that moving to a 

Federal standard interferes with the ability of States to 

protect students. State authorizing agencies will remain 

an integral part of the regulatory triad, and State AGs may 

exercise their separate authority and pursue a legal 

process to take action against institutions. These final 

regulations do not nullify, abrogate, or derogate the 

authority of States to enforce their own consumer 

protection laws. A borrower defense to repayment 

application filed with the Department is only one of 

several available avenues for potential relief to 

borrowers, and borrowers may choose the best avenue of 

relief available to them. 

These final regulations continue to allow borrowers to 

submit the factual findings supporting a final judgment in 

a State AG enforcement action against their schools as 

evidence to support their borrower defense to repayment 

claims. However, the Department notes that, as a practical 

matter, factual findings in state AG enforcement actions 

often are of limited utility to borrower defense claims 
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because State consumer protection laws cover broader issues 

than Department-backed student loans or even the provision 

of educational services. Accordingly, a judgment against 

an institution in an action brought by a State AG to 

enforce State law may not be relevant to a title IV defense 

to repayment claim. Therefore, the Department’s final 

regulations expressly state that certain categories of 

State law claims which are enumerated in 34 CFR 

685.206(e)(5)(ii)—including but not limited to, claims for 

personal injury, sexual harassment, civil rights 

violations, slander or defamation, property damage, or 

challenging general education quality or the reasonableness 

of an educator’s conduct in providing educational services—

are not directly and clearly related to the making of a 

loan or the provision of educational services by a school. 

For example, the reasonableness of an educator’s conduct in 

providing educational services, such as the educator’s 

teaching style, preparation for class, etc., is irrelevant 

to whether the educator made a misrepresentation as defined 

in these final regulations. When a borrower points to a 

final judgment in a State law action in support of an 

application for borrower defense to repayment, the 
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Department must consider the final judgment’s relevance to 

the borrower defense claim. 

A Federal standard assures borrowers equitable 

treatment under the law regardless of where they live or 

where their institutions are located. In considering 

claims under the 1995 borrower defense regulations, the 

Department found it unwieldy to navigate the consumer 

protection laws of 50 different States. Researching and 

applying the consumer protection laws of the 50 States 

requires significant resources and, thus, delays the 

adjudication of borrower defense to repayment claims. 

Further, applying disparate State law could result in 

differential and inequitable treatment of similarly 

situated borrowers. For instance, two borrowers who were 

exposed to identical misrepresentations and suffered the 

same hardship could have their borrower defense claims 

resolved inconsistently simply because the borrowers reside 

in different States. 

We do not agree that it would be beneficial to allow 

borrowers to select the State standard under which their 

claims would be reviewed. Most borrowers would lack the 

expertise and information to make such a choice-of-law 
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determination. Moreover, this approach undercuts our 

objective to adjudicate claims swiftly and equitably. 

Separately, we do not believe that the Department 

should share with State AGs sensitive academic and 

financial information for borrowers who seek individual 

loan discharges through borrower defense to repayment 

claims, the work of State AGs may inform and advance the 

Department’s efforts to ensure accountability at the 

institution level because of the important role State AGs 

play in enforcing consumer protection laws. That being 

said, title IV Federal student loans are Federal assets, 

backed by Federal tax dollars and governed by federal law. 

As a result, the Department must work independently to 

fulfill its fiduciary responsibilities to the American 

taxpayer. 

There is nothing in our final regulations that 

preempts State consumer protection laws or diminishes the 

State role in consumer protection. As explained above, 

States play a vital role in enforcing consumer protection 

laws that hold institutions accountable outside the realm 

of Federal student loans. 
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Changes: The Department adopts, with changes for 

organization and consistency, the Federal standard as 

articulated in Alternative B for § 685.206(e). 

Alignment with Definition of Misrepresentation 

Comments: None. 

Discussion: The Department seeks to better align the 

Federal standard for borrower defense claims with the 

definition of misrepresentation. The 2018 NPRM proposed 

different alternatives,39 not all of which expressly 

incorporated the definition of misrepresentation. The 

Department adopts language that expressly incorporates the 

definition of misrepresentation in 685.206(e)(3). The 

Department also expressly includes a reference to the 

provision of educational services, which appears in the 

definition of misrepresentation, in the Federal standard. 

The Department sought to streamline the Federal standard 

and definition of misrepresentation and make them parallel 

to each other. 

Changes: The Department is revising the proposed 

regulations creating a Federal standard for a borrower 

39 83 FR 37325–28.
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94 

defense claim to state that the borrower must establish by 

a preponderance of the evidence that the institution at 

which the borrower enrolled made a misrepresentation, as 

defined in 685.206(e)(3), and also expressly to reference 

the provision of educational services. 

BORROWER DEFENSES – MISREPRESENTATION 

Definition of Misrepresentation and Intent as Part of 

the Federal Standard 

Comments: Many commenters wrote in support of the 

proposed definition of misrepresentation, noting that it is 

clear and focuses on actions that are commonly accepted as 

dishonest. Some of these commenters noted that the 

definition would separate inadvertent errors from 

intentional actions by the school. Other commenters noted 

that the definition of misrepresentation will help ensure 

that frivolous claims will be prevented or rightly 

rejected. Another commenter asserted that the Department 

should allow for an institution’s innocent mistake and that 

allowing students to discharge their loans for innocent 

mistakes would create an incredible risk to schools, 

taxpayers, and ultimately the workforce. 

Many other commenters objected to the definition of 

misrepresentation, arguing that the requirement for intent, 
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knowledge, or reckless disregard was too difficult for 

borrowers to meet, effectively denying access to relief to 

most borrowers. These commenters asserted that such 

evidence would likely be available only if a borrower had 

legal counsel and access to discovery tools, such as 

subpoenas for documents and testimony. They also noted 

that misrepresentations need not be intentional to harm 

students and suggested that negligent misrepresentations be 

incorporated into the definition as well. 

One commenter requested that the Department provide a 

more fulsome justification for why its view of 

misrepresentation has changed since the 2016 final 

regulations. Similarly, another commenter contended that 

the Department has not provided adequate justification for 

its view that misrepresentation requires intentional harm 

to students. One commenter asserted that if the Department 

can adjudicate allegations of fraud and misrepresentation 

in an administrative proceeding against a school, then 

students should be able to benefit from the same standard 

for borrower defense to repayment. 

Another commenter argued that the proposed Federal 

standard would be arbitrarily difficult for borrowers to 

satisfy and seems designed to keep borrowers from receiving 
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96 

relief available to them under the law. This commenter 

asserted the Department should simplify the process and 

ensure that borrowers have equitable access to relief. 

Some commenters noted that the Department in the 2018 

NPRM acknowledged that it is unlikely that a borrower would 

have evidence to demonstrate that a school acted with 

intent to deceive, but borrowers are more likely to be able 

to demonstrate reckless disregard for the truth. The 

commenter recommends that, as an alternative, the 

regulation allow borrowers to submit sufficient evidence to 

prove that a substantial material misrepresentation was 

responsible for their taking out loans, regardless of 

whether the misrepresentation was made with knowledge or 

recklessness by the school. 

 According to one commenter, the proposed definition of 

misrepresentation adds a substantial amount of burden 

without distinguishing among the types of 

misrepresentations borrowers may have experienced. This 

commenter noted that the Department itself assumes that 

only five percent of misrepresentations are committed 

without intent, knowledge, or reckless disregard; or do not 

fall under the breach of contract or final judgment 

components of the standard in the 2016 final regulations. 
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The commenter opined that the Department, through its 

proposed definition of misrepresentation, was attempting to 

prevent borrowers who have been harmed by their 

institutions from accessing relief simply because of 

asymmetry between borrowers and the school about the nature 

of the misrepresentation. . 

One commenter criticized the proposed definition of 

misrepresentation for exceeding the standards under State 

and Federal consumer protection laws. 

Another commenter asserted that all fifty States have 

a version of consumer protection laws that prohibit certain 

unfair and deceptive conduct, commonly known as “unfair and 

deceptive trade acts and practices” (UDAP). According to 

this commenter, these UDAP laws are modeled after the 

Federal Trade Commission Act and track the CFPB’s statutory 

authority. This commenter asserts that the UDAP laws 

address both deception and unfairness and offer a common, 

stable structure, and pedigree that the Department should 

adopt. This commenter asserted that a scienter requirement 

is inconsistent with the state of mind requirements in 

other Federal laws governing unfair and deceptive 

practices. The commenter notes that, for example, the 

deception standard used by the FTC does not require a 
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showing of intent by the party against whom a deception 

claim is brought. The commenter further notes that the 

CFPB , uses a similar standard for determining whether an 

act or practice is deceptive. According to the commenter, 

under both the FTC and CFPB’s standard, a practice is 

deceptive if, among other things, it is likely to mislead a 

consumer. 

Discussion: We appreciate the commenters’ support for 

the proposed definition of misrepresentation. We agree 

that it is important to differentiate between acts or 

omissions that a school made unknowingly or inadvertently 

and acts or omissions that a school made with knowledge of 

their false, misleading, or deceptive nature or with 

reckless disregard for the truth. The Department agrees 

with negotiators and commenters that it is unlikely that a 

borrower would have evidence to demonstrate that an 

institution acted with intent to deceive, and we are 

revising these final regulations to remove the phrase “with 

intent to deceive” from the Federal standard. It is 

difficult to prove what an officer’s or employee’s intent 

is, but it is not as difficult to prove that a statement 

was made with knowledge of its false, misleading, or 
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deceptive nature or with a reckless disregard for the 

truth. For example, a student may demonstrate that an 

officer of the institution or employee misrepresented the 

actual licensure passage rates because the employee’s 

representations are materially different from those 

included in the institution’s marketing materials, website, 

or other communications made to the student. The officer 

or employee need not have an intent to deceive the student 

in making the misrepresentation about actual licensure 

passage rates. The student may use the institution’s 

marketing materials, website, or other communications to 

demonstrate that the institution’s officer or employee made 

the representation with knowledge of its false, misleading, 

or deceptive nature or with reckless disregard for the 

truth. 

To address concerns about the definition of 

misrepresentation and the Federal standard, the Department 

is revising the Federal standard to provide greater 

clarity. The Federal standard proposed in the 2018 NPRM 

requires borrowers to demonstrate that the institution made 

a “misrepresentation of material fact, opinion, intention, 
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100 

or law.”40 The Department realizes that it will be 

difficult to demonstrate a misrepresentation of “opinion, 

intention, or law” and, thus, is removing “opinion, 

intention, or law” from the Federal standard. It could be 

very difficult to demonstrate a misrepresentation of 

opinion or intention as opinions and intentions may change 

and do not constitute facts that may be proved or 

disproved. Similarly, it would be difficult to demonstrate 

that the institution made a material misrepresentation of 

law as laws are subject to different interpretations. Laws 

that are clearly stated and that are not subject to 

different interpretations may constitute a material fact. 

For example, if an institution made a material 

misrepresentation that these final regulations require a 

pre-dispute arbitration agreement and class action waiver, 

then the misrepresentation concerns a material fact. 

Accordingly, the Federal standard will only require 

borrowers to demonstrate a misrepresentation of a material 

fact. 

40 83 FR 37325.
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Additionally, the Department is revising the 

definition of misrepresentation to better align with the 

Federal standard. The Federal standard in these final 

regulations requires, in part, a misrepresentation, as 

defined in § 685.206(e)(3), of material fact upon which the 

borrower reasonably relied in deciding to obtain a Direct 

Loan, or a loan repaid by a Direct Consolidation Loan, and 

“that directly and clearly relates to: (A) [e]nrollment or 

continuing enrollment at the institution or (B) [t]he 

provision of educational services for which the loan was 

made.”41 The definition of “misrepresentation” proposed in 

the 2018 NPRM, however, requires the statement, act, or 

omission of material fact to directly and clearly relate 

“to the making of a Direct Loan, or a loan repaid by a 

Direct Consolidation Loan, for enrollment at the school or 

to the provision of educational services for which the loan 

was made.”42 Requiring the statement, act, or omission to 

directly and clearly relate to the making of a Direct Loan, 

or a loan repaid by a Direct Consolidation Loan, does not 

align with the Federal standard, which requires the 

41 § 685.206(e)(2). 42 83 FR 37326.
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misrepresentation to directly and clearly relate to 

enrollment or continuing enrollment at the institution or 

the provision of educational services for which the loan 

was made. 

Accordingly, the Department is revising the definition 

of misrepresentation to include a statement, act or 

omission that clearly and directly relates to enrollment or 

continuing enrollment at the institution or the provision 

of educational services for which the loan was made. Of 

course, a misrepresentation about the making of a Direct 

Loan, or a loan repaid by a Direct Consolidation Loan, will 

qualify as a misrepresentation because such a 

misrepresentation clearly and directly relates to 

enrollment or continuing enrollment at the institution or 

the provision of educational services for which the loan 

was made. 

The Department, however, does not wish to limit a 

misrepresentation of material fact to only a statement, 

act, or omission that directly and clearly relates to the 

making of a Direct Loan, or a loan repaid by a Direct 

Consolidation Loan. As the examples of misrepresentation 

in 685.206(e)(3)(i)-(xi) demonstrate, the misrepresentation 

of material fact may, for example, directly and clearly 
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relate to the educational resources provided by the 

institution that are required for the completion of the 

student’s educational program that are materially different 

from the institution’s actual circumstances at the time the 

representation is made.43 The Federal standard already 

provides that the borrower must have reasonably relied on 

the misrepresentation of material fact in deciding to 

obtain a Direct Loan, or a loan repaid by a Direct 

Consolidation Loan. 

We agree with the commenters who argued that a school 

should not be held liable if it committed an inadvertent 

mistake. Schools should work with students when an 

inadvertent mistake has occurred. As explained below, an 

inadvertent or innocent mistake should not, and will not, 

be treated as an act or omission that is false, misleading, 

or deceptive by an institution. In the preamble to the 

2016 final regulations, we took the position that 

institutions should be responsible for the harm to 

borrowers as the result of even inadvertent or innocent 

mistakes. However, as reiterated throughout this document, 

43 § 685.206(e)(3)(x)
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in these final rules the Department is seeking to empower 

students by providing them with information and encouraging 

them to resolve disputes directly with schools in the first 

instance. Treating innocent mistakes in the same manner as 

acts or omissions made with knowledge of their false, 

misleading, or deceptive nature, places well-performing 

schools at risk unnecessarily, potentially limiting 

postsecondary opportunities for students or increasing 

costs. Balancing the Department’s dual role to protect 

Federal tax dollars with its responsibility to borrowers, 

the Department is incorporating a scienter requirement into 

borrower defense to repayment claims. Any claim based on 

misrepresentation will require proof that the institution 

made the misrepresentation with knowledge that it was 

false, misleading, or deceptive or that the institution, in 

making the misrepresentation, acted with reckless disregard 

for the truth. 

The Department does not adopt the commenter’s 

suggestion that the final regulations include a negligence 

standard. We view our definition of misrepresentation as 

similar to, but not the same as, the common law definition 

of fraud or fraudulent misrepresentation, which requires 

that the institution or a representative of the institution 
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make the misrepresentation with knowledge of its false, 

misleading, or deceptive nature. Such a standard is 

different than the failure to exercise care that a 

negligence standard requires. 

Generally, courts find that a defendant committed 

fraud or a fraudulent misrepresentation when each of the 

following elements have been successfully satisfied: 1) a 

representation was made; 2) the representation was made in 

reference to a material fact; 3) when made, the defendant 

knew that the representation was false; 4) the 

misrepresentation was made with the intent that the 

plaintiff rely on it; 5) the plaintiff reasonably relied on 

it; and 6) the plaintiff suffered harm as a result of the 

misrepresentation.44 These elements, like our final 

regulations, create a relationship between the false 

44 In re APA Assessment Fee Litigation, 766 F.3d 39, 55 (D.C. Cir. 

2014); See also: Mid Atlantic Framing, LLC. v. Varnish Construction, 

Inc., 117 F.Supp.3d 145, 151 (N.D.N.Y. 2015); Chow v. Aegis Mortgage 

Corporation, 185 F.Supp. 914, 917 (N.D.Ill 2002); Master-Halco, Inc. v. 

Scillia Dowling & Natarelli, LLC, 739 F.Supp.2d 109, 114 (D.Conn. 

2010). Note: In cases involving commercial contracts, courts have often 

required a further element that the defrauded party’s reliance must be 

reasonable. Hercules & Co., Ltd. v. Shama Restaurant Corp., 613 A.2d 

916, 923 (D.C. Cir. 1992).
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statement, reliance upon the false statement, and a 

resulting harm. 

A plaintiff alleging negligent misrepresentation must 

show that: 1) the defendant made a false statement or 

omitted a fact that he had a duty to disclose; 2) it 

involved a material issue; and 3) the plaintiff reasonably 

relied upon the false statement or omission to his 

detriment.45 In contrast to fraudulent representation, an 

allegation of negligent misrepresentation need not show 

that the defendant had knowledge of the falsity of the 

representation or the intent to deceive.46 In addition, 

courts have found that, to be actionable, a negligent 

misrepresentation must be made as to past or existing 

material facts and that predictions as to future events, or 

statements as to future actions by a third party, are 

deemed opinions and not actionable fraud.47

45 Sundberg v. TTR Realty, 109 A.3d 1123, 1131 (D.C. 2015); See also:

Indy Lube Investments, LLC v. Wal-Mart Stores, Inc., 199 F.Supp. 2d 

1114, 1122 (D.Kan. 2002); City of St. Joseph, Mo. v. Southwestern Bell 

Telephone, 439 F.3d 468, 478 (8th Cir. 2006); Redmond v. State Farm 

Ins. Co., 728 A.2d 1202, 1207 (D.C. 1999). 46 Sundberg, 109 A.3d at 1131. 47 Stevens v. JPMorgan Chase Bank, N.A., 2010 WL 329963 (N.D.Cal. 2010); 

See also: Newton v. Kenific Group, 62 F.Supp 3d 439, 443 (D. Md. 2015); 

Fabbro v. DRX Urgent Care, LLC, 616 Fed. Appx. 485, 488 (3rd Cir. 2015) 

(Negligent misrepresentation claims, regarding the expenses involved in 

starting a franchise, were dismissed, in part, because: “Predictions or 

promises regarding future events...are necessarily approximate.”) 
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We believe that including a negligent 

misrepresentation standard into our definition would 

entirely alter the balance we seek to create with these 

final regulations, as negligent representation may include 

an inadvertent mistake. The Federal standard in these 

regulations goes beyond a mere negligence standard in 

requiring knowledge of the false, misleading, or deceptive 

nature of the representation, act, or omission and in 

requiring that the institution make the statement, act, 

omission with a reckless disregard for the truth. Reckless 

disregard often is a requirement of intentional torts, 

which go beyond mere negligence.48 For example, reckless 

disregard for the truth in the context of libel means that 

a publisher must act with a “‘high degree of awareness of 

probable falsity,’”49 as “mere proof of failure to 

investigate, without more, cannot establish reckless 

disregard for the truth.”50 Similarly, an institution’s 

statement, act, or omission must be made with a high degree 

of awareness of probable falsity to satisfy the requirement 

48 See Harte-Hanks Commc’ns, Inc. v. Connaughton, 491 U.S. 657 (1989); 

Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974). 49 Gertz, 418 U.S. at 332 (quoting St. Amant v. Thompson, 390 U.S. 727, 

731 (1968)).

50 Id. at 332.
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that the institution acted with reckless disregard for the 

truth. 

The Department has now concluded that the 2016 final 

regulations’ inclusion of misrepresentations that “cannot 

be attributed to institutional intent or knowledge and are 

the result of inadvertent or innocent mistakes”51 is 

inappropriate for these final regulations and had the 

potential to result in vastly increased administrative 

burden and financial risk to schools and, when the burden 

proves too great, to the taxpayer. In such a case, a mere 

mathematical error could lead to devastating consequences 

to the institution and potentially to its current students, 

who will bear the cost of forgiving prior students’ loans, 

even though the prior students may have decided to enroll 

for many reasons unrelated to the error. 

We realize that the definition of misrepresentation in 

these final regulations is a marked departure from the 

definition of “substantial misrepresentation” by the school 

51 81 FR 75947.
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in accordance with 34 CFR part 668, part F, that was part 

of the Federal standard in the 2016 final regulations.52 

The 2016 final regulations defined a misrepresentation as: 

“Any false, erroneous or misleading statement an eligible 

institution, one of its representatives, or any ineligible 

institution, organization, or person with whom the eligible 

institution has an agreement to provide educational 

programs, or to provide marketing, advertising, recruiting 

or admissions services makes directly or indirectly to a 

student, prospective student or any member of the public, 

or to an accrediting agency, to a State agency, or to the 

Secretary. A misleading statement includes any statement 

that has the likelihood or tendency to mislead under the 

circumstances. A statement is any communication made in 

writing, visually, orally, or through other means. 

Misrepresentation includes any statement that omits 

information in such a way as to make the statement false, 

erroneous, or misleading. Misrepresentation includes the 

52 34 CFR 685.222(d).
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dissemination of a student endorsement or testimonial that 

a student gives either under duress or because the 

institution required the student to make such an 

endorsement or testimonial to participate in a program.”53 

The 2016 final regulations define a “substantial 

misrepresentation” as “[a]ny misrepresentation on which the 

person to whom it was made could reasonably be expected to 

rely, or has reasonably relied, to that person’s 

detriment.”54 In the 2016 final regulations, the Department 

used the standard of “substantial misrepresentation,” which 

was interpreted to include negligent misrepresentations, to 

adjudicate both borrower defense to repayment claims and 

also any fine, limitation, suspension, or termination 

proceeding against the school to recover any liabilities as 

a result of the borrower defense to repayment claim. 

Unlike these final regulations, the Department’s 2016 

final regulations did not guarantee that the school would 

be allowed to respond to a borrower defense to repayment 

53 34 CFR 668.71(c). 54 Id. 
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claim. The Department’s 2016 final regulations provide 

that the Department may, but is not required to, consider a 

response or submission from the school.55 Under the 2016 

final regulations, the Department may adjudicate a borrower 

defense to repayment claim without any information from the 

school, grant that claim under the substantial 

misrepresentation, breach of contract, or judgment 

standards in the borrower’s proceeding, and proceed to 

initiate a separate proceeding against the school to 

recover the amount of any relief provided to the borrower. 

The Department now believes that using the same 

standard in two separate proceedings, one for the borrower 

to receive relief and the other for the Department to 

recover liabilities from the school, is inefficient and 

does not provide the robust due process protections that 

are best for the borrower, school, and the Federal 

taxpayer. Accordingly, as discussed elsewhere in these 

final regulations, the Department must provide the school 

with notice of a borrower defense to repayment claim and a 

meaningful opportunity to respond to such a claim. The 

55 34 CFR 685.222(e)(3).
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112 

borrower also will be able to file a reply limited in scope 

to the school’s response and any evidence otherwise in the 

possession of the Department that the Department considers. 

The Department believes a Federal standard with a 

different, more stringent definition of misrepresentation 

better guards the interests of all students, including an 

institution’s future tuition-paying students, an 

institution acting in good faith, and the Federal taxpayer 

who, in some cases, inevitably must pay for any negligent 

or innocent mistakes. The “substantial misrepresentation” 

standard in the 2016 final regulations behaves like a 

strict liability standard in torts that is, generally, 

reserved for abnormally dangerous activities where the 

activity at issue creates a foreseeable and highly 

significant risk of physical harm even when reasonable care 

is exercised by all actors.56 Although a “substantial 

misrepresentation” standard is appropriate for proceedings 

against schools in which the Department seeks to recover 

56 Restatement (Third) of Torts § 20 (2010).
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113 

liabilities, guard the Federal purse, and protect Federal 

taxpayers, such a low standard is not appropriate when the 

Department is forgiving loans and increasing the national 

debt to the detriment of Federal taxpayers.57 Student loan 

debt accounts for $1.5 trillion dollars of the national 

debt and is “now the second highest consumer debt category 

– behind only mortgage debt – and higher than both credit 

cards and auto loans.”58 Each time the Department 

discharges loans, the Department increases the national 

debt, especially if the Department is not able to recover 

the amount of discharged loans in a proceeding against the 

schools. 

We also believe that a less precise definition of 

misrepresentation would unnecessarily chill productive 

communication between institutions and prospective and 

current students. We do not want to create legal risks 

that dissuade schools from putting helpful and important 

57 See Federal Reserve, Consumer Credit Outstanding (Levels), available 

at 

https://www.federalreserve.gov/releases/g19/HIST/cc_hist_memo_levels.ht

ml. 58 Zack Freidman, Student Loan Debt Statistics in 2019: A $1.5 Trillion 

Crisis, FORBES, Feb. 25, 2019, available at

https://www.forbes.com/sites/zackfriedman/2019/02/25/student-loan-debtstatistics-2019/#7577f5f3133f 
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information in writing or allowing other students and 

faculty to share their opinions with prospective or current 

students. It could have a chilling effect on academic 

freedom and reduce the amount of information provided to 

students during academic and career counseling. We also 

believe it would be improper to subject an institution, and 

its current, past, and future students, to liability and 

reputational harm for innocent or inadvertent 

misstatements. 

Prospective students benefit when schools share more 

information, and more information naturally increases the 

risk that some of the information may be outdated or 

incorrect in some way. A student is entitled to honest 

dealing from the school, which means that a school must 

truthfully communicate when providing information. It does 

not mean, necessarily, that rapidly changing or purely 

subjective information must be perfectly free from error. 

Schools that provide a high-quality education may make 

innocent mistakes on highly complex or evolving issues. 

For example, if a school erroneously represented State 

licensure eligibility requirements for a particular 

profession because the school was unaware that the State 

amended its eligibility requirements just a few days before 
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the school made the representation, then the school did not 

act with knowledge that the representation was false. On 

the other hand, if the school continued to make such an 

erroneous representation after learning that the State 

amended the eligibility requirements, then the school acted 

with knowledge that the representation was false, which 

constitutes a misrepresentation under these final 

regulations. The Department recognizes that an institution 

may self-correct inadvertent misrepresentations through its 

various compliance programs and encourages institutions to 

do so. 

In determining whether a misrepresentation was made, 

the Department also may consider the context in which the 

misrepresentation is made. For example, demanding that the 

borrower make enrollment or loan-related decisions 

immediately, placing an unreasonable emphasis on 

unfavorable consequences of delay, discouraging the 

borrower from consulting an adviser, failing to respond to 

borrower’s requests for more information about the cost of 

the program and the nature of any financial aid, or 

unreasonably pressuring the borrower or taking advantage of 

the borrower’s distress or lack of knowledge or 

sophistication are circumstances that may indicate whether 
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the school had knowledge that its statement was false, 

misleading, or deceptive or was made with a reckless 

disregard for the truth. These examples of circumstances 

that may lead to a borrower’s reasonable reliance on a 

school’s misrepresentation standing alone, however, do not 

suffice to demonstrate that a misrepresentation occurred 

under these final regulations, just as they did not under 

the 2016 final regulations.59 

The Department disagrees that it is too difficult for 

borrowers to demonstrate that a misrepresentation occurred, 

as borrowers may easily provide the type of evidence, 

described in the 685.206(e)(3)(i)-(xi), to substantiate a 

misrepresentation. This list of evidence is nonexhaustive, as every type of evidence that could be used to 

prove a misrepresentation cannot be predicted. 

For example, borrowers may provide evidence that 

actual licensure passage rates, as communicated to them by 

their admissions counselor, are significantly different 

from those included in the institution’s marketing 

materials, website, or other communications made to the 

59 34 CFR § 685.222(d)(2)(i)-(v).
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student. The Department amended the description of 

evidence that constitutes a misrepresentation to clarify 

that actual institutional selectivity rates or rankings, 

student admission profiles, or institutional rankings that 

are significantly different from those provided by the 

institution to national ranking organizations may 

constitute evidence that a misrepresentation occurred, as 

borrowers may rely upon misrepresentations made by an 

institution to a national ranking organization. A borrower 

also may provide evidence of a representation, such as 

marketing materials or an institutional “fact sheet”, 

regarding the total, set amount of tuition and fees that 

they would be charged for the program that is significantly 

different in the amount, method, or timing of payment from 

the actual tuition and fees charged. Records about the 

amount, method, or timing of payment should be in the 

borrower’s possession, and the Department has further 

revised its amendatory language to clarify that a 

representation regarding the amount, method, or timing of 

payment 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 
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tuition and fees charged to the student may constitute 

evidence that a misrepresentation has occurred. 

In evaluating borrower defense claims, the Department 

understands that a borrower may not have saved relevant 

materials and records to substantiate his or her claim. 

The Department also may receive additional materials from 

the institution in its response to a borrower’s 

allegations. The Department may rely on records otherwise 

in the possession of the Secretary, such as recorded calls, 

as long as the Department provides both borrowers and 

institutions with an opportunity to review and respond to 

such records. The Department encourages borrowers to use 

the Department’s publicly available data as evidence to 

demonstrate a misrepresentation. The Department will make 

program-level outcome data available to institutions and 

students through Federal administrative datasets, and these 

data tools may help students satisfy this standard in a 

manner not previously possible. For example, a borrower 

may use information in the expanded College Scorecard, 

which will include program-level outcomes data, to 

demonstrate that an institution, in providing significantly 

different information than the information in the expanded 

College Scorecard, committed a misrepresentation with 
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knowledge of its falsity or reckless disregard for the 

truth. 

However, if changing economic conditions result in 

future students facing markedly diminished job 

opportunities or earnings, the institution would not have 

made a misrepresentation unless the data reported for 

earlier graduates met the definition of misrepresentation. 

Another area where an alleged misrepresentation may 

not actually meet the standard of a misrepresentation is 

job placement rate reporting. Since at least 2011, the 

Department had evidence that job placement rate 

determinations are highly subjective and unreliable.60 On 

March 1-2, 2011, RTI International, contractor for the 

Integrated Postsecondary Education Data System (IPEDS), 

convened a meeting of the IPEDS Technical Review Panel 

(TRP) to develop a single, valid, and reliable definition 

of job placement determined that while calculating job 

placement rates using a common metric would be preferable, 

doing so was not possible without further study, given that 

60 Report and Suggestions from IPEDS Technical review Panel #34 

Calculating Job Placement Rates, available at

https://edsurveys.rti.org/IPEDS_TRP_DOCS/prod/documents/TRP34_Final_Act

ion.pdf . The TRP does not report to or advise the Department of 

Education.
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States and accreditors use many different definitions to 

define in-field job placements and identify the student 

measurement cohort for calculating rates. In the absence 

of a common methodology, the TRP recommended institutions 

disclose the methodology associated with the job placement 

rate reported to their accreditor or relevant state agency 

but advised against posting institutional job placement 

rates on College Navigator. 

For the reasons stated above, the Department 

encourages accreditors and States to adopt the use of 

program-level College Scorecard data to ensure that all 

students have access to earnings data that more accurately 

and consistently – regardless of accreditor or State – 

capture program outcomes and resolve the many challenges 

associated with more traditional job placement rate 

determinations. This change in practice, alone, will 

likely reduce the potential for misrepresentations related 

to job placement rate claims. Such a practice also will 

enable students to provide evidence of misrepresentation 

because the institution’s representations may easily be 

compared to College Scorecard data. 

As in the 2016 final regulations, these final 

regulations do not require that a defense to repayment be 
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121 

approved only when evidence demonstrates that a school made 

a misrepresentation with the intent to induce the reliance 

of the borrower on the misrepresentation.61 The Department 

agrees with negotiators and commenters that it is unlikely 

that a borrower would have evidence – particularly clear 

and convincing evidence, as proposed in the 2018 NPRM - to 

demonstrate that an institution acted with intent to 

deceive. The final regulations provide that a defense to 

repayment application will be granted when a preponderance 

of the evidence shows that an institution at which the 

borrower enrolled made a representation with knowledge that 

the representation was false, or with reckless disregard 

for the truth. Accordingly, a borrower is not required to 

provide evidence that an institution acted with intent to 

deceive or with intent to induce reliance. The borrower 

must prove by a preponderance of the evidence that the 

institution’s act or omission was made with knowledge of 

its false, misleading, or deceptive nature or with a 

reckless disregard for the truth. 

61 83 FR at 37,257.
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We recognize that misrepresentations can be made 

verbally. It can be difficult to determine whether a 

representative of an institution made a verbal 

misrepresentation to a borrower several years after the 

fact. While the Department will consider borrower defense 

claims in which the only evidence is the claim by the 

borrower that an institution’s representative said 

something years prior, these necessarily are difficult 

claims to adjudicate. They also carry an inherent risk of 

abuse. We thus encourage borrowers to obtain and preserve 

written documentation of any information — including 

records of communications, marketing materials, and other 

writings – that they receive from a school that they rely 

upon when making decisions about their education. As a 

general rule, it is best for students to make these 

important decisions based upon written representations and 

documentation from the institution. 

Like the 2016 final regulations, the Department’s 

proposed misrepresentation standard covers omissions. The 

Department believes that an omission of information that 

makes a statement false, misleading, or deceptive can cause 

injury to borrowers and can serve as the basis for a 

defense to repayment. For example, providing school-
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specific information about the employment rate or specific 

earnings of graduates in a particular field without 

disclosing employment and earnings statistics compiled for 

that field by a Federal agency could constitute a 

misrepresentation under § 685.206(e)(3)(vi). Failing to 

disclose state or regional data, when available, also 

could constitute a misrepresentation as reflected by the 

new example provided in revised § 658.206(c)(3)(vi).62 . 

These revisions help clarify what the Department may 

consider an omission with respect to the definition of 

misrepresentation. 

As described in other sections of this Preamble, we 

have structured these final regulations to provide an 

equitable process for borrowers and institutions. The 

borrower and institution may review and respond to each 

other’s submissions. The process created by these final 

regulations will assist the Department in making fair and 

62 Note: As explained in the next section, below, the Department also 

revised § 685.206(e)(3)(vi) to include a parenthetical that 

institutions using national data should include a written, plain 

language disclaimer that national averages may not accurately reflect 

the earnings of workers in particular parts of the country and may 

include earners at all stages of their career and not just entry level 

wages for graduates.
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accurate decisions, while providing borrowers and schools 

with due process protections. 

The Department believes the definition of “substantial 

misrepresentation,” at § 668.71(c), is insufficient to 

address the various concerns and interests that commenters 

describe. As explained above, punishing an institution for 

an inadvertent mistake does not appropriately balance the 

Department’s obligations to current and future students or 

taxpayers. The Department, however, will not require a 

borrower to demonstrate that the institution acted with 

specific intent to deceive. The borrower must only 

demonstrate that the institution’s act or omission was made 

with knowledge of its false, misleading, or deceptive 

nature or with a reckless disregard for the truth. 

Additionally, the Department maintains the evidentiary 

standard of preponderance of the evidence from the 2016 

final regulations for borrower defense to repayment 

applications. This lower evidentiary standard 

appropriately addresses concerns about the borrower’s 

ability to demonstrate a misrepresentation occurred. 

One commenter’s assertion that the Department assumes 

five percent of misrepresentations are not committed with 

intent, knowledge, or reckless disregard is wrong. In the 
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2018 NPRM, the Department’s Regulatory Impact Analysis 

provided: “By itself, the proposed Federal standard is not 

expected to significantly change the percent of loan volume 

subject to conduct that might give rise to a borrower 

defense to repayment claim. The conduct percent is assumed 

to be 95 percent of the [President’s Budget] 2019 baseline 

level.”63 The commenter appears to have assumed that the 

conduct percent is tied to the specific requirement that an 

act or omission be made with knowledge of its false, 

misleading, or deceptive nature or with a reckless 

disregard for the truth. As mentioned in the Net Budget 

Impacts section of the RIA, the distinction between the 

borrower percent and the conduct percent is somewhat 

blurred. The change the commenter points out is more 

reflected in the borrower percent as part of the ability 

of the borrower to prove elements of their case. Given 

that the two rates are multiplied in developing the 

estimates, we believe that the impacts of the regulation 

are captured appropriately. 

63 83 FR at 37299.
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126 

The commenter’s misunderstanding of the Department’s 

Regulatory Impact Analysis informed the commenter’s 

conclusion that the definition of misrepresentation 

substantially burdens borrowers without distinguishing 

among the types of misrepresentations borrowers may have 

experienced. The commenter does not provide any data to 

support this conclusion, and the Department’s RIA does not 

establish this conclusion. Contrary to the commenter’s 

assertions, the Department’s definition of 

misrepresentation distinguishes among the different types 

of misrepresentations borrowers may have experienced. For 

example, the misrepresentation may be by act or omission. 

The school may have made the misrepresentation with 

knowledge of its false, misleading, or deceptive nature or 

with reckless disregard for the truth. 

The Department declines to adopt the UDAP standard 

suggested by commenters. Both the FTC and CFPB investigate 

consumer complaints that are not necessarily similar to 

borrower defense to repayment claims. The Department is 

not bound by FTC and CFPB standards and chooses not to 

adopt them. 

Additionally, the Department plays a role as a 

gatekeeper of taxpayer dollars regarding loan forgiveness – 
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a role not shared by the FTC or CFPB. The Department is 

unique in that it is responsible for both distributing and 

discharging loans. The FTC and CFPB do not lend money, 

like the Department does, and therefore those agencies are 

not responsible for protecting assets in the same manner as 

the Department is. 

We disagree that the Federal standard, including the 

definition of misrepresentation, should include UDAP 

violations to ensure that borrowers are protected. As we 

explained in the 2016 final regulations, we considered the 

available precedent and determined that it is unclear how 

such principles would apply in the borrower defense context 

as stand-alone standards.64 Such unfair and deceptive 

practices are often alleged in combination with 

misrepresentations and are not often addressed on their own 

by the courts. With this lack of guidance, it is unclear 

how such principles would apply in the borrower defense 

context. We would like to avoid for all parties the burden 

of interpreting other Federal agencies’ and States’ 

64 81 FR 75939-75940.
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authorities in the borrower defense context. As a result, 

we decline to adopt a standard for relief based on UDAP. 

Changes: The Department adopts, with some changes, 

the definition of misrepresentation in the 2018 NPRM for § 

685.206(e)(3). As previously noted, the Department adopts 

the Federal standard in Alternative B in the 2018 NPRM and 

makes revisions to align the Federal standard with the 

definition of misrepresentation, such as removing the 

phrase “an intent to deceive” the phrase “making of a 

Direct Loan, or a loan repaid by a Direct Consolidation 

Loan” from § 685.206(e)(2). 
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Additionally, the Department revised the regulations to 

clarify that the list of evidence of misrepresentation in § 

685.206(e)(3) is a non-exhaustive list. The Department 

further amended the description of evidence that a 

misrepresentation may have occurred to clarify that actual 

institutional selectivity rates or rankings, student 

admission profiles, or institutional rankings that are 

materially different from those provided by the institution 

to national ranking organizations may evidence a 

misrepresentation. The Department also revised its 

amendatory language to clarify that a representation 

regarding the amount, method, or timing of payment 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 evidences a misrepresentation in these final 

regulations. The Department revised the example of 

misrepresentation under § 685.206(e)(3)(vi) to include the 

failure to disclose appropriate State or regional data in 

addition to national data for earnings in the same field as 

provided by an appropriate Federal agency. 
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The Department revised the Federal standard to require 

a borrower to demonstrate a misrepresentation of a material 

fact and not a misrepresentation of a material opinion, 

intention, or law. 

Determination of Misrepresentation 

Comments: One commenter suggested that the borrower 

should still be eligible for a defense to repayment 

discharge when the misrepresentation was made by an 

employee acting without the school’s knowledge or against 

the school’s direction. The commenter notes that if a 

borrower was harmed by the school’s employee or agent, then 

the school, not the borrower, should be responsible for the 

harm caused. 

Several commenters sought determinations as to whether 

specific examples of statements or omissions would 

constitute misrepresentation under the proposed definition. 

These examples include: a failure to inform a student that 

the school may close prior to that final decision being 

made; a failure to disclose that a regulator has taken an 

adverse action against the school while the matter is on 

appeal and not final; a school makes a mistake without 

willful intent; an employee of the school provides 
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inaccurate or unclear information that can be tied to a 

deficit in training or performance; changes that occur to 

the information originally provided to the borrower, 

through no fault of the school; if State or Federal 

governments make dramatic budgetary reductions in financial 

aid that result in a reduction of aid promised to a 

borrower; incorrect information regarding what financial 

aid is available; changes in costs after a student enrolls; 

incorrect information regarding the cost of attending the 

school; differences in reporting to adhere to State, 

Federal, accrediting agency, and licensing board 

requirements; Nursing National Council Licensure 

Examination (NCLEX) passage rates; clinical facility sites 

utilized during nursing school; institutions stating that a 

borrower can make the national average of earnings in a 

particular field, even if that average exceeds those of 

program graduates; typographical errors in marketing 

materials produced internally or by outside entities; and 

falsified data provided to an institutional ranking 

organization in order to inflate the school’s rankings. 

One commenter asked whether students at specific 

institutions would be covered under this regulation, had 
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this standard been in place and given the evidence now 

available to the Department. 

Other commenters sought clarification on what 

constitutes a deceptive practice or act or omission on the 

part of a school and requested guidance from the Department 

regarding what policies to put in place to ensure schools 

are not misleading students in any way. These commenters 

also would like to know how compliance with these policies 

may be enforced. 

Some commenters objected to the inclusion within the 

specific examples of statements or omissions that would 

constitute a misrepresentation under the proposed 

definition of “availability, amount, or nature of financial 

assistance.” These commenters note that the volatility of 

financial aid awards is more often attributable to a change 

in the student’s eligibility, rather than an independent 

determination by the school. 

Another commenter objected to the inclusion within the 

specific examples of statements or omissions that would 

constitute a misrepresentation under the proposed 

definition of “[a] representation regarding the 

employability or specific earnings of graduates without an 

agreement between the school and another entity for such 
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employment or specific evidence of past employment earnings 

to justify such a representation or without citing 

appropriate national data for earnings in the same field as 

provided by an appropriate Federal agency that provides 

such data.” 

The commenter cites research that found that earnings 

from the Bureau of Labor Statistics exceed the actual 

earnings of program graduates in gainful employment (GE) 

programs in 96 percent of programs analyzed, including in 

almost every one of the top 10 most common GE occupations, 

even for the program graduates with the highest earnings. 

Discussion: A borrower may successfully allege a 

defense to repayment based on a misrepresentation by a 

school’s employee who acts without the school’s knowledge 

or against the school’s direction as long as the borrower 

demonstrates they reasonably relied on the 

misrepresentation under the circumstances and that the 

employee acted with reckless disregard for the truth. The 

Department will not fault a borrower for failing to 

recognize that the employee is acting without the school’s 

knowledge or against the school’s direction, unless the 

circumstances clearly indicate the employee is not 
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authorized to make the alleged representations on behalf of 

the school. These circumstances will help to determine 

whether the borrower reasonably relied on the 

misrepresentation of material fact, as required by the 

Federal standard in § 685.206(e)(2)(i). 

For example, if an employee in the school’s cafeteria 

who serves food made a misrepresentation about the 

availability, amount, or nature of financial assistance 

available to a particular student, that student should 

reasonably recognize the employee is not authorized to make 

such representations. The Department will take into 

consideration whether the school’s employee is authorized 

to act on behalf of the school in determining whether to 

recover funds from the school. 

To address some of the commenter’s concerns, the 

Department is revising § 685.206(e)(3)(vii) to clarify that 

a misrepresentation may constitute 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 materially different 

in availability, amount, or nature from the actual 

financial assistance available to the borrower from the 
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135 

institution or any other entity to pay the costs of 

attendance at the institution after enrollment.” The 

Department recognizes that a student’s eligibility for 

financial assistance may change and will examine the 

school’s representation in light of the student’s 

eligibility at the time the school made the representation 

regarding the availability, amount, or nature of any 

financial assistance available to the student. The 

school’s representation must be materially different in 

availability, amount, or nature from the actual financial 

assistance available to the borrower in order to constitute 

a misrepresentation. 

Additionally, the Department revised the proposed 

definition of the terms “school” and “institution” to align 

more closely with the persons or entities who may make a 

misrepresentation in 34 CFR § 668.71. Accordingly, these 

final regulations expressly define a school or institution 

to “include an eligible institution, one of its 

representatives, or any ineligible institution, 

organization, or person with whom the eligible institution 

has an agreement to provide educational programs, or to 

provide marketing, advertising, recruiting or admissions 
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136 

services.”65 This definition captures the Department’s 

interpretation of the 2016 final regulations, as the 

preamble to the 2016 final regulations indicates that 

schools may be held liable for their employees’ 

representations.66

The Department agrees that it can be difficult to 

differentiate between an institution that misrepresents the 

truth to students as a matter of policy and an individual 

employee who violates the institution’s policies to make 

the misrepresentation. To determine whether an institution 

acted with reckless disregard for the truth, the Department 

may consider the controls that an institution had in place 

to prevent or detect any misrepresentations. For this 

reason, it is important that the final regulations provide 

an opportunity for an institution to contribute to the 

record. An opportunity to respond in a proceeding is a 

well-established principle of due process. The Department 

will determine whether a misrepresentation occurred based 

on information from both the borrower and the school. 

65 34 CFR § 685.206(e)(iv). 66 81 FR 75952.
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We understand the commenters’ interest in further 

clarification as to whether specific circumstances may 

constitute a misrepresentation. However, we do not believe 

it is possible or appropriate to provide an exhaustive list 

of examples or a hypothetical discussion of the analytical 

process the Department will undertake to ascertain whether 

a specific borrower’s claim meets the requirements of 

misrepresentation. The determination of whether a school 

made a misrepresentation that could be the basis for a 

borrower defense claim will be made based on the specific 

facts and circumstances of each borrower defense to 

repayment application. The Department will carefully 

examine the facts presented in each application and cannot 

anticipate the unique facts of each application. 

In response to the commenter’s request for more 

clarity regarding the circumstances that may constitute a 

misrepresentation, the Department made a minor revision to 

§ 685.206(e)(3)(ix). In § 685.206(e)(3)(ix), the 

Department added that a representation that the 

institution, its courses, or programs are endorsed by 

“Federal or State agencies” may constitute a 

misrepresentation if the institution has no permission or 

is not otherwise authorized to make or use such an 
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138 

endorsement. Institutions should not represent that their 

courses or programs are endorsed by Federal or State 

agencies, if these agencies have not endorsed them. 

In § 685.206(e)(3)(x), the Department states that a 

representation regarding the location of an institution 

that is materially different from the institution’s actual 

location at the time of the representation could constitute 

a misrepresentation for borrower defense purposes. The 

Department does not intend for this specific provision to 

apply to institutions that relocate to a new location after 

a student enrolls to comply with the new FASB standards or 

after an institution’s lease runs out and is not 

subsequently renewed. Under the Department’s definition of 

misrepresentation, an institution’s representation about 

its location must be accurate at the time when the 

representation is made. If the institution makes a 

representation about its location and later changes its 

location, then the institution should accurately represent 

its change in location. We expect the implementation of 

the new FASB standards will increase the number of 

institutions that relocate, which should not be permitted 

to result in an increase in the number of borrower defense 

claims based upon misrepresentations about the school’s 
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139 

location as long as the school’s representation about its 

location is accurate at the time when the representation is 

made. Subject to additional material facts and 

circumstances, an institution that moves to a slightly 

different location, with comparable facilities and 

equipment, which does not create an overly burdensome 

commute, will not be viewed by the Department as having 

committed a misrepresentation. 

The Department acknowledges that allegations against 

the specific institutions that the commenters referenced 

are well-known. The discharge applications submitted by 

students who attended those schools are being evaluated 

under the pre-2016 regulations. It is not appropriate to 

speculate how those cases would be decided using a 

different standard, a different process, and different 

evidence. The Department does not comment on claims or 

matters that are pending. 

The Department’s regulations provide a non-exhaustive 

list of evidence that a borrower may use to demonstrate 

that a misrepresentation occurred. Institutions may 

develop internal controls and compliance policies based on 

this non-exhaustive list. Institutions are well positioned 

to determine how to ensure compliance with institutional 
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policies promulgated to prevent and prohibit 

misrepresentations to students. In these policies, 

institutions may describe the consequences, including 

disciplinary measures, that employees face if they make a 

misrepresentation. 

The Department will not determine that a school made a 

misrepresentation if a student’s eligibility for financial 

aid changed as a result of changes in Federal programs or a 

student’s eligibility for aid. The Department, however, is 

concerned that many institutions engage in strategic 

dissemination of institutional aid where they provide 

significant first year aid to attract a student to the 

institution, but do not continue that level of support 

throughout the program even when the student meets the 

requirements for receiving that level of support. Conduct 

such as this could constitute a misrepresentation, 

depending on the details of the situation. 

Similarly, the Department will not determine that an 

institution made a misrepresentation for complying with 

differing requirements of accreditors or States to report 

multiple job placement rates for a single program, if a 

student, through no fault of the institution, 

misunderstands which of those placement rates more 
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141 

accurately reflects his or her likely outcomes. If the 

institution uses data that is required by accreditors or 

States in its own publications and materials, the 

Department encourages institutions to provide context for a 

student to understand the relevance of the job placement 

rate or other data required by accreditors or States. For 

example, institutions with an Office of Postsecondary 

Education Identification Number (OPE ID) may report job 

placement rates that include many campuses across the 

country. 

As a result, these institutions may be required to 

report a rate that is not intended to represent earnings 

for students who live in parts of the country where wages 

are lower than average or higher than average. The use of 

OPE IDs to report outcomes also may cause an institution to 

appear to be located in one part of the country, even 

though the campus that a student attends may be at an 

additional location in another part of the country where 

prevailing wages differ. Similarly, accreditors and States 

may define measurement cohorts differently and may have 

different standards for what constitutes an in-field job 

placement. Accordingly, an institution may report data 

accurately based on the various definitions they are 
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142 

required to use, and a student may not understand how to 

interpret this data. As long as the institution does not 

use that data in a manner to knowingly mislead or deceive 

students or with reckless disregard for the truth, the 

Department will not consider the use of such data to 

constitute a misrepresentation. 

An institution, however, that makes claims about 

guaranteed employment or guaranteed earnings to borrowers 

should maintain evidence to support those guarantees. An 

institution could be considered to have made a 

misrepresentation if evidence of such guarantees do not 

actually exist or do not apply to all students to whom the 

guarantee is made. 

We appreciate the commenters’ concern regarding 

discrepancies between BLS and GE earnings data. To 

clarify, it is important to remember that GE rates, as 

previously calculated, were based upon earnings measured 

only a few years after a title IV participating student 

graduates, while BLS measures earnings of everyone in an 

occupation, including those who have years of experience 

and expertise. 

Thus, BLS data may more accurately represent longterm, occupational earning potential rather than the 
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expected earnings of an institution’s program graduates 

within two or three years of graduation. Until an expanded 

College Scorecard provides institutions with median 

program-level earnings, BLS data is the most reliable 

source of Federal wage data available to help students 

understand earnings for particular occupations. BLS data is 

helpful because a student is generally interested in 

earnings over the course of a career, and not just a few 

years after completion of the program. 

To address the concerns of commenters that a borrower 

may misunderstand the national data, the Department also 

revised § 685.206(e)(3)(vi) to include a parenthetical that 

institutions using should include a written, plain language 

disclaimer that national averages may not accurately 

reflect the earnings of workers in particular parts of the 

country and may include earners at all stages of their 

career and not just entry level wages for graduates. Such 

a disclaimer places the national data that an institution 

may use in context and will help the borrower understand 

that the national data does not guarantee a specific level 

of income. Such a disclaimer also will help the borrower 

understand that the national data may not be representative 
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of what a student will make in the early years of their 

career or in a particular part of the country. 

Changes: The Department is revising 34 CFR 

685.206(e)(3)(vi), which provides examples of 

misrepresentation, to include a parenthetical that 

instructs institutions to include a written, plain language 

disclaimer that national averages may not accurately 

reflect the earnings of workers in particular parts of the 

country and may include earners at all stages of their 

career and not just entry level wages for recent graduates. 

The Department revised the example of a 

misrepresentation in 685.206(e)(3)(vi) regarding the 

availability, amount, or nature of the financial assistance 

available to students to expressly state that the 

representation regarding such financial assistance must be 

materially different from the actual financial assistance 

available to the borrower. 

In § 685.206(e)(3)(ix), the Department added that a 

representation that the institution, its courses, or 

programs are endorsed by “Federal or State agencies” may 

constitute a misrepresentation if the institution has no 

permission or is not otherwise authorized to make or use 

such an endorsement. 
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The Department also revised the proposed definition of 

the terms “school” and “institution” to align more closely 

with the persons or entities who may make a 

misrepresentation in 34 CFR § 668.71. 

BORROWER DEFENSES – JUDGMENTS AND BREACH OF CONTRACT 

Comments: A number of commenters supported the 

Department’s proposal to use State judgments, breaches of 

contract, and/or other third-party information in its 

evaluation of, but not as an automatic approval for, 

borrower defense claims.

Several commenters urged the Department to view 

breaches of contract and prior judgments as additional 

bases for a borrower defense claim. One commenter noted 

that if colleges were in violation of other laws, 

recognizing such claims would provide relief to wronged 

borrowers and failure to recognize these types of claims 

limits a borrower’s opportunity to obtain relief. 

One commenter noted that although the preamble 

clarifies that breaches of contracts or judgments may be 

considered as evidence of a misrepresentation, this 

position should be explicitly stated in the text of the 

regulation. 
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146 

One commenter suggested that the Department modify the 

rule to require the Department to review any State 

judgments for relevant information before requiring 

additional documentation from the borrower, and that if a 

State judgment satisfies the Federal standard and the 

school was provided an opportunity to present its evidence, 

the borrower’s claim should be accepted and proceed to the 

harm stage. Another commenter noted that under the 

Department’s proposal, a person who has been determined to 

be a victim through a robust judicial process at the State 

level is denied relief. A different commenter indicated 

that individual borrowers should not be required to 

identify illegal conduct at schools but should be able to 

rely on State court determinations. 

One commenter indicated that the Department should not 

eliminate breach of contract as a basis for a claim merely 

because the Department did not find a sufficient number of 

borrowers asserting those rights in the past as the next 

crisis may not look like the last one. 

Another commenter indicated that the final language 

should clarify whether a breach of contract can serve as 

the basis for a claim if it related directly to the 

educational services provided by the school. 
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Discussion: The Department appreciates the commenters’ 

support for our proposed regulations. 

Unlike the 2016 final regulations, the Federal 

standard in these final regulations does not include a 

breach of contract as a basis for a borrower defense to 

repayment claim. The 2016 final regulations provide that a 

borrower may assert a borrower defense to repayment, “if 

the school the borrower received the Direct Loan to attend 

failed to perform its obligations under the terms of a 

contract with the student.”67 The Department, however, did 

not identify the elements of a breach of contract and did 

not define what may constitute a contract between the 

school and the borrower. The Department noted in the 2016 

NPRM that “a contract between the school and a borrower may 

include an enrollment agreement and any school catalogs, 

bulletins, circulars, student handbooks, or school 

regulations” and cited to two Federal cases, one of which 

67 34 CFR § 685.222(c).
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148 

is unpublished.68 The Department further provided in the 

preamble of the 2016 final regulations that “it is unable 

to draw a bright line on what materials would be included 

as part of a contract because that determination is 

necessarily a fact-intensive determination best made on a 

case-by-case determination.”69 The Department declined to 

adopt a materiality element with respect to a breach of 

contract and did not define the circumstances in which an 

immaterial breach may satisfy the Federal standard.70 

Finally, the Department did not tie the breach of contract 

basis of the Federal standard to State law. 

We continue to acknowledge that a breach of contract 

may depend on the unique facts of a claim, but are 

concerned that both borrowers and institutions will not 

know how the Department determines what constitutes a 

contract or a breach of contract with respect to borrower 

defense to repayment claims. The Department does not 

publish its decisions with respect to an individual 

borrower’s claims and, thus, the public will not be able to 

68 81 FR 39,341 (citing Ross v. Creighton University, 957 F.2d 410 (7th 

Cir. 1992) and Vurimindi, 435 F. App’x at 133 (quoting Ross)). 69 81 FR 75944. 70 Id.
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know or understand the facts or circumstances the 

Department considers in accepting a breach of contract 

claim that satisfies the Federal standard. 

We also are concerned that the lack of clarity with 

respect to breach of contract as a basis for a borrower 

defense to repayment claim will lead to uncertainty and 

confusion among schools and borrowers in different states 

because the breach of contract basis in the 2016 Federal 

standard is not tied to or based on State law. For 

example, contrary to the Federal case law cited in the 

preamble of the 2016 final regulations, the Supreme Court 

of Virginia expressly held that statements in an 

institution’s “letters of offers of admission from the 

College's Admissions Committee; correspondence, including 

e-mail, among the College's representatives and the 

students; and the College's [] Academic Catalog” did not 

constitute a contract between the school and its students.71 

71 Dodge v. Trustees of Randolph-Macon College Woman’s College, 661 

S.E.2d 801, 802–03 (Va. 2008).
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These materials contained representations that a female 

liberal arts college, which had provided an education to 

women only for over 100 years, would remain single-sex.72 

The school’s catalog even expressly stated: The school 

“offers an education fully and completely directed toward 

women. In a time of increasing opportunities for women, it 

is essential that the undergraduate years help the student 

build confidence, establish identity, and explore 

opportunities for careers and for service to the society 

that awaits her.”73 

The Supreme Court of Virginia ruled that these 

representations did not constitute a contract and, thus, 

admitting male students could not constitute a breach of 

contract claim.74 Under the 2016 final regulations, it is 

not clear whether such representations in a school’s 

catalog or other materials may constitute a breach of 

contract in satisfaction of the Federal standard if the 

school then began to admit male students subsequent to the 

claimant’s enrollment, as the breach need not be material 

72 Id. 73 Id. at 802. 74 Id. at 803-04.
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in nature. Breach of contract laws vary among States, and 

the breach of contract standard in the 2016 final 

regulations may be in contravention of some breach of 

contract laws such as the breach of contract laws in 

Virginia. In promulgating the 2016 final regulations, the 

Department expressly anticipated that guidance may 

eventually be necessary to further define breach of 

contract.75 The Department does not wish to maintain a 

borrower defense regime that increases uncertainty as to 

what constitutes a contract and how that contract may be 

breached. Instead of maintaining a Federal standard that 

requires more clarification through guidance, the 

Department has decided to provide more certainty and 

clarity through regulations that provide a different 

Federal standard. 

Unlike the Federal standard in the 2016 final 

regulations, the Federal standard in these final 

regulations requires a misrepresentation of material fact 

upon which the borrower reasonably relied in deciding to 

75 81 FR 75,994.
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obtain a loan. The requirements of materiality and 

reasonable reliance provide more certainty and clarity. A 

breach of contract claim, unlike a claim of fraud or 

material misrepresentation, does not necessarily require 

any reliance by the borrower.76 If the borrower does not 

rely on a school’s promise to perform a contractual 

obligation, the borrower may not have suffered harm as a 

result of the school’s breach of contract. 

For example, if the school represents in its catalog 

that it will publish the number of robberies in a specific 

geographic area in a crime log but fails to do so, the 

school may have failed to perform its obligation. Assuming 

arguendo that this failure constitutes a breach of contract 

claim, such a breach likely will not affect the benefit the 

student receives from the education. Such a breach also 

likely is not material in nature. A Federal standard that 

requires a material misrepresentation and reliance by a 

borrower provides a more accurate gauge for any harm the 

student may have suffered. A more accurate gauge of harm 

to the student will enable the Department to more easily 

76 Compare Restatement (First) of Contracts § 312 (2018) with

Restatement (First) of Contracts §§ 470–471.
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determine the amount of relief to provide in a successful 

borrower defense to repayment claim. 

The Department is not eliminating breach of contract 

as the basis for a claim merely because the Department did 

not find a sufficient number of claims. The Department 

believes that a breach of contract that directly and 

clearly relates to enrollment or continuing enrollment or 

the provision of educational services may be used as 

evidence in support of a borrower defense to repayment 

claim. Standing alone, however, a breach of contract, will 

not be sufficient to satisfy the Federal standard. 

Similarly, the Department acknowledges that if a 

borrower has obtained a non-default, favorable contested 

judgment against the school based on State or Federal law 

in a court or administrative tribunal of competent 

jurisdiction, then there may circumstances when the 

borrower may use such a judgment as evidence to satisfy the 

Federal standard in these final regulations. 

For example, where a borrower obtains a judgment 

against a school for statements it made to the borrower 

about licensure passage rates for a program in which the 

borrower enrolled, and court found that the school knew the 

statement to be false and that the borrower suffered 
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financial harm, the borrower may use the judgment as 

evidence in support of his or her application to seek a 

discharge of a Direct Loan or a loan repaid by a Direct 

Consolidation Loan. These regulations do not prohibit a 

borrower from pursuing relief from courts or administrative 

tribunals. For example, settlements negotiated by States 

have included elimination of private loans, reimbursement 

of cash payments, and repayment of outstanding Federal loan 

debt. However, the defense to repayment provision limits 

relief to Federal student loan repayment obligations and 

does nothing to assist students who used cash, college 

savings plans, or other forms of credit to pay tuition. 

Unlike the 2016 final regulations, a judgment, 

standing alone, will not necessarily automatically satisfy 

the Federal standard. If the borrower has obtained a 

judgment against a school, then the court or administrative 

tribunal very likely provided an adequate remedy to the 

borrower as part of the judgment. Accordingly, the 

Department may not be able to offer any additional relief. 

Even if the Department may offer further relief, the 

Federal standard should not include an inherent assumption 

that the relief provided by the court or administrative 

tribunal was insufficient. Accepting judgments as evidence 
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in support of borrower defense claims allows for the 

Department to undertake the necessary analysis to determine 

whether additional relief is warranted, but including such 

judgements as an automatic basis to qualify for relief 

presumes more than what is appropriate in all cases. We 

should not supplant the judicial system by granting relief 

that a court or administrative tribunal did not deem 

necessary. 

The Department chose not to use a State law standard 

in the 2016 final regulations because a State law standard 

may result in inequities among borrowers who qualify for 

relief. If one State’s laws are more generous than those 

in another State, then two equally situated borrowers may 

obtain very different results in their respective State 

courts. If a judgment based on State law automatically 

qualifies a borrower for a borrower defense to repayment, 

then inequities among borrowers will perpetually continue. 

Accordingly, the Department has determined that a judgment 

against the school, alone, should not constitute the 

Federal standard. 

In order to ensure that both borrowers and 

institutions have due process rights, these final 

regulations add new steps to the borrower defense to 
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repayment adjudication process that provides both with an 

opportunity to provide evidence and respond to evidence 

provided by the other party. Therefore, automatic relief 

under any circumstance would be inappropriate, especially 

since the circumstances that resulted in a breach of 

contract may or may not meet the Federal standard for 

misrepresentation. As such, while a judgment or breach of 

contract related to enrollment or the provision of 

educational services may serve as compelling evidence to 

support a borrower’s borrower defense to repayment claim, 

the Department cannot award automatic borrower defense 

relief since that would eliminate the opportunity for the 

institution to respond to the borrower’s claim with the 

Department. The Department sufficiently explained in this 

Preamble that a judgment and/or a breach of contract may be 

used as evidence in support of a borrower defense to 

repayment claim. Changing the amendatory language to this 

effect is not necessary and may mislead or confuse 

borrowers by implying that a judgment or breach of contract 

may independently and automatically satisfy the Federal 

standard. The Federal standard in these final regulations 

marks a departure from the Federal standard in the 2016 

final regulations with respect to a judgment or breach of 
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157 

contract, and the Department does not wish to cause 

confusion.

Changes: None. 

BORROWER DEFENSES – PROVISION OF EDUCATIONAL SERVICES 

AND RELATIONSHIP WITH THE LOAN 

Comments: Some commenters supported the Department’s 

proposal to exclude defense to repayment claims that are 

not directly related to the provision of educational 

services. Some commenters also supported the definition 

the Department proposed for the provision of educational 

services. 

Other commenters argued that the limitation of the 

provision of educational services to a borrower’s program 

of study was inappropriately narrow. These commenters 

suggested that the borrower’s claim should apply to all 

Federal student loans, regardless of how the funds were 

spent, and to the school’s pre- and post-enrollment 

activities. One commenter also stated that the provision of 

educational services is too narrowly defined, because 

schools may have made promises about the quality of the 

education that fall outside of the specific requirements of 

accreditors or State agencies, but that may significantly 

affect the borrower’s educational experience. This 
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commenter also asserted that the Department failed to 

adequately justify its decision to limit the provision of 

educational services only to those related to the 

borrower’s program of study. 

Another commenter objected to the definition limiting 

misrepresentation to circumstances where the school had 

withheld something “necessary for the completion” of the 

program, as that would leave too much room for abuse by 

schools. 

One commenter found it needlessly inimical to require 

that a misrepresentation relate to a borrower’s program of 

study for the borrower to make a defense to repayment 

claim. The commenter argued that the value of a degree 

rests in large part on the reputation of the school and, if 

that reputation is tarnished or destroyed, the value of the 

degree is as well. 

A group of commenters asked what “educational 

resources” means. Additionally, they noted that 

accrediting agencies, State licensing agencies, or 

authorizing agencies may require schools to maintain 

certain licensure passage or job placement rates in their 

programs, but there are not “requirements for the 

completion of the student’s educational program.” These 
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commenters inquired whether the definition of provision of 

educational services excludes borrower defenses on the 

basis of misrepresentations about job placement and exam 

passage rates. These commenters further inquired whether a 

particular attribute or representation regarding 

transferability of credits constitutes a “requirement for 

the completion of the student’s educational program.” 

These commenters noted that only subparagraph (J) of 

proposed § 685.206(d)(5)(iv), in the 2018 NPRM, refers to 

“educational resources” and inquired whether subparagraph 

(J) is the only provision that may serve as the basis of a 

misrepresentation regarding the provision of educational 

services. 

Discussion: We thank the commenters for their support 

of the proposed regulations pertaining to the provision of 

educational services. 

As noted in the NPRM, the Department included a 

definition of “provision of educational services” at the 

request of some of the non-Federal negotiators. The 

Department acknowledged that there are well-developed 

bodies of State law that explain this term, and each State 

may define this term differently. Accordingly, in the 
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NPRM, we concluded that the term “provision of educational 

services” is subject to interpretation and proposed to 

define that term as “the educational resources provided by 

the institution that are required by an accreditation 

agency or a State licensing or authorizing agency for the 

completion of the student’s educational program.”77 A 

misrepresentation relating to the “provision of educational 

services” thus is clearly and directly related to the 

borrower’s program of study. 

The Department expects the school’s communications and 

acts that are directly or clearly related to the provision 

of educational services to conform to the Federal standard 

set forth in these final regulations. 

We do not believe it is appropriate to consider acts 

or omissions unrelated to the making of a Direct Loan for 

enrollment at the school or the provision of educational 

services for which the loan was made as relevant to a 

borrower defense claim. For example, under the 

Department’s definition, an institution that advertises a 

winning sports team does not make a misrepresentation for 

77 83 FR 37254
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161 

borrower defense purposes, if in years subsequent to a 

borrower’s enrollment the team has less successful seasons. 

Similarly, an institution that advertises certain on-campus 

restaurants does not make a misrepresentation for borrower 

defense purposes if one or more of those restaurants closed 

their on-campus locations and were no longer available to 

students who purchased a campus meal plan. 

However, if, for example, an institution represented 

in their college catalog that they provided highlyqualified faculty for the business program, modern 

equipment, low teacher-to-student ratios, and excellent 

training aids, but actually provided only one unqualified 

teacher for the program - who was also the school’s 

registrar - one course session of forty-two students (all 

taking different level courses), and only two 10-key adding 

machines, then, with this combination of issues, the 

institution may have made a misrepresentation that could be 

used as a basis for a discharge application.78 

Similarly, it is likely a misrepresentation when an 

institution insists in its marketing materials that its 

78 American Commercial Colleges, Inc. v. Davis, 821 S.W.2d 450, 452 

(Tex.App. Eastland 1991).
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online program is “substantially identical” to the same 

course offered in the traditional classroom setting, but 

only provided PowerPoint slides from in-class courses 

without any accompanying lectures or videos, scanned copies 

of books with cut-off information and blurred entire 

sentences, and instructors that did not prepare course 

materials and were hardly involved at all in any actual 

online instruction.79 

The Department disagrees that it should allow a 

borrower’s defense to repayment application to apply to all 

Federal student loans, irrespective of how the borrower 

spends the funds. These loans are Federal assets, and the 

Federal taxpayer should not be liable for the choices of a 

borrower not related to a loan for enrollment at the school 

or to the provision of education services for which the 

loan was made. 

A school’s pre- and post-enrollment activities may 

support a borrower defense to repayment application if the 

institution’s pre- or post-enrollment acts or omissions 

directly and clearly relate to the making of a loan for 

79 Bradford v. George Washington University, 249 F.Supp. 3d 325, 330 

(D.D.C. 2017).
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enrollment or continuing enrollment at the school or to the 

provision of education services for which the loan was 

made. The Department revised both the regulations on the 

Federal standard and the definition of misrepresentation to 

clarify that an institution’s act or omission that directly 

and clearly relates to the enrollment or continuing 

enrollment at the institution may constitute grounds for a 

borrower defense to repayment claim. 

Although the Department rejected similar requests by 

commenters in the past, the Department accepts these 

requests, which non-Federal negotiators also made during 

the most recent negotiated rulemaking sessions, to clarify 

that the provision of educational services must relate to 

the borrower’s program of study. In adjudicating borrower 

defense to repayment applications, the Department seeks to 

avoid making inconsistent determinations. Tying the 

provision of educational services to the student’s program 

of study will result in more consistent interpretations of 

the term “provision of educational services.” This 

definition provides greater clarity as claims related to 

more general concerns associated with the institution’s 

provision of educational services will not be considered. 

The Department does consider enrollment in general 
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164 

education courses prior to the borrower’s selection of a 

major or educational service provided in relation to a 

student’s prior major to be included in the definition of a 

program of study. 

The definition of “provision of educational services” 

is based on educational resources as those resources 

provided by the institution that are required by an 

institution’s academic programs, its accreditation agency 

or a State licensing or authorizing agency for the 

completion of the student’s educational program. 

Educational resources may include an adequate number of 

faculty to fulfill the institution’s mission and goals or 

successful completion of a general education component at 

the undergraduate level that ensures breadth of knowledge. 

The Department cannot describe all the educational 

resources that various accrediting agencies or State 

licensing or authorizing agencies may require for 

completion of the student’s educational program, so we 

decline to provide an exhaustive list in these final 

regulations. 

The definition of the provision of educational 

services does not categorically exclude all borrower 

defenses on the basis of misrepresentations about job 
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placement and exam passage rates. The final regulations 

define a misrepresentation as directly and clearly related 

to the making of a loan for enrollment at the school or to 

the provision of educational services for which the loan 

was made. Misrepresentations about job placement and exam 

passage rates may directly or clearly be related to the 

making of a loan for enrollment at the school. 

A representation regarding transferability of credits 

may constitute a requirement for the completion of the 

student’s educational program depending on the 

circumstances. If the school makes a statement that all 

credits from another school are transferable and may be 

used to complete an educational program with knowledge that 

few or none of the credits are transferable, then that 

school likely would be considered to have made a 

misrepresentation as defined in these final regulations. 

The definition of “provision of educational services” 

relates to elements necessary for the completion of the 

student’s educational program, but a misrepresentation is 

not limited to circumstances where the school had withheld 

something “necessary for the completion” of the program. 

As explained above, a misrepresentation may be an act or 
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omission that directly and clearly relates to the making of 

a loan for enrollment at the school. 

We disagree with the commenter who asserted that 

defenses to repayment should be based on harm to a school’s 

general reputation. Institutions may suffer reputational 

damage for a number of reasons, including, for example, 

poor performance of an athletic team, sexual misconduct on 

the part of a member of the staff or instances when a staff 

member accepts payment in exchange for boosting a student’s 

chances to be admitted. But reputational harm does not 

generally have a widespread impact on the quality of 

education the students receive. An institution’s level of 

admissions selectivity has a significant impact on the 

institution’s reputation, but it would be hard to argue 

that it is the fault of the institution if a borrower 

selected a less-selective institution and did not benefit 

from the advantages of a social network typical of an elite 

institution. A borrower would not be entitled to borrower 

defense to repayment relief as a result of reputational 

damage, although if the institution misrepresented its 

admissions selectivity or admissions criteria, then the 

borrower may be eligible for relief. A school’s reputation 

is not always tied to misrepresentations as defined for 
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purposes of these regulations, but a borrower’s program of 

study remains integral to the purpose and use of the loan. 

Changes: The Department is not making any changes to 

the definition of “provision of educational services.” The 

Department is revising the definition of 

“misrepresentation” and the Federal standard to clarify 

that an institution’s acts or omissions that clearly and 

directly relate to enrollment or continuing enrollment at 

the institution or provision of educational services for 

which the loan was made may constitute grounds for a 

borrower defense to repayment application. 

Effective Date 

Comments: A group of commenters noted that the 

Department’s 1995 Notice of Interpretation, 60 FR 37769, 

clarified that the act or omission of a school, in order to 

serve as the basis for a borrower defense, must “directly 

relat[e] to the loan or to the school’s provision of 

educational services for which the loan was provided.” 

These commenters assert that if this Notice of 

Interpretation is not sufficiently clear, then the 

Department should apply its definition of “provision of 

educational services” in these final regulations to 
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168 

existing loans instead of to loans first disbursed on or 

after July 1, 2019. 

Discussion: Although the Department issued a Notice 

of Interpretation in 1995 to clarify that an act or 

omission must directly relate to the loan or the school’s 

provision of education services, commenters in 2016 

requested that the Department clarify that the provision of 

educational services is tied to the student’s program of 

study. Some of the non-Federal negotiators made this same 

request during the negotiated rulemaking in 2017, and the 

Department has responded by providing a definition for the 

term “provision of educational services.” For concerns 

discussed elsewhere in these final regulations regarding 

retroactively applying definitions and standards, the 

Department will only apply this definition to loans first 

disbursed on or after July 1, 2020. 

Changes: These final regulations provide that the 

definitions of provision of educational services and 

misrepresentation will apply to loans first disbursed on or 

after July 1, 2020. 

BORROWER DEFENSES – CONSOLIDATION LOANS 

Comments: A group of commenters contend that FFEL 

borrowers should have the same rights to a borrower defense 
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169 

discharge as Direct Loan borrowers and that pursuant to § 

455(a) of the HEA, Direct Loans and FFEL loans are to have 

the same terms, conditions, and benefits. Another 

commenter argued that borrower defense should be available 

to FFEL borrowers without requiring consolidation or proof 

of any special relationship between their schools and FFEL 

lenders. 

A group of commenters asserted that there are several 

problems with the proposal to make consolidation a 

necessary prerequisite for FFEL borrowers to access the 

borrower defense to repayment process. Requiring 

consolidation creates another administrative obstacle for 

borrowers. These commenters noted other obstacles include 

the Department’s proposal to preclude borrowers with new 

Direct Loans, consolidated after the effective date of the 

rule, from asserting defenses unless they are either in 

collection proceedings or within three years from leaving 

the school. 
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170 

These commenters also noted that not every FFEL 

borrower is eligible to consolidate into a Direct 

Consolidation Loan and that the Department should change 

the rules to permit all FFEL borrowers to do so. These 

commenters further asserted that the Department should 

allow for refunds of amounts already paid on FFEL loans. 

They urged the Department to give FFEL borrowers more 

certainty that their loans will be discharged by committing 

to a pre-approval process whereby the Department will 

determine FFEL borrowers’ eligibility for discharge, 

contingent upon consolidation, prior to requiring 

consolidation or advising borrowers to consolidate to 

access relief. 

Another group of commenters also requested that the 

Department outline what policy will apply to borrowers 

whose borrower defense applications are submitted prior to 

the effective date of the final rule but are not yet 

approved on that date, including FFEL borrowers that have 

requested pre-approval of their application prior to 

applying for a Direct Consolidation Loan. 

This group of commenters suggested specific amendatory 

language regarding administrative forbearance for FFEL loan 

borrowers while the Department makes a preliminary 
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171 

determination before the borrower consolidates his or her 

loan(s). These commenters explained that administrative 

forbearance would be more appropriate than discretionary 

forbearance due to the limit imposed on discretionary 

forbearance. This group of commenters also suggested early 

implementation of administrative forbearance and suspension 

of collection activities. 

These commenters noted that the final regulations 

should allow servicers to suspend collection activity while 

the Department makes a preliminary determination (prior to 

the borrower consolidating his or her loans) as to whether 

relief may be appropriate under the new Federal standard. 

 

Discussion: The Department derives its authority for 

the borrower defense to repayment regulations from § 455(h) 

of the HEA, which specifically concerns Direct Loans, not 

FFEL loans. The statutory authority for the borrower 

defense to repayment regulations does not allow FFEL 

borrowers to access the borrower defense to repayment 

process unless the FFEL borrower consolidates their loans 

into a Direct Consolidation Loan. Direct Consolidation 

Loans are made under the Direct Loan Program. Generally, 

the Department views a consolidation loan as a new loan, 
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172 

distinct from the underlying loans that were paid in full 

by the proceeds of the Direct Consolidation Loan. 

Accordingly, the Department’s existing practice is to 

provide relief under the Direct Loan authority if a 

qualifying borrower’s underlying loans have been 

consolidated into a Direct Consolidation Loan under the 

Direct Loan Program. As a corollary, if consolidation is 

being considered depending on the outcome of any 

preliminary analysis of whether relief might be available 

under § 685.206(c), relief cannot be provided until the 

borrower’s loans have been consolidated into a Direct 

Consolidation Loan. Although commenters allege the 

Department is creating administrative obstacles for 

borrowers, the Department is allowing FFEL borrowers who 

are eligible to consolidate their loans into a Direct 

Consolidation Loan to receive relief under these 

regulations. This parallels, for example, how the 

Department makes FFEL borrowers eligible for PSLF, which is 

another opportunity limited to Direct Loan borrowers. 

FFEL Loans are governed by specific contractual rights 

and the process adopted here is not designed to address 

those rights. We can address potential relief under these 

procedures for only those FFEL borrowers who consolidate 
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their FFEL Loans into a Direct Consolidation Loan. FFEL 

borrowers have other protections in their master promissory 

note and the Department’s regulations. Since 1994, and to 

this day, the FFEL master promissory note states that for 

loans provided to pay the tuition and charges for a school, 

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

and defenses that [the borrower] could assert against the 

school with respect to [the] loan.”80 As noted in the 2016 

final regulations, the Department adopted this provision 

from the FTC’s Holder Rule provision, and the Department’s 

2018 NPRM did not propose to revise the regulation 

regarding this provision. 

Upon further consideration, however, the Department 

will continue placing the borrower’s loans into 

administrative forbearance for Direct Loan borrowers while 

a claim is pending.81 Interest still accrues during 

administrative forbearance, and will capitalize if the 

80 34 CFR § 682.209(g). 81 These final regulations, unlike the 2016 final regulations, do not 

expressly state that a borrower who asserts a borrower defense to 

repayment application will be provided with information on availability 

of income-contingent repayment plans and income-based repayment plans 

because this information is always available to borrowers. Borrowers 

also may avail themselves of such information on the Department’s 

website at 

https://studentloans.gov/myDirectLoan/ibrInstructions.action. 
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claim is not successful. The accrual of interest will deter 

borrowers from submitting a borrower defense to repayment 

application if no misrepresentation occurred. The 

Department amended these final regulations to clarify the 

borrower defense to repayment application will state that 

the Secretary will grant forbearance while the application 

is pending and will notify the borrower of the option to 

decline forbearance. Similarly, FFEL loans will be placed 

into administrative forbearance and collection will cease 

on FFEL loans, upon notification by the Secretary that the 

borrower has made a borrower defense claim related to a 

FFEL loan that the borrower intends to consolidate into the 

Direct Loan Program for the purpose of seeking relief in 

accordance with § 685.212(k). 

In the 2018 NPRM, the Department did not propose to 

revise regulations in § 682.220, concerning the eligibility 

of FFEL borrowers to consolidate into a Direct 

Consolidation Loan, and maintains that the current 

eligibility requirements remain appropriate. The 

Department also did not propose to allow for refunds of 

amounts already paid on FFEL loans, as such a proposal 

exceeds its authority under § 455(h) of the HEA. The 

Department is limited by statute to discharging and 
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refunding no more than the amount of the Direct Loan at 

issue, and only discharge of the remaining balance on the 

consolidated loan is possible. 

Finally, the Department does not agree with the 

suggestion that we revise the final regulations to create a 

“pre-approval” process to determine FFEL borrowers’ 

eligibility for discharge, contingent upon consolidation. 

Notably, the 2016 final regulations did not include any 

regulations about a “pre-approval” process. The preamble 

of the 2016 final regulations explained that the Department 

will provide FFEL borrowers with a preliminary 

determination as to whether they would be eligible for 

relief on their borrower defense claims under the Direct 

Loan regulations, if they consolidated their FFEL Loans 

into a Direct Consolidation Loan.82 However, no information 

was provided as to how such a determination would be made, 

what would happen if additional information made it clear 

that a misrepresentation did not actually occur, or that 

after giving advice not to consolidate, additional evidence 

makes it clear that it did. Importantly, FFEL payments 

82 83 FR 75961.
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cannot be refunded. Such a preliminary determination 

process, however, is not possible under these final 

regulations. 

These final regulations create a robust process 

whereby borrowers and schools have an opportunity to review 

each other’s submissions. The Department will not be able 

to provide a borrower with an accurate preliminary 

determination without weighing any evidence and issues that 

the school presents in its submission. Accordingly, the 

Department will not include a preliminary determination 

process under these final regulations. 

The Department still believes it is appropriate to 

determine what standard would apply to a particular 

borrower’s discharge application based upon the date of the 

first disbursement of the Direct Consolidation Loan. 

Therefore, for Direct Consolidation Loans first disbursed 

on or after July 1, 2020, the standard that would be 

applied to determine if a defense to repayment has been 

established is the Federal standard in 685.206(e). The 

Department understands that this approach may deter some 

borrowers who might otherwise wish to consolidate their 

loans, but do not wish to be subject to the Federal 

standard and associated time limits we adopt in these final 
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regulations. The Department believes that this concern is 

outweighed by the benefits of this standard. This approach 

is consistent with the longstanding treatment of 

consolidation loans as new loans, and we believe it will 

provide additional clarity as to the standard that applies, 

especially in cases where borrowers are consolidating more 

than one loan. As under the existing regulations, a 

borrower will be able to choose consolidation if she or he 

determines it is the right option for them. 

Changes: The Department is leaving in effect the 

revisions and additions to §§ 682.211(i)(7) and 

682.410(b)(6)(viii) that were made in the 2016 final 

regulations. 

Accordingly, we will ask loan holders to place FFEL 

loans into administrative forbearance and suspend 

collection upon notification by the Secretary that the 

borrower has made a borrower defense claim related to a 

FFEL loan that the borrower intends to consolidate into the 

Direct Loan Program for the purpose of seeking relief in 

accordance with §685.212(k). 

Additionally, the Department is revising 

§685.205(d)(6) to provide that Direct loans will be placed 

in administrative forbearance for the period necessary to 
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determine the borrower’s eligibility for discharge under 

§685.206, which includes the borrower defense to repayment 

regulations in these final regulations. The Department 

also is revising § 685.206(e)(8) to clarify the borrower 

defense to repayment application will state that the 

Secretary will grant forbearance while the application is 

pending, that interest will accrue during this period and 

will capitalize if the claim is not successful, and will 

notify the borrower of the option to decline forbearance. 

In addition, we are revising the final regulations to 

clarify that the standard that applies to a borrower 

defense claim is determined by the date of first 

disbursement of a Direct Loan or Direct Consolidation Loan. 

BORROWER DEFENSES – EVIDENTIARY STANDARD FOR ASSERTING 

A BORROWER DEFENSE 
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Preponderance of the Evidence, Clear and Convincing 

Evidentiary Standards 

Comments: There were many comments on the 

preponderance of the evidence and clear and convincing 

evidentiary standards under consideration by the 

Department. Those who supported a preponderance of the 

evidence standard noted that it is the typical evidentiary 

standard for most civil lawsuits. Some stated that a 

higher standard would make it impossible for borrowers to 

prove a misrepresentation, as defined by the proposed 

regulations, while others argued that a higher standard 

would be out of step with consumer protection law and the 

Department’s other administrative proceedings. Some 

commenters expressed concern that a higher standard would 

create new barriers to relief for defrauded students. 

Other commenters pointed to the HEA’s intention to provide 

loan discharges based on institutional acts or omissions, 

which they asserted normally would be adjudicated on a 

preponderance of the evidence standard. 

One commenter noted that a heightened standard of 

proof is particularly inappropriate for an administrative 

proceeding that does not include discovery rights for the 

borrower, which would be available to the borrower in 
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court. This commenter noted that the vast majority of 

borrowers will not have access to a lawyer. 

Other commenters opposed the clear and convincing 

evidence standard. Some commenters asserted that there is 

no principled or logical basis for imposing the higher 

standard on borrowers seeking a loan discharge. Several 

commenters asserted that elevating the evidentiary standard 

to clear and convincing evidence would create substantial 

new barriers to relief for defrauded students, fail to 

protect them against institutional misconduct, and 

effectively prevent them from receiving the relief to which 

they are legally entitled. Another commenter noted that 

the clear and convincing evidence standard would present an 

extreme change. 

One commenter noted that the Department cites no 

support to suggest the evidentiary standard prevents or 

dissuades consumers from submitting claims. This commenter 

asserted that it seems likely that most borrowers do not 

know what the evidentiary standard expected of them is, 

would not be able to contextualize evidentiary requirements 

without legal assistance, and would not change their 

behavior even if they did understand the expectations for 

evidence. Similarly, another commenter asked what evidence 
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181 

the Department considered that a heightened evidentiary 

standard may be necessary to deter frivolous or unwarranted 

claims for relief. 

Opponents to the preponderance of the evidence 

standard often favored a clear and convincing evidence 

standard because it would protect institutions and 

taxpayers from frivolous borrower defense claims. Those 

who supported a clear and convincing evidence standard 

argued that it strikes a balance between the looser 

preponderance of the evidence standard and the far more 

stringent beyond a reasonable doubt standard. 

One commenter generally supported the clear and 

convincing evidence standard and asserted that the 

Department should provide the strongest evidentiary 

standard possible that also is in accordance with standard 

consumer protection practices. 

Some commenters expressed concern that under the 

preponderance of the evidence standard, a misstatement 

related to any provision of education services, no matter 

how small, would support a borrower defense claim, 

requiring the school to repay the Department and serving as 

a black mark against the school. These commenters worried 

that under the lower evidentiary standard, colleges would 
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182 

disclaim everything possible, disclose nothing to students, 

and treat them as potential litigants. 

Many commenters agreed that a school should be held 

accountable for knowingly providing false or misleading 

information to borrowers. However, they caution that 

misrepresentation is a serious accusation that can 

seriously damage a school, even if the Department 

determines that the institution did not make a 

misrepresentation. These commenters argue that a borrower 

making such a claim should be required to provide clear and 

irrefutable evidence. 

Discussion: The Department appreciates the many thoughtful 

comments received regarding the evidentiary standard 

appropriate for adjudicating defense to repayment claims. 

The Department considered the clear and convincing evidence 

standard because this standard is typically the standard 

required by courts in adjudicating claims of fraud.83 

The Department has been persuaded, however, that for 

borrowers, without legal representation or access to 

83 See Restatement (Third) of Torts: Liab. For Econ. Harm section 9 TD 

No 2(2014) (“The elements of a tort claim ordinarily must be proven by 

a preponderance of the evidence, but most courts have required clear 

and convincing evidence to establish some or all of the elements of 

fraud.”). 
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discovery tools, the clear and convincing evidence standard 

may be too difficult to satisfy. Therefore, we adopt a 

preponderance of the evidence standard for borrower defense 

claims in these final regulations. We note that this is 

the same evidentiary standard used in the 2016 final 

regulations. 

The Department’s decision to engage institutions in 

developing a complete record prior to adjudicating a 

defense to repayment claim will ensure that decisions are 

made on the basis of a strong evidentiary record. Such a 

record will help to protect institutions and taxpayers, 

while helping students with meritorious claims compile 

necessary information. 

The Department agrees that access to information may 

differ between students and institutions. We also wish to 

emphasize to consumers that, given the sizeable investment 

one makes in a college education, it is incumbent upon 

students to shop wisely and get information in writing 

before making a decision largely dependent upon that 

information. The Department seeks to establish a policy 

that encourages students to fulfill responsibilities they 

have in seeking information and evaluating the accuracy and 
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184 

validity of that information when making a decision as 

important as selecting an institution of higher education. 

The Department does not wish to create a standard so 

low that students either alone, or with the help of 

unscrupulous third parties, attempt to induce statements 

that could then be misconstrued or used out of context to 

relieve borrowers who otherwise received an education from 

their repayment obligations. 

Borrowers should be protected against 

misrepresentations made by institutions that result in 

financial harm to them, but at the same time, the 

Department must uphold a sufficiently rigorous evidentiary 

standard to ensure that the defense to repayment process 

does not impose unnecessary or unjustified financial risk 

to institutions, taxpayers, or future students. A borrower 

who makes an unsubstantiated claim about a school with the 

Department incurs comparatively little risk. 

The Department believes it has established an 

evidentiary standard in these final regulations that 

carefully balances the need to protect borrowers in 

instances where they suffered harm as a result of 

misrepresentations with the need to maintain the integrity 

of the student loan program. In addition, this change is 
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185 

appropriate so that borrowers shop wisely, take personal 

responsibility for seeking the best information available 

and make informed choices, and accept the benefits of 

student loans with the full understanding that they, 

generally, are legally obligated to repay those loans in 

full. 

The Department acknowledges that some commenters 

supported the clear and convincing evidence standard. The 

Department agrees with commenters that a school should be 

held accountable for knowingly providing false or 

misleading information to borrowers and that a 

misrepresentation is a serious accusation that can damage a 

school’s reputation. A clear and convincing evidence 

standard for borrower defense to repayment claims may have 

been appropriate if the Department adopted a different 

definition of misrepresentation. In these final 

regulations, misrepresentation constitutes a statement, 

act, or omission by an institution that is false, 

misleading, or deceptive and that was made with knowledge 

of its false, misleading, or deceptive nature. The 

Department provides a non-exhaustive list of types of 

evidence that may be used to prove that an institution made 

a misrepresentation. 
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Changes: The Department adopts the “preponderance of 

the evidence” standard for both affirmative and defensive 

claims in these final regulations. It is appropriate to 

require a borrower to prove that an institution, more 

likely than not, made the alleged misrepresentation. 

Multiple Standards 

Comments: One commenter objected to the proposal to 

use a higher evidentiary standard for borrowers based on 

their repayment status – i.e., to apply the clear and 

convincing standard to borrowers asserting affirmative 

claims, while applying a preponderance of the evidence to 

those asserting defensive claims. 

Another commenter stated that if affirmative claims 

are allowed, then affirmative claims should be adjudicated 

under a clear and convincing evidence standard. 

One commenter asserted that the Department should use 

the clear and convincing evidence standard for both 

affirmative and defensive claims. 

Discussion: Although we considered applying a clear 

and convincing evidentiary standard to affirmative claims, 

we ultimately decided to apply the preponderance of the 

evidence standard to all claims, as described above. As 
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previously noted, the definition of misrepresentation is 

more stringent than the 2016 definition and, thus, a 

preponderance of the evidence standard for all claims is 

more appropriate to balance the Department’s interests in 

providing a fair, accessible, and equitable process for 

both borrowers and schools. Because a borrower is required 

to prove that an institution’s act or omission was made 

with knowledge of its false, misleading, or deceptive 

nature or with a reckless disregard for the truth, there is 

no reason to require a higher evidentiary standard based 

on the borrower’s repayment status. Applying a higher 

evidentiary standard to borrowers who are not in default 

may encourage these borrowers to default on the loans to 

receive the benefit of a lower evidentiary standard. After 

weighing the various interests, the Department determined 

that applying a higher evidentiary standard to affirmative 

claims, but not defensive claims is not justified. 
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Changes: The Department adopts the “preponderance of 

the evidence” standard for both affirmative and defensive 

claims in these final regulations. 

Evidence Presented in Support of the Claim 

Comments: Some commenters contended that a borrower’s 

affidavit or sworn testimony should constitute sufficient 

evidence to support a defense to repayment claim. These 

commenters argued that a borrower would typically be unable 

to obtain evidence from a school to evince recklessness or 

intent and requiring more than their testimony would erect 

too great of a barrier to recovery. 

Some commenters suggested that a borrower should have 

physical forms of evidence to show misrepresentation by the 

school. 

Another commenter expressed concern that if any 

evidence is permitted beyond the borrower’s sworn 

affidavit, schools could continue to defraud borrowers by 

submitting false or manufactured evidence in response to 

borrowers’ claims. 
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Discussion: The Department thanks the commenters for 

their opinions, but disagrees that a borrower’s affidavit 

or sworn testimony, alone, is sufficient evidence to 

warrant a decision by the Department that has significant 

financial consequences not just for borrowers, but for 

institutions, current and future students, and taxpayers 

who ultimately will bear the costs if there are high 

volumes of discharges. Taking such an approach could 

increase the likelihood that future students will bear the 

cost of prior students’ borrower defense claims in the form 

of increased tuition. Under the process adopted in these 

final regulations, a borrower may submit a sworn affidavit 

in support of the borrower defense application, but the 

institution will have an opportunity to respond and provide 

its own rebuttal evidence, if any. The borrower will have 

an opportunity to reply. Then the Department, with the full 

benefit of all the evidence presented, will adjudicate the 

claim. The Department believes that these procedures, 

similar to those used at certain stages in judicial 

proceedings, provide protections against frivolous 

affidavits. 
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The Department believes that the defense to repayment 

regulations can play an important role in helping borrowers 

become more educated consumers, including by providing an 

incentive for institutions to put all claims material to 

the student’s enrollment decision in writing. As more 

information becomes available to borrowers, they will be 

better able to make informed decisions. 

Borrower defense to repayment claims may be submitted 

three years after a borrower exited a program at a 

particular institution, and both the borrower and the 

institution may have difficulty recalling the precise 

language that was used or the information verbally 

conveyed. To be sure, institutions that make 

misrepresentations should suffer harsh consequences, but 

any finder of fact, including the Department as an 

adjudicator of borrower defense claims, is ill-equipped, 

many years after the fact, to make determinations based 

solely on one party’s statement. Therefore, an affidavit, 

alone, is not sufficient evidence to adjudicate a claim 

that could be worth tens, if not hundreds, of thousands of 

dollars to the borrower making the affidavit. 

The Department is removing the phrase “intent to 

deceive” in the Federal standard and will not require a 
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borrower to demonstrate such intent in order to establish a 

borrower defense claim. Instead, the borrower must prove 

by a preponderance of the evidence that an institution made 

a misrepresentation of material fact upon which the 

borrower reasonably relied in deciding to obtain a loan 

that is clearly and directly related to enrollment or 

continuing enrollment at the institution or for the 

provision of educational services for which the loan was 

made. The definition of misrepresentation also does not 

expressly require the borrower to demonstrate that the 

institution acted with intent to deceive. As previously 

stated, a misrepresentation constitutes a statement, act, 

or omission that was made with knowledge of its false, 

misleading, or deceptive nature or with reckless disregard 

for the truth. 

As noted elsewhere in this preamble, evidence that 

borrowers may present to the Department includes, but is 

not limited to: web-based advertisements or claims, direct 

written communications with an institution official, 

information provided in the college catalog or student 

handbook, the enrollment agreement between the institution 

and the student, or transcripts of depositions of school 

officials. It is important for students to obtain, review, 
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and retain written materials provided by the school; if the 

student is told information materially different than the 

information provided in writing, the Department will 

consider the evidence of the alleged verbal 

misrepresentation. Students should seek a written 

explanation to clarify any discrepancies. 

The Department disagrees that an institution is likely 

to submit fraudulent documents to the Department in 

response to a borrower defense to repayment application. 

Institutions face grave risks for making any falsified or 

misleading representation to the Department. The 

Department may remove the institution from all title IV 

programs if the institution submitted false or manufactured 

evidence in response to a borrower’s claim. Under no 

circumstance is a title IV participating institution 

permitted to commit fraud on students or the Department. 

The Department’s goal is to ensure that defrauded 

students have reasonable access to financial remedies while 

ensuring students have access to the information they need 

to be smart consumers by making decisions based on 

information that a seller, vendor, or service provider 

commits in writing. Students, like all consumers, should 

obtain written representations in relation to any 
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transaction in the marketplace that presents a significant 

financial commitment. Borrowers should understand the 

risks associated with making decisions based on verbal 

promises that an institution or any other entity in the 

marketplace is unable to substantiate or support in 

writing. Student advocacy groups, for instance, may help 

student become wise consumers on the front end, rather than 

successful borrower defense claimants after the fact. 

Changes: None. 

BORROWER DEFENSES – FINANCIAL HARM 

General 

Comments: Many commenters supported the Department’s 

definition of financial harm, noting that it clarifies what 

might be included and excluded, including the nonexhaustive list of examples. Some commenters noted that 

the definition appropriately addresses the longstanding 

legal principle that a victim’s harm should be considered 

in determining a remedy. Other commenters supported the 

view that opportunity costs should not be included. 

Several commenters cited protecting the financial 

interest of the taxpayer as an important goal when 

considering financial harm, especially if a borrower 
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continued his or her enrollment after realizing that a 

misrepresentation occurred. 

Some commenters believed that the requirement of 

proving financial harm beyond the debt incurred is 

“arbitrary, unsupported, and not feasible.” Others stated 

that the Department’s proposed financial harm definition is 

burdensome to borrowers. Commenters suggested that the 

Department provide clear information, such as a checklist 

of examples of financial harm from those identified in the 

proposed rule, and ask borrowers to check all that apply, 

explaining the meaning of items in the list, and allowing 

borrowers to describe other examples of financial harm they 

have experienced. This commenter also suggested that the 

Department eliminate asking unnecessary questions and ask 

necessary questions in a way that does not deter borrowers 

from applying. 

Other commenters claimed that requiring financial harm 

is inconsistent with the statute and the statutory intent, 

citing the statutory language of “acts or omissions by an 

institution of higher education.” 

Commenters stated that the requirement of financial 

harm will result in the denial of claims where a student 
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acquired a loan on the basis of misrepresentations but did 

not suffer financial harm. 

Discussion: The Department thanks the commenters for 

their support of these regulatory changes. The definition 

of financial harm should provide clarity and the list of 

examples should also further enhance the understanding of 

its meaning. The Department’s list of examples of 

financial harm may be found at 685.206(e)(4)(i)-(iv). The 

Department believes that borrower defense relief should 

relate to financial harm. The Department reminds 

commenters that these final regulations provide an 

administrative proceeding, and broader remedies are 

available to borrowers in other venues. The Department 

does not wish for its borrower defense to repayment process 

to supplant venues where borrowers may recover opportunity 

costs or other consequential or extraordinary damages. 

Unlike courts, which may award the borrower more than 

the loan amount for opportunity costs or other 

consequential extraordinary damages, Section 455(h) of the 

HEA authorizes the Department to allow borrowers to assert 

“a defense to repayment of a [Direct Loan],” and to 

discharge outstanding amounts to be repaid on the loan. 
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This section further provides that “in no event may a 

borrower recover from the Secretary . . . an amount in 

excess of the amount the borrower has repaid on such 

loan.”84 Accordingly, it is improper for the Department to 

allow for extraordinary damages that likely will exceed the 

loan amount. 

Even if financial harm continues after the filing of a 

claim, the Department may not provide to a borrower any 

amount in excess of the payments that the borrower has made 

on the loan to the Secretary as the holder of the Direct 

Loan. Although a borrower may be able to pursue such 

remedies through other avenues, under applicable statute, a 

borrower may not receive punitive damages or damages for 

inconvenience, aggravation, or pain and suffering as part 

of a borrower defense to repayment discharge. The 2016 

final regulations similarly state that relief to the 

borrower may not include “non-pecuniary damages such as 

inconvenience, aggravation, emotional distress, or punitive 

damages.”85

84 20 USC 1087e(h). 85 34 CFR 685.222(i)(8).
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Regarding the protection of taxpayer dollars, the 

Department believes that the financial harm standard is an 

important and necessary deterrent to unsubstantiated claims 

or those generally beyond the scope of borrower defense to 

repayment. Students may experience disappointments 

throughout their college experience and career, such as 

believing that they would have been better served by a 

different institution or major. However, such 

disappointments are not the institution or the taxpayer’s 

responsibility. 

Without the link between loan relief and harm, it is 

likely that many borrowers could point to a claim made by 

an institution about the potential a student could realize 

by enrolling at the institution. For example, institutions 

that advertise undergraduate research experiences typically 

do not guarantee that every student will have such an 

opportunity. Similarly, institutions that include the 

nicest dorm on campus as part of the college tour cannot 

guarantee that every student will have the opportunity to 

live in that dormitory. Institutions frequently feature 

graduates’ top outcomes on their websites, but doing so 

does not suggest, or guarantee, that all students will have 
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the same outcomes. Many factors beyond the control of the 

institution will influence outcomes. 

Contrary to the commenter’s statutory interpretation, 

the inclusion of financial harm in the calculation of a 

borrower’s claim is a reasonable interpretation of a 

statute that is silent on the issue. The 2016 final 

regulations made clear the Department’s position that, even 

if a misrepresentation was made by an institution, relief 

may not be appropriate if the borrower did not suffer harm. 

The Department stated in the 2016 final regulations that 

“it is possible a borrower may be subject to a substantial 

misrepresentation, but because the education provided full 

or substantial value, no relief may be appropriate.”86 

Defense to repayment relief is not provided for a 

borrower who is disappointed by the college experience or 

subsequent career opportunities, or who wishes he or she 

had chosen a different career pathway or a different major. 

Instead, defense to repayment relief is limited to 

instances where a school’s misrepresentation resulted in 

quantifiable financial harm to the borrower. If a 

86 83 FR 75975.
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misrepresentation associated with the making of a loan did 

not result in any such harm, it would not qualify as a 

basis for a defense to repayment under these final 

regulations. 

The Department disagrees with commenters who believe 

that showing financial harm is overly burdensome. Although 

the process should be as simple as possible for borrowers, 

we need to balance that concern with the need to protect 

the interests of taxpayers. We believe that the examples 

of financial harm evidence should be within the ability of 

most applicants to show and should not substantially 

complicate the process of submitting a defense to repayment 

application. 

Although the 2016 final regulations did not expressly 

include “financial harm” as part of a borrower defense to 

repayment claim, they tied relief to a concept of financial 

harm. Under the 2016 final regulations and specifically 

under Appendix A to subpart B of Part 685, a borrower would 

not be able to receive any relief if a school represents in 

its marketing materials that three of its undergraduate 

faculty members in a particular program have received the 

highest award in their field but failed to update the 

marketing materials to reflect the fact that the award-
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winning faculty had left the school. In such circumstances 

and under the 2016 final regulations, the Department notes: 

“Although the borrower reasonably relied on a 

misrepresentation about the faculty in deciding to enroll 

at this school, she still received the value that she 

expected. Therefore, no relief is appropriate.”87 

Although the borrower had a successful borrower 

defense to repayment claim, the borrower did not receive 

any relief, which is a waste of the borrower’s time and 

resources. To avoid such situations, financial harm will 

be an element of the borrower defense to repayment claim 

under the 2020 final regulations. 

The borrower may always seek financial remedies from 

the institution through the courts or arbitration 

proceedings, but for the purpose of a defense to repayment 

claim, the Department’s role is more narrowly limited to 

determining whether or not the student should retain the 

repayment obligation. This is why financial harm is a key 

element of a defense to repayment claim. 

87 34 CFR Part 685, App. A.
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The Department appreciates the suggestions for 

development of a new form to be used as the result of these 

regulations and will formally seek such public input 

pursuant to the Paperwork Reduction Act information 

collection process. 

Changes: None. 

Factors for Assessing Financial Harm 

Comments: Several commenters argued that the 

Department should not penalize schools for conditions out 

of their control including economic conditions, or a 

borrower voluntarily choosing not to accept a job, to 

pursue part-time work, or to work outside of the field for 

which he or she studied. 

Several commenters indicated that it is important to 

balance the financial costs to institutions of borrower 

defense to repayment provisions with the need to establish 

an equitable recourse for students impacted by an 

institution’s actions. They indicated that concern whether 

a school may close should not be a factor when determining 

whether a student has been harmed by fraud. 

Some commenters contended that the Department should 

expand the definition of financial harm to include monetary 
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losses predominantly due to local, regional, or national 

labor market conditions or underemployment which could 

otherwise be used by institutions to “quibble with” 

borrowers’ applications. 

Other commenters suggested revising the rule to state 

that “Evidence of financial harm includes, but is not 

limited to, the following circumstances” to clarify that 

the list is not exhaustive and that a borrower may raise 

other types of harm to establish eligibility for relief. 

Commenters noted that it can be difficult to quantify 

harm and especially challenging to distinguish among 

degrees of harm. Some pointed out that the proposed rule 

would not account for opportunity costs and that harm 

continues even after filing a claim. Some suggested that 

if misrepresentation is substantiated and there is 

resultant harm, the Department should grant full relief 

unless the harm can be shown to be a limited or 

quantifiable nature. 

Several commenters objected to requiring borrowers to 

demonstrate economic harm beyond taking out a loan. These 

commenters believe that obtaining the loan is enough to 

show they are financially harmed when the school committed 
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a misrepresentation. One commenter suggested that parttime work is an indication of financial harm. 

Discussion: The Department agrees that schools should 

not be penalized for conditions beyond their control and 

believes that the definition of financial harm adopted in 

these final regulations achieves that goal. The Department 

is revising the definition of financial harm to expressly 

state that the harm is the amount of monetary loss that a 

borrower incurs as a consequence of a misrepresentation. 

This definition further emphasizes that financial harm is 

an assessment of the amount of the loan that should be 

discharged. Borrowers also will have an opportunity to 

state in their borrower defense to repayment application 

the amount of financial harm allegedly caused by the 

school’s misrepresentation. The borrower needs only to 

demonstrate the presence of financial harm to be eligible 

for relief under these final regulations,88 and the 

Department will consider the borrower’s alleged amount of 

financial harm as stated in the application. 

88 83 FR 37259-60 (“As with the 2016 final regulations, however, the 

Department does not believe it is necessary for a borrower to 

demonstrate a specific level of financial harm, other than the presence 

of such harm, to be eligible for relief under the proposed standard.”)
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Also, the Department believes that part-time work is 

not necessarily evidence of financial harm and, as a 

result, cannot be treated as such. A student may have very 

valid reasons for deciding to work part-time that are 

unrelated to any consequence suffered as a result of a 

misrepresentation. 

For example, a student who is a parent may decide to 

work part-time to raise children, especially as daycare is 

costly. If a borrower decides to work part-time, even 

though full-time work is available to the borrower, then 

the part-time work is not evidence of financial harm. If 

only part-time work is available to a borrower due to an 

institution’s misrepresentation and the borrower would like 

and is qualified for full-time work, then part-time work 

may constitute evidence of financial harm. 

Where an institution has engaged in misrepresentation 

that results in financial harm to students, the final 

regulations the Department implements now will provide 

relief to students and seek funds from institutions without 

regard to the impact on the institution. At the same time, 

the final regulations are designed to protect against a 

systemic financial risk to institutions that are, in good 

faith, providing accurate information to students. 
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The Department does not propose to consider the impact 

on a school’s financial condition when making a 

determination of misrepresentation. In the 2018 NPRM, the 

Department was making the point that it cannot assume that 

the student is always right, accusations against an 

institution are always true, or false claims against an 

institution do not have serious implications for 

institutions, students, and taxpayers. 

The Department maintains, as we did in the 2018 NPRM 

and the 2016 final regulations, that partial student loan 

discharge is a possible outcome of a defense to repayment 

claim. Our reasoning for this approach is discussed 

further in the Borrower Defenses – Relief section of this 

preamble. 

The Department continues to believe that, when 

choosing to pursue a particular career, students face a 

multitude of choices - where to live, where to attend 

school, when to attend school, and how quickly to graduate. 

Students are in the best position to make these decisions 

in light of their own circumstances. The Department 

believes that students must remain the primary decisionmakers on the key points of how to navigate these difficult 

factors. Students should allege the amount of financial 
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harm caused by the school’s misrepresentation and not any 

financial harm incurred as a result of the student’s own 

choices. 

The Department does not wish to impose liability on 

institutions for outcomes that are dependent upon highly 

variable local and national labor market conditions, as 

these conditions are outside the control of the 

institution. The Department is willing to clarify the type 

of evidence that may demonstrate financial harm. Upon 

further consideration and in response to commenter’s 

concerns, the Department revised the type of evidence that 

may demonstrate financial harm. The 2018 NPRM proposed: 

“extended periods of unemployment upon graduating from the 

school’s programs that are unrelated to national or local 

economic downturns or recessions.”89 The Department 

realizes that the phrases, “extended periods” and “economic 

downturns,” are not defined and may be subject to different 

interpretations. Economists, however, have defined what 

constitute an “economic recession.”90 Accordingly, the 

89 83 FR 37327. 90 See, e.g., Miller, David S. (2019). "Predicting Future Recessions," 

FEDS Notes. Washington: Board of Governors of the Federal Reserve 

System, May 6, 2019, https://doi.org/10.17016/2380-7172.2338.
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Department revised the phrase to “periods of unemployment 

upon graduating from the school’s programs that are 

unrelated to national or local economic recessions” in § 

685.206(e)(4)(i). 

In response to the commenters’ suggestions, the final 

regulations also have been revised to clarify that the list 

of examples is non-exhaustive. This rule provides a nonexhaustive list of examples of evidence of financial harm, 

meaning that borrowers are encouraged to provide evidence 

that they believe is instructive, and the Department will 

develop expertise in assessing financial harm based on this 

kind of evidence. 

The Department is not including a specific methodology 

in this regulation for determining financial harm, in part, 

because the Department is awaiting a court ruling on at 

least one potential methodology developed to assess 

financial harm to borrowers.91 The Department disagrees 

that it is unreasonable to require students to make their 

own assessment of financial harm, as they have the most 

information about their financial situation and 

91 Manriquez v. Devos, No. 18-16375 (9th Cir. argued Fed. 8, 2019).
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circumstances. Indeed, it would be unreasonable to 

require the Department to assess financial harm without any 

input from the student as to what financial harm the 

student suffered. Students have the best records to assess 

and establish other costs associated with their education 

such as books, etc. Students will have the opportunity to 

provide whatever documentation they would like to provide 

to support their allegation of financial harm, and the 

Department will consider the student’s submission. The 

Department also will take into account the amount of 

financial harm that the student alleges she or he suffered 

in determining the amount of relief to award for a 

successful borrower defense to repayment application. As 

described in the section on relief, below, the borrower’s 

relief may exceed the financial harm alleged by the 

borrower but cannot exceed the amount of the loan and any 

associated costs and fees. The Department will consider 

the borrower’s application, the school’s response, the 

borrower’s reply, and any evidence otherwise in the 

possession of the Secretary in awarding relief. 

The Department rejects, outright, the commenter’s 

suggestion that taking out a loan is, on its own, evidence 

of financial harm. Under the 2016 final regulations, the 
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Department acknowledged in example 5 in Appendix A to 

subpart B of part 685 that a borrower may take out a loan 

as a result of a misrepresentation of a school but will not 

be entitled to recover any relief. The Department now 

understands that it is a waste of both the borrower’s time 

and resources as well as the Department’s to acknowledge 

that the borrower has suffered from a misrepresentation but 

cannot recover any relief because there was no financial 

harm. Accordingly, financial harm is an element of a 

borrower defense to repayment claim in these final 

regulations. The financial harm must be a consequence of 

an institution’s misrepresentation, for the reasons 

explained above. 
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Changes: We thank the commenter for the suggestion 

about clarifying what evidence constitutes financial harm. 

As a result of that recommendation, we are revising the 

text of § 685.206(e)(4) to state that “Evidence of 

financial harm includes, but is not limited to, the 

following circumstances.” One of these examples is 

“extended periods of unemployment upon graduating from the 

school’s programs that are unrelated to national or local 

economic recessions,” and the Department is revising 

“extended periods of employment” to “periods of employment” 

in § 685.206(e)(4)(i). Upon further consideration, the 

Department determined that “periods of unemployment” is 

clearer than “extended periods of unemployment,” as the 

period of time that constitutes an extended period is not 

specified. The Department also removed the phrase 

“economic downturn” in § 685.206(e)(4)(i), as the phrase 

“economic recession” provides greater clarity. The 

Department also revised § 685.206(e)(8)(v) to allow the 

borrower to state the amount of financial harm in the 

borrower defense to repayment application. 

Submission and Analysis of Evidence 
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Comments: A number of commenters supported collecting 

information from the borrower, such as the specific 

regulations they are citing for their defense to repayment, 

outlining how much financial harm they think they suffered, 

and certifying the claim under penalty of perjury. 

Some commenters contended that the evidence borrowers 

would need to satisfy proposed financial harm requirements 

would require sophisticated analysis, including the 

possibility of expert testimony from labor economists. 

Similarly, several commenters argued that it is challenging 

to identify when students’ outcomes are predominantly due 

to external factors and recommended that the Department 

eliminate that from the definition of financial harm. 

One commenter noted that borrowers may not know how to 

quantify the harm they have suffered as a result of the 

misrepresentation. Many commenters criticized the proposal 

to ask borrowers what the commenters cited as invasive and 

inappropriate questions about drug tests, full-time versus 

part-time work status, or disqualifications for a job. 

These commenters noted that these are subjective and 

impacted by many outside factors. Commenters were also 

concerned that this information could potentially get back 

to the school. Another commenter stated that the burden 
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should fall on the school or the Department—but not the 

borrower—to prove that external factors did not cause the 

financial harm. 

Discussion: The Department does not believe, and has 

not stated, that borrowers should be required to cite the 

specific regulation which they believe the institution 

violated, as a typical borrower would likely not have any 

knowledge of the relevant parts of Federal regulations. 

The Department does not believe borrowers should be 

required to seek legal counsel in order to submit a defense 

to repayment claim. 

Through these final regulations, the Department 

intends to create a borrower defense process that is 

accessible to typical borrowers and rests on evidence 

likely to be in their possession or the possession of the 

school. External factors such as labor market conditions 

can be assessed by the Department using available and 

reliable data. There is no need for borrowers to engage 

labor economists or expert witnesses. Borrower defense is 

an administrative determination based upon the best 

available information. The Department does not believe 

that the calculation of the borrower’s financial harm 
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should be discarded because of its potential complexity. 

For example, in many instances, the Department is being 

asked to evaluate whether job placement rates were 

misrepresented to students. Given that a TRP, as discussed 

earlier in the document, pointed to job placement 

determinations as highly subjective and imprecise, the 

Department has shown its willingness to engage in 

complicated and subjective determinations. 

The Secretary will determine financial harm based upon 

individual earnings and circumstances; the Secretary may 

also consider evidence of program-level median or mean 

earnings in determining the amount of relief to which the 

borrower may be entitled, in addition to the evidence 

provided by the individual about that individual’s earnings 

and circumstances, if appropriate. The Department must 

have some information relating to the borrower’s career 

experience subsequent to enrollment at the institution. 

The goal is a proper resolution for each borrower defense 

claim, which requires evidence not only of an institution’s 

alleged misrepresentations, but also of, among other 

factors, the borrower’s subsequent career and earnings. 

While the Department has not taken this approach previously 

and continues to believe that for purpose of the previous 
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standards, information relating to the individual’s career 

experience may not be necessary to provide appropriate 

relief, the administrative difficulties the Department has 

faced in formulating an approach without such information 

has led the Department to conclude that such information 

will be required from borrowers for these final 

regulations. Without information about the individual’s 

unique circumstances, including career experience, the 

Department has found it difficult to determine that a 

particular borrower actually suffered the financial harm 

necessary to be entitled to relief under the borrower 

defense statute. The Department is accordingly moving to 

an approach that requires individuals to provide such 

evidence. It is mitigating the burden of that approach, 

however, by requiring borrowers to provide necessary 

documentation of financial harm at the time of application. 

In addition, the Department believes that other reforms in 

these regulations, including the new Federal borrower 

defense standard, mitigate the burdens of this approach. 

In response to the many commenters strongly opposed to 

the Department asking borrowers for information such as 

employment status, employment history, or other 

disqualifications for employment, we believe these factors, 
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while potentially subjective and impacted by outside 

forces, provide important context when determining the 

proper extent to which an institution caused financial harm 

or how much relief is warranted based on the actions of the 

institution. These questions are not intended, in any way, 

to shame borrowers, and we will maintain the borrower’s 

privacy, as required by applicable laws and regulations. 

Through this regulatory provision, the Department is 

attempting to confirm that any financial harm results from 

actions of the school and not the disposition, actions, or 

non-education related decisions made by the borrower. 

Despite the commenter’s suggestions, the Department 

continues to believe that the borrower is in the best 

position to know certain information and that the burden on 

the borrower to submit a signed statement containing 

information they know is appropriate. 

In response to the suggestion that the burden for 

certain elements of a borrower defense claim should fall on 

the school or the Department, the process outlined is for 

both the borrower and school to provide the information 

needed for correct resolution. The process is meant to be 

accessible to unrepresented borrowers, and it will not rely 

on formal notions of burden shifting. 
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The Department acknowledges that it is difficult to 

precisely quantify financial harm. We believe that the 

information requested by the Department from borrowers and 

schools will provide a factual basis for the Department to 

determine the extent of financial harm. 

Changes: None. 

Equitable Resolution of Claims 

Comments: Commenters indicated that common law 

principles of equity must apply and, as a result, the 

proposed definition of financial harm must be rejected. 

According to the commenters, the common law principle of 

equity requires that victims of fraud be made whole. 

These commenters stated that the Department is 

conflating harm and levels of harm based on a student’s 

individual earning ability. The commenters explained that 

this analysis misuses the cause and effect of fraud upon a 

student’s earning potential. A student’s individual 

earning capacity is based upon that student’s circumstances 

and one student’s wages should not be used in comparison to 

another student. The commenters argued that the standard 

being used is unfair when, in an entire program that only 

results in graduates having wages below the Federal poverty 

line, a student that is making more than the Federal 
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poverty line would receive only partial discharge, if any, 

because that student may be doing marginally better than 

his or her fellow graduates. 

The only harm that can be measured consistently 

according to these commenters is the amount of student loan 

debt as it is not based on individual student 

circumstances, improper cause and effect analysis on 

earning potential, and accounting for an entire population 

of graduates that has poor outcomes. 

Discussion: The Department appreciates the 

commenters’ concerns, but we emphasize that the defense to 

repayment regulation is not meant to replace the courts in 

rendering decisions about consumer fraud. Instead, it 

seeks to provide students with relief from loan repayment 

obligations when an institution’s misrepresentations, as 

defined at § 685.206(e)(3), cause a student financial harm. 

The importance of harm resulting from the 

institution’s acts or omissions was a critical part of the 

2016 final regulations92 and remains a critical part of 

92 Example 5 in Appendix A to subpart B of part 685 demonstrates that a 

borrower would not receive relief from the Department unless there was 

financial harm.
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these final regulations, so that the financial risk to 

borrowers, institutions, and taxpayers is properly and 

fairly balanced. Were the Department to eliminate the need 

for a borrower to demonstrate harm, institutions may be 

more reluctant to provide information to prospective 

students, which could make it harder, rather than easier, 

for a student to select the right institution for them. 

In order to assess whether a borrower is being 

appropriately compensated in a successful claim, the 

Department must assess his or her financial harm in 

context, and that context may consider earnings relative to 

peers, market wages, cost of living, and other factors. 

The Department disagrees that the only measure of harm 

that should be used is the amount of the student’s loan 

debt. As discussed above, the Department believes that 

financial harm is implied in the statutory authority and 

necessary to the resolution of borrower claims. We believe 

the definition of financial harm provides such balance to 

all parties involved. If the borrower received an 

educational opportunity reasonably consistent with that 

promised by the institution from the institution, then the 

borrower should not be relieved of his or her repayment 
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obligations, even if some of the information provided to 

the student in advance had inadvertent errors. 

Changes: None. 

BORROWER DEFENSES – LIMITATIONS PERIOD FOR FILING A 

BORROWER DEFENSE CLAIM 

Comments: Many commenters supported the Department’s 

proposal to limit claims to three years from the date the 

borrower completes his or her education. Commenters 

thought a three-year limitation would be fair, because: 

evidence will still be available; recollections of the 

parties will be relatively clearer; and most borrowers 

should know that they have been wronged within three years. 

Many commenters argued that after three years, it becomes 

much harder for schools to defend themselves against 

claims, particularly since schools are discouraged by 

regulators from keeping records for longer than three to 

five years due to security and privacy concerns. 

Some commenters believe that a three-year limitations 

period should relate to defensive claims as well as 

affirmative claims, arguing that three years is enough time 

for a borrower to file a claim and that schools should not 

be expected to defend themselves against a claim made many 

years after the student left school. 
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A commenter noted that one way to address this concern 

would be to allow borrowers to file defensive claims at any 

time, but only hold the school liable for five years. One 

commenter maintained that a three-year period instead of a 

five-year period for the Department to seek recovery 

against an institution would balance the Department’s 

interest in recovering from institutions against the 

institutions’ reasonable ability to predict and control 

their financial situation. 

Another commenter suggested that a borrower should not 

be able to raise a claim if the borrower has been in 

default for more than three months. 

Other commenters argued that the proposed timeline 

does not provide enough time for borrowers to realize that 

they have been harmed, learn about the claim process, 

gather supporting evidence, and file a claim. Those 

commenters noted that disadvantaged borrowers may not 

understand their right to seek relief, may not possess the 

evidence needed, or may not be made aware that they were 

misled until much later. 

Some commenters argued that the Department cannot 

legally preclude borrowers from defending against a demand 

for repayment. Multiple commenters indicated that since 
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there is no limitations period on repayment, there should 

be no limitations period on defenses. Some commenters 

opposed adding any limitation, arguing that a limitation 

would likely keep the most disadvantaged borrowers from 

receiving relief. One commenter noted that imposing a 

limitations period on borrower defense claims would be 

contrary to well-established law and inconsistent with the 

Department’s practice with respect to other discharge 

programs. The commenter further argued that such a 

limitation would indiscriminately deny meritorious and 

frivolous claims alike. 

One commenter argued that because there is no 

requirement that the student be made aware of their 

eligibility to file a borrower defense claim during the 

statute of limitations, the opportunity to file a claim is 

rendered “effectively moot.” 

Commenters argued that the limitations period, 

whatever its length, should run from discovery of the harm 

or misrepresentation rather than running from the date the 

student is no longer enrolled at the institution. 

Another commenter noted that the most frequent statute 

of limitations for civil suits involving fraud is six years 

from the act. 
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Several commenters raised concerns that the Department 

was taking punitive measures against borrowers by requiring 

them to raise a borrower defense to repayment claim within 

the applicable timeframes set for a proceeding to collect 

on a loan, which could result in a short effective 

limitation period of 30-65 days depending upon the 

proceeding. The commenter suggested instead to use 

“positive incentives” to encourage borrowers to file 

claims.

Discussion: The Department appreciates the support 

for our limitations period proposal in the 2018 NPRM. 

However, after careful consideration of the comments, the 

Department has decided to revise the limitation period, as 

stated in the 2018 NPRM, in these final regulations. 

The Department was persuaded by the commenter who 

proposed that a three-year limitations period be put in 

place for both affirmative and defensive borrower defense 

claims. The commenter pointed out that, under the 2018 

NPRM, a borrower who went into default nearly twenty years 

after graduation could, potentially, assert a defensive 

claim at that time. It is very unlikely that an 

institution would still possess the records needed to 

defend against such a claim at that time. In fact, it 
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would be ill-advised and very difficult for institutions to 

maintain records for that entire period, especially when 

considering privacy, as well as physical and digital 

storage considerations. It is equally unlikely that faculty 

or staff would still be employed at the same school or be 

able to recall the incident(s) subject to the claim. 

Therefore, the Department now believes that a threeyear period for the filing of affirmative and defensive 

claims with the Department, commencing from the date when 

the borrower is no longer enrolled at the school, is fair 

to both the borrower and the institution and strikes the 

right balance between providing obtainable relief for 

borrowers and allowing institutions to predict and control 

their financial conditions. 

The final regulations would also entirely avoid the 

consequence of a short limitations period – 30-65 days — 

that many commenters thought borrowers would find difficult 

to satisfy. The Department understands the commenter’s 

concerns that the timeline proposed for the filing of 

defensive claims in the 2018 NPRM was insufficient, but we 

disagree with the commenter who suggested that this was a 

punitive measure. On the other hand, we do agree that the 

Department should, within certain limits, create incentives 
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to borrowers to file meritorious claims in a timely manner. 

As a result, the Department will not be implementing the 

filing deadlines for the various proceedings in which a 

defense borrower defense claim may be raised, including: 

Tax Refund Offset proceedings (65 days); Salary Offset 

proceedings for Federal employees under 34 CFR part 31 (65 

days); Wage Garnishment proceedings under section 488A of 

the HEA (30 days); and Consumer Reporting proceedings under 

31 USC 3711(f) (30 days). These short limitations periods 

are no longer necessary given the change in the final 

regulations regarding the three-year limitations period for 

the filing of all claims, including defensive claims 

arising as a result of a collections proceeding. 

Notwithstanding anything in these final regulations, 

borrowers may continue to maintain other legal rights that 

they may have in collection proceedings. No provision in 

these final regulations burdens a student’s ability to seek 

relief outside the Department’s borrower defense claim 

process. Subject to applicable law, borrowers are not 

deprived of a defense to, nor precluded from defending 

against, a collection action for as long as the debt can be 

collected. 
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225 

The Department is not persuaded by the commenter’s 

suggestion that schools should be limited to five years of 

liability in a defensive borrower defense claim or that the 

Department should waive the time limit to file a claim 

entirely. The three-year limitations period strikes the 

proper balance for records retention, the parties’ 

recollection of the events, and documentation requirements. 

Similarly, waiving the time limit could potentially 

generate massive liabilities for schools, which could 

create undesirable incentives for schools and negatively 

impact their long-term financial stability. 

We considered the commenter’s suggestion to begin the 

limitation period at the discovery of harm. The Department 

recognizes that this standard can be found in other bodies 

of law. However, we have concluded that this suggestion 

would not be appropriate for an administrative proceeding 

like the adjudication of a borrower defense claim. 

Determining whether and when a borrower discovered or 

should have discovered the misrepresentation is a difficult 

task that is administratively burdensome. Such a 

determination is very subjective. Such a determination 

also requires the Department to consider evidence that 

likely will not be part of the borrower defense to 
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226 

repayment application or readily available to the borrower 

or the institution, especially if much time has passed 

between enrollment and the discovery of the 

misrepresentation. 

The Department notes that while the limitations period 

begins at graduation, the institution’s misrepresentation 

was likely committed before the borrower enrolled. Taking 

into account the period of the borrower’s enrollment – 

whether two, three, or four years – the effective 

limitations period is between five and seven years. 

Consequently, the limitations period is comparable to State 

statute of limitations periods for civil fraud. For 

example, New York state law requires that a fraud-based 

action must be commenced within six years of the fraud or 

within two years from the time the plaintiff discovered the 

fraud or could have discovered it with reasonable 

diligence.93

Further, when compared to a civil proceeding in a 

court of law, the Department does not possess the court’s 

ability to compel parties to produce documents, call 

93 Sargiss v. Magarelli, 12 NY3d 527, 532 (2009), quoting CPLR 213 [8] 

and CLPR 203 [g].
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227 

witnesses to produce testimony, or hold formal crossexamination. Therefore, the Department is limited in our 

ability to judge claims. As a result, the opportunities 

afforded to civil litigants are not all appropriately 

applied here. The Department has decided to seek a balance 

between the need for students who are eligible for relief 

to obtain it and to allow schools to be exposed to 

unlimited liability. The Department also notes here, as 

elsewhere, that nothing in these final regulations burdens 

a student’s ability to seek relief outside the borrower 

defense claim process. 

Throughout these final regulations, the Department has 

emphasized the need for students to be engaged and informed 

consumers when making determinations about their education 

choices. We disagree with the commenter who stated that 

without notification, presumably from the Department, of 

the borrower’s eligibility to file a claim, the opportunity 

to file a claim is “effectively moot.” We believe 

borrowers are able to inform themselves of their options, 

if they feel they have been harmed by an institution’s 

misrepresentation. 

The three-year limitations period should be considered 

in the context that the period is not tied to the date of 
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228 

the act or omission, but rather from the date of that the 

borrower is no longer enrolled in the institution. For the 

many borrowers who enroll in multi-year programs, the 

Department’s limitations period will be, in actual 

practice, longer than even a five- or six-year limitations 

period that begins to run from the time of the alleged 

wrong. 

As discussed in the 2018 NPRM, the Department believes 

that giving consideration to all comments received and on 

current records retention policies, which was not the 

subject of this rulemaking, that three years after the date 

of the end of their enrollment is sufficient and 

appropriate. Therefore, we believe these final regulations 

provide sufficient time for borrowers to become aware of 

the borrower defense process, gather evidence, and file a 

claim. 

The Department does not believe that, for loans first 

disbursed on or after July 1, 2020, it would be beneficial 

for students or schools to be subjected to different 

limitations periods depending upon the rules of individual 

States or accreditors. The Department notes that statutes 

of limitations for civil suits involving fraud vary between 

States and jurisdictions. For example, the statute of 
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229 

limitations for civil fraud in Louisiana is one year;94

three years in California;95 four years in Texas;96 and five 

years in Kentucky.97 Such a policy leads to inconsistent 

treatment of borrowers and confusion for schools that may 

be subject to different rules by their States and 

accreditors. The Department does not adopt the commenter’s 

proposal to bar a borrower, who has been in default for 

more than three months, from raising a borrower defense 

claim. Unfortunately, the commenter did not add any 

justification for the Department to consider when raising 

this consideration. Even so, in an effort to treat all 

borrowers equally and fairly, we believe that every 

borrower, regardless of payment or non-payment status, 

continues to possess the ability to file a borrower defense 

claim within the limitations period.

The Department disagrees that creating a limitations 

period on filing affirmative claims is “contrary to wellestablished law” and inconsistent with past practice. In 

fact, in the past, the Department has, unwisely, embraced 

94 La. Civ. Code art. 3492. 95 Cal. Civ. Proc. Code §338 (2006). 96 Tx. Civ. Prac. & Rem. §16.001(a)(4). 97 Ky. Rev. Stat. §413.120(11) (2016).
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incongruous and inconsistent limitations periods for 

borrower defense claims. For loans first disbursed on or 

after July 1, 2017, the 2016 final regulations allowed for 

affirmative claims based upon judgments against the school 

to be filed at any time, while breaches of contract and 

substantial misrepresentations were limited to “not later 

than six years.”98 Despite our concerns regarding these 

multi-tiered limitation periods, as a matter of policy, the 

Department has decided to continue these inconsistencies 

until July 1, 2020 due to retroactivity concerns. However, 

the Department looks forward to a consistent application of 

a standard limitations period for loans first disbursed on 

or after July 1, 2020. 

Changes: For loans first disbursed on or after July 

1, 2020, the Department has established a three-year 

limitations period to apply to both affirmative and 

defensive borrower defense claims at §685.206(e)(6). 

BORROWER DEFENSES – RECORDS RETENTION FOR BORROWER 

DEFENSE CLAIMS 

98 34 CFR 685.222(b)-(d).
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Comments: Some commenters supported different 

timeframes, including four years, six years, or the record 

retention timeframes used by States and accreditors. 

Conversely, some commenters argued for shorter time-frames 

such as one or two years. Other commenters argued that 

keeping records for longer than three years raises privacy 

concerns. 

One commenter noted that basing the three-year 

proposed timeframe on the Federal records retention 

requirement does not take into consideration that 

accrediting agencies require much longer retention of 

records and that Federal records likely would not be 

relevant for these claims. Another commenter indicated 

that the Federal records retention requirement is a minimum 

retention requirement and that institutions may hold 

records for longer periods. A number of commenters 

requested that a records retention requirement align with 

other Department records retention policies. 

Discussion: The Department thanks the commenters for 

pointing out the plethora of records retention statutes 

that institutions, especially those with a presence in 

multiple States, are subject to as well as the added 

complexity of accreditor records retention requirements. 
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As discussed in the previous section, we believe that 

the three-year requirement provides ample opportunity for 

borrowers to make a claim as well as consistency with other 

Department requirements for institutions. As stated above, 

the Department continues to assert that the three-year 

limitations period will provide a fair opportunity for 

borrowers to file claims and a fair standard for 

institutions who retain thousands of pages of records. 

This three-year limitation period will also provide greater 

certainty to schools and taxpayers, protect student 

privacy, and ensure that borrower defense matters are 

processed on the basis of relatively fresh recollections 

and with records still available. 

Changes: None. 

BORROWER DEFENSES – EXCLUSIONS 
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Comments: Many commenters supported the Department’s 

non-exhaustive list of exclusions of what constitutes 

grounds for filing a borrower defense to repayment claim. 

These commenters noted that it was helpful to explain that 

certain areas would not be considered as the basis for a 

borrower defense to repayment claim. 

Some of these commenters further noted that they 

appreciated the Department citing factors it would not 

consider. 

Discussion: We appreciate commenters’ support in 

outlining examples of exclusions of what would not 

constitute the basis for a borrower defense to repayment 

claim under these final regulations. 

Changes: None 

Comments: None. 

Discussion: As discussed above, the Department 

removed the phrase “that directly and clearly relates to 

the making of a Direct Loan, or a loan repaid by a Direct 
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234 

Consolidation Loan”99 from the definition of 

misrepresentation to better align this definition with the 

Federal Standard. Both the Federal standard and the 

definition of misrepresentation refer to a 

misrepresentation of material fact “that directly and 

clearly relates to enrollment or continuing enrollment at 

the institution or the provision of educational services 

for which the loan was made.”100 

To align the language in the exclusions section with 

the Federal standard and the definition of 

misrepresentation, the Department is removing the phrase “a 

claim that is not directly and clearly related to the 

making of the loan and provision of educational services by 

the school” and replacing it with the phrase “a claim that 

does not directly and clearly relate to enrollment or 

continuing enrollment at the institution or the provision 

of educational services for which the loan was made.” This 

revision provides consistency and clarity with respect to 

the Federal standard, definition of misrepresentation, and 

exclusions section. 

99 83 FR 37326. 100 Compare § 685.206(e)(2) with §685.206(e)(3).
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Changes: The exclusions apply to a claim that does not 

directly and clearly relate to enrollment or continuing 

enrollment at the institution or the provision of 

educational services for which the loan was made instead of 

to a claim that is not directly and clearly related to the 

making of the loan or the provision of educational services 

by the school. This revision aligns the exclusions section 

with the Federal standard and definition of 

misrepresentation. 

BORROWER DEFENSES – ADJUDICATION PROCESS (Sections 

685.206, 685.212) 

General 

Comments: Many commenters wrote in support of the 

proposed adjudication process. They noted that the process 

is clear and provides due process for all parties. These 

commenters also assert that as compared with the process in 

the 2016 final regulations, the proposed process strikes a 

fairer balance between individual responsibility and school 

accountability. 

Discussion: We appreciate the support of these 

commenters. For the reasons described earlier in this 
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236 

document, we agree that our final rule strikes the right 

balance. 

Changes: We are adopting, with changes for 

organization and consistency, Alternative B for paragraphs 

(d)(5) Introductory Text and (d)(5)(i) and (ii) 

(Affirmative and Defensive) for loans first disbursed on or 

after July 1, 2020. 

Process 

Comments: Many commenters expressed support for the 

proposed process providing an opportunity for schools to 

respond and provide evidence when notified of a borrower 

defense to repayment claim. One commenter who supported 

the proposed process noted that it would provide a clear 

process for both parties and, thus, enable the Department 

an opportunity to render a fair decision, hold appropriate 

parties accountable, and greatly reduce abuse of the loan 

discharge provision. 

One commenter expressed concern that the Department 

may require additional information about the borrower’s 

personal employment history that is irrelevant to the 

allegations against a school. This commenter further 

asserts that racism impacts the ability to find employment, 
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causing borrowers of color to appear less deserving of 

relief. 

Another commenter recommended that the Department 

employ an initial review of a borrower’s discharge 

application to determine whether there is probable cause or 

jurisdiction to continue the investigation. The commenter 

recommended that, if there is insufficient information 

provided by the student or there is no jurisdiction, a form 

letter be sent to the borrower on the determination that 

the application has been closed with no further action by 

the Department. The borrower may then file a new 

application that meets the Department’s standards. The 

commenter also recommended that the regulation be 

consistent and align with Federal regulations under 34 CFR 

685.206 and 668.71. 

Some commenters suggested that the Department adopt a 

principle from civil litigation that pleadings from parties 

who are not represented by an attorney be liberally 

construed. These commenters recommend that the Department 

liberally construe applications from borrowers who are not 

represented by an attorney. 

Another commenter asserted that requiring written 

submissions in government proceedings can be an undue 
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238 

burden. This commenter asserts that the Supreme Court of 

the United States recognized the burden of requiring 

written submissions in Goldberg v. Kelley,101 and the 

Department should recognize this burden and revise its 

process. This commenter further noted that the lack of 

relief in the past may lead low-income borrowers to believe 

that it is not worth paying attention to the Department’s 

notices. 

Discussion: The Department appreciates support from 

commenters for our revised process. We agree that these 

regulations create a more balanced and fair process. The 

2016 final regulations only expressly gave institutions the 

opportunity to meaningfully respond pursuant to the group 

claims process, assuming the institution was not closed.102 

The revised process affords institutions the opportunity to 

respond to allegations against the institution during the 

adjudication process for the borrower’s claim. These 

regulations reduce the likelihood that the Department and 

101 397 U.S. 254 (1970). 102 34 CFR 685.222.
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239 

schools will be burdened by unjustified claims or that 

taxpayers will bear the cost of wrongly discharged loans. 

The Department will only request information that is 

or may be relevant to the defenses that the borrower 

asserts. As the Department stated in the 2016 final 

regulations, the kind of evidence that may satisfy a 

borrower’s burden will necessarily depend on the facts and 

circumstances of each case.103 

The Department does not have sufficient resources to 

perform a preliminary review of all claims to assess 

jurisdiction or sufficiency of information prior to 

performing a full review, and such a preliminary review 

would unnecessarily divert resources from the timely review 

of other claims. Creating such a preliminary review also 

would result in giving borrowers numerous attempts to file 

a satisfactory application, which could result in 

additional burden and backlog for the Department’s 

processing of claims and a delay in awarding relief to 

borrowers in a timely manner. The borrower is required to 

submit a completed application, which the Department will 

103 81 FR at 75962. 
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240 

review during the regular adjudication process. Incomplete 

applications will not be accepted, and borrowers will be 

notified when the Department is unable to process an 

incomplete application. Borrowers may submit another, 

completed borrower defense to repayment application within 

the limitations period. Borrowers must submit a completed 

application to receive Federal student aid and also must 

submit a completed borrower defense to repayment 

application to receive relief. 

The Department revised § 685.206(e)(11)(ii) to clarify 

that the Department will not issue a written decision, 

which is final and not subject to further appeal, if the 

Department receives an incomplete application. Instead, 

the Department will return the application to the borrower 

and notify the borrower that the application is incomplete. 

The Department, however, is not precluded, when directed by 

the Secretary, from requesting more information from the 

borrower or the school with respect to the borrower defense 

to repayment process. 

The Department is cognizant of how these final 

regulations will align with other Federal regulations. The 

definition of misrepresentation, at 34 CFR 685.206(e)(3), 

for the borrower’s defense to repayment application is 
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purposefully different than the definition of substantial 

misrepresentation in 34 CFR 668.71(c) for initiating a 

proceeding or other measures against the institution. The 

different definitions of misrepresentation allow the 

Department to act in a financially responsible manner to 

protect taxpayers. The Department will discharge a loan, 

in whole or in part, when a borrower demonstrates by a 

preponderance of the evidence a misrepresentation pursuant 

to 34 CFR 685.206(e)(3) and financial harm to the borrower; 

this provision relates to loan forgiveness for borrowers. 

The Department will exercise its enforcement authority 

against institutions pursuant to the 34 CFR 668.71(c); this 

provision relates to the Department’s enforcement authority 

against schools. 

As explained in more detail above, the definition of 

misrepresentation for Department enforcement actions is 

broader than the definition of misrepresentation for 

borrower defense to repayment claims because as the latter 

underpins, in part, the Department’s authority to recover 

liabilities, guard the Federal purse, and protect Federal 

taxpayers. 

Liberally construing pleadings of persons who are not 

represented by an attorney is appropriate in a court and is 
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required pursuant to rules governing judicial proceedings. 

The Department is not a court of law and is not conducting 

a judicial proceeding that requires an attorney. The 

Department intends to provide instructions that are easy to 

understand and does not expect borrowers to provide legal 

arguments. The Department need not liberally construe 

applications filed by unrepresented borrowers, as doing so 

supposes that they are less capable of completing an 

application, which the Department does not believe is the 

case, however we will use our discretion and expertise, 

when necessary, to determine the merits of a borrower 

defense to repayment claims. 

In Goldberg v. Kelley, the Supreme Court considered 

whether a State may terminate public assistance payments to 

a particular recipient without affording the recipient the 

opportunity for an evidentiary hearing prior to the 

termination.104 The Supreme Court stated that the 

“opportunity to be heard must be tailored to the capacities 

and circumstances of those who are to be heard.”105 

104 Goldberg, 397 U.S. at 255. 105 Id. at 268–69.
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Here, we are describing a process afforded to an 

individual who had the opportunity to engage in higher 

education, meaning their written submissions are 

appropriate for students who have been admitted to 

institutions of higher education as well as the 

institutions that they attended. Such individuals will 

have received secondary education or the equivalent of such 

education. With respect to Parent PLUS loans, parents who 

are borrowers have experience in applying for Federal 

student aid or other loans and in making other financial 

decisions. Requiring written submissions should not be a 

substantial burden on borrowers or institutions and allows 

the Department to easily keep a record of each party’s 

evidence and arguments. A written record also is helpful 

to borrowers or institutions who may wish to later 

challenge the Department’s determination in court 

proceedings. 

Unlike the 2016 final regulations, these final 

regulations require the Department to consider the 

borrower’s application and all applicable evidence. The 

borrower will receive a copy of all applicable evidence 

and, thus, will know what evidence the Department relied 

upon in making its determination. 
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The Department encourages all borrowers to read and 

pay careful attention to the Department’s notices. The 

Department will continue to issue such notices and will 

strive to make notices easy to understand and accessible to 

all borrowers. 

Changes: We are adopting, with changes for 

organization and consistency, the approach in Alternative B 

for paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) of the 2018 NPRM for loans 

first disbursed on or after July 1, 2020. 

The Department is revising 685.206(e)(11)(ii) to 

clarify that if the Department receives a borrower defense 

to repayment application that is incomplete and is within 

the limitations period in 685.206(e)(6) or (e)(7), it will 

not issue a written decision on the application and instead 

will notify the borrower in writing that the application is 

incomplete and will return the application to the borrower. 

Comments: Some commenters recommended that the 

Department revise the process to consider applications for 

borrower defense to repayment when the Department is 

already in possession of documents and evidence relevant to 

the claim. 
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Other commenters noted that the proposed rule 

indicated that if the Secretary uses evidence in his or her 

possession, the school will be able to review and respond 

to such evidence, but that borrowers are not afforded the 

same opportunity. The commenters request that both parties 

to the claim be provided an opportunity to review and 

respond to all evidence under consideration in the 

determination of the claim. One of these commenters noted 

that under some States’ processes, schools and borrowers 

have the opportunity to provide evidence and arguments and 

to respond to each other’s submissions. 

Other commenters expressed concern that the Department 

provides schools, but not borrowers, an opportunity to 

respond to evidence at the point in the process where the 

Department is determining whether to discharge the 

borrower’s loan. 

Discussion: The Department agrees with the commenters 

who recommended that the Department may consider evidence 

otherwise in the possession of the Secretary and adopts, 

with changes for organization and consistency, the approach 

in Alternative B for Paragraphs 685.206(d)(5) Introductory 
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Text and (d)(5)(i) and (ii) (Affirmative and Defensive) of 

the 2018 NPRM.106

The Department also agrees with commenters that, 

subject to any applicable privacy laws, both the borrower 

and the institution should be able to review the evidence 

in possession of the Secretary that will be considered in 

the evaluation of the claim. The Department values 

transparency and would like both the borrower and the 

institution to have the opportunity to review evidence in 

possession of the Secretary and to respond to such 

evidence. Accordingly, the Department is revising the 

regulatory language to expressly state that if the 

Secretary considers evidence otherwise in her possession, 

then both the borrower and the institution may review and 

respond to that evidence and submit additional evidence. 

The Department acknowledges the concern that the 

borrower should have an opportunity to review and respond 

to the school’s submission. The Department stated in its 

106 83 FR 37326.
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247 

2018 NPRM that “the borrower and the school will each be 

afforded an opportunity to see and respond to evidence 

provided by the other.”107 Accordingly, the Department is 

revising the final rule to provide that a borrower has the 

opportunity to review the school’s submission and to 

respond to issues raised in that submission. 

Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) of the 2018 NPRM for loans 

first disbursed on or after July 1, 2020, and revises § 

685.206(e)(9) to expressly state that the Secretary may 

consider evidence in his or her possession provided that 

the Secretary permits the borrower and the institution to 

review and respond to this evidence and to submit 

additional evidence. The Department also will revise § 

685.206(e)(10) to provide that a borrower will have the 

opportunity to review a school’s submission and to respond 

to issues raised in that submission. We also make a 

107 83 FR 37262.
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248 

conforming change in § 685.206(e)(11), to state that the 

Secretary issues a written decision after considering “all 

applicable evidence” as opposed to specifying that such 

evidence would come from the borrower and the school. 

Internal or Voluntary Resolution with School 

Comments: One commenter suggested that borrowers 

should be required to bring their claims to the school 

first and provide the school with an opportunity to clearly 

explain accountability and legal consequences to the 

borrower if the accusation is proven to be false or 

unfounded. 

Another commenter who suggested we consider a 

Resolution Agreement process similar to that used within 

the Department’s Office for Civil Rights when considering 

borrower defense claims. The commenter suggested that this 

would reduce the burden on the Department’s resources by 

allowing borrowers and schools to more quickly resolve the 

dispute and loan obligations prior to the Department’s 

adjudication process. Another commenter suggested adding a 

period of time during which the borrower and school may 

meet to voluntarily resolve any dispute short of commencing 

with a filed claim. 
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A group of commenters recommended a new provision that 

would require borrowers seeking to file an affirmative 

claim to first inform the school of their concern and give 

the school time to resolve the matter. 

One commenter suggested that, if a school is 

deficient, the borrower should sue the school to recover 

the money to repay his student loans. 

Discussion: The Department encourages institutions to 

provide an internal dispute resolution process to resolve a 

borrower’s claims, including affirmative claims, before the 

borrower files the claim with the Department. The benefits 

of such a process included that the borrower could seek 

relief for cash payments, private loans, and 529 plans used 

to pay tuition. In such a case, should the institution 

determine that it should repay some or all of a borrower’s 

loans, these payments will not be considered as a defaulted 

loan. The Department, however, will not require the 

borrower to go through the institution’s internal dispute 

resolution process prior to filing an application with the 

Department. The borrower retains options to resolve a 

claim, such as a traditional court proceeding, arbitration 

proceeding, or State-level administrative process, and the 

Department does not wish to limit the borrower’s ability to 
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choose the best process for them. Likewise, the Department 

also does not wish to impose any requirement as to which 

process the borrower must go through first. Borrowers are 

best suited to determine which process will be most 

beneficial in their personal circumstances and will benefit 

from having options. 

 For reasons of administrative burden and resource 

allocation, we do not believe it is necessary to include an 

early dispute resolution process in these final 

regulations, whereby the Department or another party would 

mediate borrower defense disputes between a borrower and 

the school, to attempt to resolve the disputes without the 

need for the parties to go through the Department’s full 

borrower defense adjudication process. 

These final regulations do not prevent a borrower from 

engaging in other, existing dispute resolution processes to 

resolve any claim with an institution prior to filing an 

application with the Department. A borrower and 

institution also may choose to resolve a claim after the 

borrower files an application with the Department. The 

borrower may voluntarily withdraw his or her application 

with the Department if the borrower resolves a claim with 

the institution. 
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251 

 Institutions may disclose any internal dispute 

resolution process available to borrowers and explain the 

benefits of any such process. Institutions also may 

disclose the consequences of making a false or fraudulent 

allegation in the school’s internal dispute resolution 

process. The institution, however, should not present the 

consequences of making a false or fraudulent allegation 

with the intent to prevent, or in a manner that prevents, a 

borrower from filing a borrower defense to repayment 

application with the Department. 

 The Department does not prohibit a borrower from 

filing or require a borrower to file a lawsuit against an 

institution. Borrowers may utilize any process available 

to them. 

 Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) of the 2018 NPRM for loans 

first disbursed on or after July 1, 2020. 

Role of the School in the Adjudication Process 

Comments: Some commenters expressed concern that the 

proposed regulation involves schools in a manner that 

privileges schools with respect to the adjudicatory process 
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252 

with no gesture towards fairness or balance for the 

borrowers. 

One commenter recommended the Department limit the 

schools’ roles in the process to avoid overrepresentation 

of institutional interests to the detriment of harmed 

borrowers. The commenter noted that borrowers are at a 

distinct disadvantage, stating that while the school 

maintains records on the student’s time at the school, the 

school’s disclosures to that and other prospective or 

enrolled students, and hundreds or thousands of other data 

points, the student is largely reliant on his own testimony 

-- and largely dependent on the Department and other factfinding agencies to seriously investigate any claims. The 

commenter urges the Department to be cautious to protect 

the borrower from undue pressure by the school. 

Another commenter urged the Department to make changes 

to ensure the process is accessible and equitable to 

borrowers unrepresented by an attorney, since the proposed 

process, in the commenter’s view, stacks unrepresented 

borrowers against represented schools, does not allow 

borrowers to re-apply based on evidence not previously 

considered, and will necessitate that borrowers seek 

guidance as to what to include in their applications. Some 
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253 

commenters expressed concern that providing documentation 

associated with a defense to repayment claim to a school 

provides opportunities for schools to retaliate against a 

borrower for filing a claim. The commenters suggested that 

any act of retaliation should be viewed as evidence to 

support the approval of a defense to repayment claim. 

Discussion: The Department believes that its 

adjudicatory process fairly balances the interests of 

institutions and students. The Department’s revisions to 

the proposed regulations allow both the borrower and the 

school the opportunity to see and respond to evidence 

provided by the other. The revisions further allow both 

the borrower and the school to see and respond to evidence 

otherwise in the possession of the Secretary that the 

Secretary considers in the adjudication of the claim. Such 

a process provides both borrowers and schools with due 

process protections.

It is critical that schools be provided an opportunity 

to respond to claims made against them so that the 

Department can adjudicate claims based on a complete 

record. It is incumbent upon the borrower to provide 

evidence to the Secretary to establish by a preponderance 

of the evidence that the school made an act or omission 
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254 

that qualifies as a basis for borrower defense to repayment 

relief, and it is reasonable to provide a school with the 

opportunity to respond to such claims. Additionally, if 

institutions have unknowingly made a misrepresentation or 

have an employee who has made misrepresentations, the 

Department’s notice to the institution of the borrower’s 

claim may help the institution implement corrective action 

more quickly to ensure that other students are not 

impacted. 

The Department disagrees that students are largely 

reliant on their own testimony to file a defense to 

repayment claim. The Department urges students to make 

informed consumer decisions and treats students as 

empowered consumers. While students should request 

important information that is relevant to their enrollment 

decision in writing, institutional misconduct is never 

excusable. 

The Department intends to publish instructions for 

submitting a borrower defense application that will explain 

the process and provide other relevant information to help 

borrowers successfully complete the application. 

The Department acknowledges that institutions are more 

likely than students to have access to paid legal counsel, 
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255 

but a student will not need paid legal counsel to submit a 

borrower defense to repayment application. Institutions 

almost always are more likely than students to have access 

to paid legal counsel, but students do not need an attorney 

to file a claim with the Department’s Office for Civil 

Rights and similarly will not need an attorney to submit a 

borrower defense to repayment application. Of course, 

students may seek help from legal aid clinics or take 

advantage of services from numerous student advocacy groups 

in submitting a borrower defense to repayment application. 

Additionally, institutions do not need to employ counsel to 

respond to a borrower’s application and may choose to have 

staff - for example, staff in their Financial Student Aid 

office or admissions office - submit a response to the 

Department. Moreover, by adopting a preponderance of the 

evidence standard, the Department believes that a student 

should reasonably and more easily be able to satisfy that 

standard. 

To address concerns that a student may have discovered 

evidence relevant to a borrower defense to repayment claim 

through a lawsuit or an arbitration proceeding, the 

Department revised section 685.206(e)(7) to state that the 

Secretary may extend the three-year limitations period when 
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256 

a borrower may assert a defense to repayment under section 

685.206(e)(6) or may reopen the borrower’s defense to 

repayment application to consider evidence that was not 

previously considered in the exceptional circumstance when 

there is a final, non-default judgment on the merits by a 

State or Federal Court that establishes that the 

institution made a misrepresentation, as defined in § 

685.206(e)(3), or a final decision by a duly appointed 

arbitrator or arbitration panel that establishes that the 

institution made a misrepresentation, as defined in § 

685.206(e)(3). In this exceptional circumstance, the 

Secretary may extend the time period when a borrower may 

assert a defense to repayment or may reopen a borrower’s 

defense to repayment application to consider evidence that 

was not previously considered. 

 The Department agrees that students should not suffer 

retaliatory acts by institutions that have been accused of 

misrepresentation, and the Department does not tolerate 

retaliation. The Department may consider evidence of any 

retaliatory acts by the institution in evaluating the 

borrower’s application. The borrower may submit evidence 

of any such retaliatory acts to the Department. The 

Department is revising the proposed regulations to allow 
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257 

the borrower to file a reply to address the issues and 

evidence raised in the school’s submission as well as any 

evidence otherwise in the possession of the Secretary that 

the Department will consider. The borrower’s reply will be 

the final submission, and the final regulations do not 

provide the school with the opportunity to file a surreply. In this sense, the student will have the final word 

and may report any retaliatory acts to the Department. The 

Department also is not listing the types of information 

that the school may receive in these final regulations as 

proposed in the 2018 NPRM. The school will still receive 

the student’s application as well as any evidence otherwise 

in the possession of the Secretary and used to adjudicate a 

borrower defense claim, but the language listing the 

information the school will receive is unnecessary. These 

revisions provide a more equitable balance and address the 

commenters’ concerns. 

Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) for loans first disbursed 

on or after July 1, 2020. As noted above, the Department 

revised section 685.206(e)(7) to provide that the Secretary 
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258 

may extend the time period when a borrower may assert a 

defense to repayment under section 685.206(e) or may reopen 

the borrower’s defense to repayment application to consider 

evidence that was not previously considered in two 

exceptional circumstances. The borrower may now file a 

reply that addresses the issues and evidence raised in the 

school’s submission as well as any evidence otherwise in 

possession of the Secretary. Additionally, the Department 

will no longer list the types of information that the 

school may receive as proposed in §685.206(d)(8)(i) because 

the final regulations expressly state the information the 

school will receive in §685.206(e)(10). 

Timelines 

Comments: Several commenters requested the Department 

include specific timeframes within which various steps of 

the adjudication process would occur. Many commenters 

recommended a 45-day interval for a school to respond to a 

borrower’s claim, a 30-day interval for the borrower to 

reply to the school’s initial response, and an additional 

15-day interval for the school to submit any new evidence 

as a result of the borrower’s reply. Other commenters 

proposed different timeframes for a school’s response, a 

borrower’s reply, and/or the resolution of the claim. 
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259 

Other commenters noted that the proposed process 

changes are described by the Department as a means to 

reduce the time required to review claims because it would 

discourage frivolous claims. The commenters note that most 

of the currently pending claims are supported by evidence 

in the Department’s possession. They further assert that 

the proposed process requires a review of voluminous 

paperwork prepared by counsel for the school, which is 

likely to slow rather than expedite the adjudication 

process. 

Some commenters who supported the proposed process 

expressed concern that the regulation did not include 

specific information regarding how final determinations 

would be made or timeframes for the adjudication of claims. 

Discussion: The Department appreciates the 

recommendations made by commenters but does not believe 

that the proposed time limits would be appropriate in 

certain circumstances. For instance, the Department most 

likely could not adhere to the proposed time limits if a 

large number of defense to repayment claims were submitted 

to the Department simultaneously, which could be the case 
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260 

if an outside entity organized a particular group of 

students to submit claims en masse. 

The Department agrees that it is reasonable to 

prescribe a timeframe for an institution’s response and the 

borrower’s reply and intends to do so in the instructions 

for the defense to repayment application and the notice to 

the institution. In response to these comments, the 

Department revised § 685.206(e)(16)(ii) to specify that the 

Department will notify the school of the defense to 

repayment application within 60 days of the date of the 

Department’s receipt of the borrower’s application. This 

revision makes clear that the school will receive the 

borrower’s application in a timely manner. 

The Department also revised § 685.206(e)(10)(i) to 

state that the school’s response must be submitted within a 

specified timeframe included in the notice, which shall be 

no less than 60 days. To give the borrower as much time as 

the school, the Department also revised § 

685.206(e)(10)(ii) to give the borrower no less than 60 

days to submit a reply after receiving the school’s 

response and any evidence otherwise in the possession of 

the Secretary. Although commenters suggested a timeframe 

less than 60 days for the school’s response and the 
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261 

borrower’s reply, the Department would like to give both 

borrowers and schools ample and equivalent time to review 

and respond to each other’s submissions. The Department 

realizes that borrowers and schools have other matters to 

attend to and would like both borrowers and schools to have 

sufficient time to compile records to support their 

respective submissions. These timeframes also reduce the 

administrative burden on the Department. Because of 

potential process changes over time, the Department will 

provide more specific instructions in the application and 

notice to institutions and students rather than in the 

final regulation. 

The Department does not agree that it has all of the 

evidence required to adjudicate borrower defense claims in 

its possession. For example, for one college, the 

Department did not complete an investigation of the 

documents provided by the institution, but relied on the 

California Attorney General to review some of the documents 

and draw conclusions. It was the California AG’s 

conclusions, and subsequent allegations, that prompted the 

Department to take action. The Department must also assess 

financial harm for each pending claim and may not 
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262 

immediately have all the relevant evidence necessary to 

make such a determination. 

As stated in the 2018 NPRM, the Department is 

committed to providing both borrowers and schools with due 

process and affords both the borrower and the institution 

the opportunity to see and respond to evidence provided by 

the other. We are revising the final regulations to 

expressly afford the borrower an opportunity to file a 

reply to address the issues and evidence in the school’s 

submission as well as any evidence otherwise in the 

possession of the Secretary. 

The Department’s regulations at § 685.206(e)(3) 

provide how determinations will be made and examples of 

evidence of misrepresentation. Although such a process may 

be longer, this approach provides a fair and more equitable 

process for both borrowers and institutions. 
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263 

Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) for loans first disbursed 

on or after July 1, 2020. The Department is also revising 

at § 685.206(e)(10) to allow the borrower to file a reply 

to address issues and evidence in the school’s submission 

as well as any evidence otherwise in the possession of the 

Secretary. 

The Department revised § 685.206(e)(16)(ii) to specify 

that the Department will notify the school of the defense 

to repayment application within 60 days of the date of the 

Department’s receipt of the borrower’s application. The 

Department also revised § 685.206(e)(10)(i) to state that 

the school’s response must be submitted within a specified 

timeframe included in the notice, which shall be no less 

than 60 days. 

Comments: Some commenters sought assurance that, while 

a borrower’s defense to repayment claim is pending, the 

borrower’s loans should be placed in forbearance so that no 

additional financial burden accrues while the claim is 

being adjudicated. 
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264 

One commenter suggested that we include a provision 

that would forgive a borrower’s interest accrual when the 

adjudication timeline is not met by the Department. The 

commenter asserts that this would be a show of good faith 

to borrowers, assuring them the Department will process 

claims in a reasonable timeframe, and that borrowers will 

not be the ones to pay the price if it does not. 

Discussion: As explained above, the Department is 

willing to place claims into administrative forbearance 

while a claim is pending. The Department determined that 

the accrual of interest while a loan is in administrative 

forbearance would deter a borrower from filing an 

unsubstantiated borrower defense to repayment application. 

The Department is changing the procedures to process 

borrower defense to repayment applications in these 

regulations. As stated in the 2016 final regulations, we 

are still unable to establish specific timeframes for 

processing claims. Neither these final regulations nor the 

2016 final regulations set a timeline for the Department’s 

adjudication. Nonetheless, the Department will strive to 

efficiently resolve all borrower defense to repayment 

applications in a timely manner. In lieu of forgiving a 

borrower’s interest accrual, the Department will place the 
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265 

loans in administrative forbearance while the borrower 

defense to repayment application is pending. As explained, 

above, the Department wishes to deter borrowers from filing 

unsubstantiated borrower defense to repayment claims, and 

interest accrual will serve as a deterrent. Automatically 

placing loans in administrative forbearance is a compromise 

from the Department’s position in the 2018 NPRM, proposing 

to require borrowers to request administrative forbearance 

separately from the borrower defense to repayment 

application. Automatically granting administrative 

forbearance to borrowers who complete and submit a borrower 

defense to repayment application is a sufficient response 

to the concern raised by the commenter about interest 

accrual. 

Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) for loans first disbursed 

on or after July 1, 2020. The Department is amending 

§685.205(e)(6) for loans to be placed in administrative 

forbearance for the period necessary to determine the 

borrower’s eligibility for discharge under §685.206, which 
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266 

includes the borrower defense to repayment regulations in 

these final regulations. 

Appeals 

Comments: Several commenters advocated for the 

inclusion of an appeals process for schools when a borrower 

defense to repayment claim is approved by the Department 

and for borrowers when a claim is denied. These commenters 

argued that, under the proposed regulations, a school 

seeking review of an approved borrower defense to repayment 

claim would be required to appeal their case in Federal 

court and create too high a bar for both borrowers and 

schools. The commenters assert that a non-appealable 

decision by the Department is an affront to the basic 

elements of due process rights of schools accused of 

misrepresentation by former students. 

One commenter requested an appeal be specifically 

permitted when new evidence comes to light. This commenter 

noted that, in a rule that requires borrowers to 

demonstrate intent, knowledge, or reckless disregard to 

meet the Federal standard for loan discharge, evidence is 

likely to come from State and Federal investigations 

spurred by borrower complaints, and with the extremely 
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267 

limited filing deadline that had been proposed, the 

taxpayer risk of that reconsideration is minimal. 

Some commenters expressed general concern that the 

adjudicatory process does not allow borrowers to reapply 

based on new evidence. These commenters inquired whether 

borrowers who have received denials will be permitted to 

submit new applications with new evidence. These 

commenters suggested that to the extent the Department 

denies borrower defense applications for failure to state a 

claim, the Department should notify the borrower of the 

reason for the denial in writing and should allow for 

reconsideration if a new application with new evidence is 

submitted. 

Another commenter asserted that it is unjust to 

provide schools, and not students, greater due process 

rights, including the ability to appeal a Department’s 

decision. 

Discussion: The Department does not believe it is 

necessary add an appeals process to the adjudication 

process, nor does due process require an appeal. The 

Department provides both the borrower and the school the 

opportunity to see and respond to evidence provided by the 

other, which its current procedures for adjudicating 
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268 

borrower defense to repayment claims do not require. 

Additionally, the Department is providing both borrowers 

and institutions an opportunity to review and respond to 

evidence otherwise in possession of the Secretary that is 

used to adjudicate the claim. 

It is incumbent upon borrowers and schools to provide 

as much information as possible when making or responding 

to a borrower defense claim, and these final regulations 

provide a fair and equitable process for both parties. A 

party may challenge the Department’s decision through a 

judicial proceeding, and courts are required to liberally 

construe pleadings of a party who is not represented by an 

attorney. Additionally, the Department is not the only 

avenue of relief for a borrower; the borrower may pursue 

relief through his or her State consumer protection agency 

or avail himself or herself of other consumer protection 

tools. 

Although the Department does not allow borrowers to 

submit an appeal, reapply, or request reconsideration of 

the application, the Department made certain revisions to 

address concerns about newly discovered evidence. As 

stated above, the Department revised section 685.206(e)(7) 

to state that the Secretary may extend the time period when 
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269 

a borrower may assert a defense to repayment under section 

685.206(e) or may reopen the borrower’s defense to 

repayment application to consider evidence that was not 

previously considered in the exceptional circumstance when 

there is a final, contested, non-default judgment on the 

merits by a State or Federal Court that establishes that 

the institution made a misrepresentation, as defined in § 

685.206(e)(3), or a final decision by a duly appointed 

arbitrator or arbitration panel that establishes that the 

institution made a misrepresentation, as defined in § 

685.206(e)(3). 

This exceptional circumstance allows the borrower to 

reapply and provide newly discovered evidence to the 

Department for consideration. Additionally, as explained 

in the section regarding pre-dispute arbitration 

agreements, the limitations period will be tolled for the 

time period beginning on the date that a written request 

for arbitration is filed, by either the student or the 

institution, and concluding on the date the arbitrator 

submits in writing, a final decision, final award, or other 

final determination to the parties. Tolling the 

limitations period for such a pre-dispute arbitration 

arrangement between the school and the borrower will allow 
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270 

the borrower to discover evidence that may potentially be 

used in a borrower defense to repayment application and 

also provide the school with the opportunity to resolve the 

claim without cost to the taxpayer. Finally, the 

Department is providing a more robust borrower defense to 

repayment process in allowing both borrowers and schools to 

view and respond to each other’s submissions. This robust 

process will make it less likely that there will be newly 

discovered evidence. 

As stated above, the Department does not have 

sufficient resources to perform a review of claims to 

assess whether the borrower failed to state a claim and to 

allow for reconsideration if a second application with new 

evidence is submitted. Such a process will unnecessarily 

divert resources from the timely review of other claims. 

Such a process also will result in giving borrowers 

countless attempts to file a satisfactory application. The 

borrower is required to submit a completed application, 

which the Department will review during the regular 

adjudication process. 

The Department’s process also does not provide schools 

with an appeal. The Department may choose to initiate a 

proceeding to require a school whose act or omission 
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271 

resulted in a successful borrower defense to repayment to 

pay the Department the amount of the loan to which the 

defense applies. The recovery proceeding, which would be 

conducted in accordance with 34 CFR part 668 subpart G, is 

not an appeal. 

Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) for loans first disbursed 

on or after July 1, 2020. As noted above, the Department 

revised section 685.206(e)(7) to provide that the Secretary 

may extend the time period when a borrower may assert a 

defense to repayment under section 685.206(e) or may reopen 

the borrower’s defense to repayment application to consider 

evidence that was not previously considered in two 

exceptional circumstances. The Department is revising 

section 685.206(e)(10) to provide that a borrower will have 

the opportunity to review a school’s submission and to 

respond to issues raised in that submission. The proposed 

regulations also are further revised to give the borrower 

an opportunity to file a reply that addresses the issues 

and evidence raised in the school’s submission as well as 

any evidence otherwise in possession of the Secretary. 
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Independence of Hearing Officials and Administrative 

Proceeding 

Comments: Some commenters suggested that the 

Department use Administrative Law Judges (ALJs) to review 

and make determinations on borrower defense to repayment 

claims. These commenters argued that ALJs are legal 

professionals and would provide a level of assurance to all 

parties that the process is fair. Some commenters also 

argued that administrative review by ALJs instead of a 

review by Department staff will insulate schools from any 

political bias and asserted that the Department’s staff 

varies based on the President’s administration. 

One commenter recommended that an ALJ make the 

determination on a claim, and that the parties be permitted 

to appeal this determination within a specified time. This 

commenter would require the Department to issue the 

determination on appeal in a manner consistent with the 

publication of decisions from the Department’s Office of 

Hearings and Appeals (OHA). Neither party would be able to 

appeal the determination to the Secretary. 

Other commenters expressed concern that the 

adjudication process creates a conflict of interest within 
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273 

the Department, since the Department would be responsible 

for advocating on behalf of borrowers and determining the 

outcome of the case. These commenters urged the Department 

to ensure the independence of decision makers involved in 

borrower relief determinations. 

Discussion: We believe that, under the 2016 final 

regulations, the Department held too much power in that the 

Secretary could both initiate group claims and adjudicate 

appeals of those claims, and the institution, assuming the 

institution did not close, would have a limited opportunity 

to respond to the Department’s allegations in the group 

claim process. Under these final regulations, only a 

borrower may initiate a claim, and both the borrower and 

the institution always have the opportunity to provide 

evidence to support their positions. Because the Secretary 

is required to provide to borrowers and institutions any 

additional evidence in their possession and that is used to 

adjudicate a claim, there is a greater level of 

transparency in the adjudication process. 

In contrast to the 2016 final regulations, these final 

regulations do not provide a process for the Secretary to 

initiate a claim. Section 455(h) of the HEA expressly 

states that the “Secretary shall specify in regulations 
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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.” (emphasis added) We 

believe the better reading of Section 455(h) of the HEA is 

for the Department to adjudicate only borrower-initiated 

defense to repayment claims. We believe this will result in 

the adjudication of such claims being more balanced and 

less influenced by changes in Department policy. 

Through these final regulations, the Department is 

providing a fair and equitable process that does not 

require OHA or ALJs for the determination of a borrower 

defense to repayment claim. The Department has learned 

through processing tens of thousands of defense to 

repayment claims that there are not sufficient resources to 

subject each claim to an overly-extensive administrative 

procedure, burdening students and delaying the timely 

adjudication of claims. The Department believes that 

including the OHA in the process of adjudicating claims 

would create a regulatory process that is more costly for 

the Department to administer and could create the false 

impression that the claim or the determination are subject 

to a hearing and appeal, which is not the case. 
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The Department appreciates the suggestion regarding 

the incorporation of an administrative law judge in the 

borrower defense process, but we have determined, as above, 

that this would unnecessarily complicate, make more 

expensive, and create confusion about the availability of a 

hearing and appeal. 

The commenter’s inclusion of an ALJ would not change 

the Department’s calculation of not including an appeals 

process in these final regulations, as explained in the 

previous section. 

The Department does not advocate on behalf of the 

borrower or the school. The Department is a neutral 

arbiter and will consider the evidence submitted by both 

the borrower and the institution. Additionally, the 

Department will provide both the borrower and the school 

with any evidence otherwise in the possession of the 

Secretary, and both parties will have an opportunity to 

respond to such evidence. 
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Changes: The Department adopts, with changes for 

organization and consistency, the approach in Alternative B 

for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 

(ii) (Affirmative and Defensive) for loans first disbursed 

on or after July 1, 2020. 

BORROWER DEFENSES – RELIEF (Section 685.206) 

General 

Comments: One commenter suggested amendments to the 

proposed regulations to require that, in the case of an 

approved borrower defense to repayment, the Secretary 

reverse an affected loan’s default status and reinstate the 

borrower’s eligibility for title IV aid, and update reports 

to consumer reporting agencies to which the Secretary had 

previously made adverse credit reports regarding the loan. 

The commenter noted that proposed regulations provide that 

the Secretary may take such actions and stated that 

regardless of whether both affirmative and defensive claims 

are allowed, the Secretary should always reverse an 

affected loan’s default status and any adverse credit 

reports as well as recalculate a borrower’s eligibility 

period for which the borrower may receive Federal 

subsidized student loans. 
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Discussion: The Department’s practice has been, and 

currently is, that if the Department had previously made 

adverse credit reports to consumer reporting agencies 

regarding a Federal student loan that is the subject of an 

approved borrower defense application, the Department will 

take the appropriate steps to update those credit reports. 

Similarly, it is the Department’s practice that, if 

appropriate, the necessary steps will be taken to reinstate 

the borrower’s eligibility for title IV aid. 

The Department revised the regulations to expressly 

provide that the relief awarded to a borrower will include 

updating reports to consumer reporting agencies to which 

the Secretary previously made adverse credit reports with 

regard to the borrower's Direct Loan or loans repaid by the 

borrower’s Direct Consolidation Loan. Additionally, the 

Department is revising the regulations to reference that as 

part of any further relief the borrower may receive, the 

Department will eliminate or recalculate the subsidized 

usage period that is associated with the loan or loans 

discharged, pursuant to 34 CFR § 685.200(f)(4)(iii). The 

Department did not rescind the revisions made to 34 CFR § 

685.200 through the 2016 final regulations. The Department 
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278 

also is clarifying that the list of further relief a 

borrower may receive is an exclusive list.108

However, such steps may not be applicable for all 

approved borrower defense applicants. For example, we do 

not anticipate that all approved borrower defense 

applicants will have been subject to adverse credit 

reporting as a result of a defaulted Federal student loan. 

Similarly, not all approved borrower defense applicants 

will need a determination that they are not in default on 

their loans because there may be borrowers who are not in a 

default status and who apply for borrower defense 

discharges. 

We also do not believe it is appropriate to expressly 

require in the final regulations that the Secretary 

recalculate a borrower’s eligibility period for which the 

borrower may receive Federal subsidized student loans. Not 

all borrowers may have received subsidized Federal student 

loans, so such an action would not be relevant to all 

108 The exclusive list of further relief is located at 

685.206(e)(12)(ii). Further relief includes one or both of the 

following, if applicable: 1) Determining that the borrower is not in 

default on the loan and is eligible to receive assistance under title 

IV; and 2) eliminating or recalculating the subsidized usage period 

that is associated with the loan or loans discharged pursuant to 

685.200(f)(4)(iii). 
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borrowers. Further, the changes made to section 685.200(f) 

(2017) by the 2016 final regulations, which are now 

effective, require that the Department recalculate the 

period for which the borrower may receive Federal 

subsidized student loans if a borrower receives a borrower 

defense to repayment discharge and sets forth the specific 

conditions for when the recalculation may occur. As a 

result, we believe it is appropriate to designate the 

recalculation of a borrower’s subsidized Federal student 

loan eligibility period as further relief that may be 

provided by the Secretary if a borrower defense to 

repayment application is approved. 

For clarity only, we have moved the phrase 

“reimbursing the borrower for amounts paid toward the loan 

voluntarily or through enforced collection” from the list 

of potentially applicable further relief in § 

685.206(e)(12)(ii) to the section on borrower defense 

relief in § 685.206(e)(12)(i). If applicable, this item 

would be part of borrower defense relief itself, so the 

Department believes including it in the list of further 

relief could be confusing. 
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Changes: As noted above, we moved “reimbursing the 

borrower for amounts paid toward the loan voluntarily or 

through enforced collection” from the list of potentially 

applicable further relief in § 685.206(e)(12)(ii) to the 

paragraph describing borrower defense relief in § 

685.206(e)(12)(i). Additionally, the Department revised 

the regulations to note that “relief” and not “further 

relief” includes updating credit reports to consumer 

reporting agencies to which the Secretary previously made 

adverse credit reports with regard to the borrower's Direct 

Loan or loans repaid by the borrower’s Direct Consolidation 

Loan in § 685.206(e)(12)(i). The Department revised § 

685.206(e)(12)(ii)(B), which concerns further relief, to 

reference 34 CFR § 685.200(f)(4)(iii), which address 

subsidized usage periods. Finally, the Department revised 

§ 685.206(e)(12)(ii) to clarify that the list of “further 

relief” is an exclusive list. 

Partial Discharges 

Comments: Several commenters supported the 

Department’s position that a partial loan discharge as 

relief for an approved borrower defense application would 

be warranted in some circumstances. One such commenter 
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281 

stated that that the proposed process would provide fair 

compensation to borrowers and tiers of relief to compensate 

borrowers as necessary. Another commenter asserted that 

the proposed approach, in allowing for partial relief, 

would provide the Department with flexibility in providing 

borrowers with relief. This commenter expressed support 

for a tiered method of relief that had been developed by 

the Department in 2017 based upon a comparison of earnings 

between a borrower defense claimant to earnings of 

graduates in a similar program. The commenter also 

supported adopting this methodology for calculating partial 

relief for the purposes of this regulation. One commenter 

asserted that relief should be based on the degree of harm 

suffered by a borrower. 

Several commenters, in support of the provision of 

partial relief, suggested that partial relief should be 

limited to the amount of tuition paid with the Federal 

student loan and not include funds received for living 

expenses. One such commenter stated that relief should not 

be capped at the total cost of a student’s attendance at 

the school, as opposed to the total amount of tuition and 

fees. This commenter asserted institutions should not be 

held responsible for portions of a Direct Loan, up to the 
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282 

full cost of attendance, including the student’s living 

expenses, because schools are unable to limit the amount of 

Direct Loans students may choose to take out to support 

their living expenses under the Department’s regulations. 

This commenter also argued that the nexus between a 

school’s act or omission, underlying a borrower defense to 

repayment, is more attenuated than the nexus between the 

act or omission and the tuition and fees charged by the 

institution. This commenter stated that it is difficult to 

see how a claim based on an act or omission relating to the 

provision of educational services, as required under the 

proposed regulations, could be connected to a Direct Loan 

used to pay for living expenses given that the amount of 

such a loan is controlled by the Department’s loan limits 

and the student’s decisions. 

Many commenters advocated full relief, in the form of 

a complete discharge of a borrower’s remaining Direct Loan 

balance and a refund of payments made, for borrowers who 

demonstrate that they qualify for borrower defense to 

repayment relief. Some of these commenters supported full 

relief for approved applications in each instance, and 

others supported establishing a presumption of full relief. 
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Many commenters argued that any effort to determine a 

partial loan discharge amount would lead to the 

inconsistent treatment of borrowers; be subjective, costly, 

time-consuming, and difficult to administer; add to the 

burden on the Department; and unnecessarily delay the 

Department’s provision of borrower defense relief. One 

group of commenters stated that a calculation of partial 

relief based upon a borrower’s degree of harm suffered 

would be speculative because most students would not have 

enrolled had the school made truthful representations. One 

commenter stated that full relief should be provided, given 

the profit the Department receives from the student loan 

program. 

Generally, some of the commenters who objected to the 

Department’s position that a partial loan discharge would 

be warranted in some circumstances argued that borrowers 

who had demonstrated misrepresentation by their school 

would have been harmed in many ways and incurred financial 

harm, and non-financial harms, beyond the obligation to 

repay a Federal student loan. As a result, even full 

relief from the Department through the borrower defense 

process would be insufficient to remedy students’ injuries. 
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One group of commenters asserted that under State 

unfair and deceptive practices laws that have traditionally 

been the primary basis for borrower defense claims, all 

such types of direct and consequential damages and 

pecuniary as well as emotional harms may provide a basis 

for relief. According to these commenters, such relief may 

include relief exceeding the amount paid for the service or 

good. 

Several commenters suggested that the Department adopt 

an approach similar to that used by enforcement agencies 

and financial regulators when consumers have been 

fraudulently induced to take on other types of consumer 

debt. Those other regulators, stated one of the 

commenters, seek to unwind the transaction and put 

borrowers in the same position they would have been absent 

fraud. This commenter stated that partial relief in 

accordance with an unspecified methodology on the basis of 

the value provided by the services received would be 

difficult to determine and deviates from the approach used 

by financial regulators. 

In arguing for a full relief approach, several 

commenters stated that allowing partial relief would 

establish a presumption that the education provided by a 
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285 

school that has been found culpable of wrongdoing has some 

value to the borrower. These commenters stated that the 

provision of partial relief would reduce the Department’s 

incentive to ensure it is properly monitoring schools to 

prevent misconduct and harm both borrowers and taxpayers. 

Commenters urged the Department to abandon its 

proposal to provide partial relief stating that the 

Department spent three years trying to develop a 

methodology to calculate partial discharges and have been 

unsuccessful in devising a fair and consistent way to do 

so. These commenters suggested that, consistent with 

closed school and false certification loan discharges, the 

borrowers should receive full discharges of the Federal 

student loans associated with their defense to repayment 

claim. One group of such commenters disagreed with the 

Department’s rationale in the NPRM for why full relief is 

justified for the false certification and closed school 

processes, but not for the borrower defense process. These 

commenters asserted the Department’s rationale that the 

false certification and closed school discharge processes 

are straightforward as compared to the borrower defense 

process. This group of commenters also stated that if the 

Department is unwilling to provide full relief for all 
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approved borrower defense claims, the Department should 

simplify the relief process and ensure that borrowers 

receive consistent relief, such as by establishing a 

presumption of full relief. Where full relief is not 

warranted, the commenters suggested that the Department be 

required to explain in writing the basis for its decision 

and provide the borrower with an opportunity to respond. 

One group of commenters asserted that it was incumbent 

upon the Department to clearly delineate the conditions 

borrowers would need to meet in order to receive partial or 

full relief. The commenters noted that, given the burden 

the Department proposed to impose upon borrowers to assert 

a successful claim, providing full relief for the borrower 

and recovering those funds from the school remains the 

appropriate action for the Department to pursue. The 

commenters further asserted that there are a number of 

reasons to doubt the Department’s ability to make fair and 

accurate determinations of the degree of financial harm 

suffered by each individual borrower, and stated that any 

such determination would need to account for a wide range 

of factors that could include the borrower’s education and 

employment history, the regional unemployment rates both 

overall and in the borrower’s career field, and numerous 
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287 

other circumstances that directly impact an individual’s 

earnings potential. The commenters asserted that, even if 

these factors could be reliably measured and some income 

gain determined to exist, that gain would then need to be 

measured against the expenditures the borrower put towards 

his or her program. The commenters noted that, as evidence 

of the inherent complexity of this method, the proposed 

rule referenced the serious difficulties the Department 

faced in attempting to create a formula to address this, 

and resultantly, does not include a proposed formula. The 

commenters also referenced the Department’s claim of the 

associated administrative burden imposed by reviewing the 

tens of thousands of borrower defense claims that have been 

asserted in recent years and noted that, setting aside the 

significant challenges inherent in attempting to make these 

determinations at all, that doing so on the scale 

considered would greatly increase the time and difficulty 

involved in processing each claim, adding enormously to the 

burden on the Department and further delaying the 

expeditious review of claims. 

Another commenter expressed confusion as to why the 

borrower’s financial circumstances would be considered in 

determining the amount of relief to which he was entitled. 
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The commenter agrees that a borrower’s choice not to pursue 

a field related to their course of study at a school or 

periods of unemployment due to regional economic 

circumstances should not be a basis for relief, but was 

concerned that the language offered in the proposed 

regulation would create inequitable outcomes for borrowers 

who experienced the same misrepresentations, but had more 

successful outcomes than others. The commenter asserts 

that a borrower’s relief in the case of proven 

misrepresentation should in no way be based on whether the 

borrower was savvy enough to pursue a different field, 

transfer schools, live in a more economically advantageous 

region, or be simply more fortunate than other borrowers. 

The commenter recommends that a borrower should have to 

show harm to receive a loan discharge, and that the measure 

of that harm should in no way be linked to an individual’s 

life choices or circumstances, but instead on the harm that 

resulted from the fraudulent activities of the school. 

Commenters asked whether the Department could approve 

a borrower defense discharge and subsequently determine 

that the amount of financial relief to be provided would be 

zero. The commenters also asked whether borrower defense 

claims could be made on the basis of misrepresentations 
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289 

about job placement, exam passage rates, and the 

transferability of credits. 

One commenter stated that if a borrower has been 

harmed, or will clearly suffer harm, as a result of a 

school’s misrepresentation, full relief should be provided. 

This commenter asserted that partial relief should be 

provided only in very limited cases where the value of the 

harm is directly related to the misrepresentation. 

One commenter expressed concerns about tax 

implications and credit reporting for partial relief 

awards. The commenter stated that while a rescission of a 

transaction may not result in taxable income for borrowers 

as a “purchase price adjustment” and lead to the deletion 

of the related tradeline from a borrower’s credit report, 

the Department’s proposed rule would not offer borrowers 

such protections. 

One commenter requested the Department more clearly 

articulate how partial relief would be applied in the case 

of a defensive claim asserted as to a defaulted loan. 

Specifically, this commenter asked whether the Department 

would strike the borrower’s record of default and if the 

borrower would be obligated to pay for collection costs on 

the partial relief provided. 
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Discussion: The Department appreciates the support of 

commenters regarding its proposal to provide for partial 

loan relief, if warranted, in these final regulations, 

which is consistent with the existing regulation at 34 CFR 

685.222(i). As we stated in 2016, given the Department’s 

responsibility to protect the interests of Federal 

taxpayers as well as borrowers, we do not believe that full 

relief is appropriate for all approved borrower defense 

claims, nor do we believe that it is appropriate to 

establish a presumption of full relief.109 

We acknowledge that an approach that allows the 

Department to make determinations of partial relief may be 

more administratively burdensome and time-consuming because 

it involves a more complicated analysis than an approach 

that assumes full relief. However, given the taxpayer and 

borrower interests at issue, as well as those of current 

and future students who will bear the cost of an 

institution’s repayment of the claim to the Department, we 

continue to believe that an approach that provides the 

Department with the flexibility to provide partial relief, 

109 See 81 FR 75973 – 75976. 
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291 

if warranted, strikes an appropriate balance between these 

interests. 

The Department agrees that not every borrower who 

experiences a misrepresentation suffers the same amount or 

types of harm, for a variety of reasons including those 

listed by commenters. However, since the degree of 

financial harm suffered is critical to the determination of 

defense to repayment relief for the reasons explained 

above, the Department must take this into consideration 

when awarding relief. It is impossible to know whether all 

borrowers who attended the same institution experienced the 

same misrepresentation, relied on that information to make 

the same decision(s), or were harmed by the 

misrepresentation in the same way or to the same degree. 

As the Department explains in one of the examples for 

how relief may be determined for substantial 

misrepresentation borrower defense claims in Appendix A 

corresponding to section 685.222 of the 2016 final 

regulations, a borrower would not be eligible for defense 

to repayment relief even if an institution was proven to 

have misrepresented the truth, if the student still 

received an education of value. For example, presume a 

prestigious law school misstated its full-time employment 
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292 

rate six months after graduation by 20 percent, but the 

borrower graduated, obtained and maintained employment as 

an attorney, and has above average earnings; and the school 

has maintained its strong reputation. In this case, the 

Department may determine, notwithstanding other evidence, 

that the institution made a misrepresentation related to 

the making of a Direct Loan for enrollment at the school; 

however, given the facts of this hypothetical, the 

Department could also determine that the borrower was not 

harmed by the misstatement of the placement rates. 

It is possible that a successful borrower defense 

claim could be based upon evidence of an institutional 

misrepresentation of job placement rates, exam passage 

rates, the transferability of credits, or other similar 

factors, if it is related to the making of a Direct Loan 

for enrollment at the school. 

Although we are now adopting a new misrepresentation 

standard for loans first disbursed on or after July 1, 2020 

that does not incorporate Appendix A from the 2016 final 

regulations, the same principle of educational value from 

that example applies. 

We disagree that such an approach would be subjective 

and lead to the inconsistent treatment of borrowers. As we 
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293 

stated in 2016, administrative agency tribunals and State 

and Federal courts commonly make relief determinations, and 

the proposed process provides Department employees 

reviewing borrower defense applications with the same 

discretion that triers-of-fact in other fora have.110 

Nor do we believe that a determination of partial 

relief, if warranted, under the proposed regulations would 

be speculative. Under § 685.206(e)(8), a borrower would be 

required to state the amount of financial harm that they 

claim to have resulted from the school’s action and to 

supply any supporting relevant evidence. Given that 

applicants will provide information regarding the amount of 

their financial harm, the Department believes that it will 

be able to make relief determinations in a reasonable 

manner and has retained this requirement in these final 

regulations. 

Upon further consideration, the Department revised § 

685.206(e)(12)(i) to clarify that the amount of relief that 

a borrower receives may exceed the amount of financial 

harm, as defined 685.206(e)(4), that the borrower alleges 

110 See 81 FR 75975.
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in the application pursuant to 685.206(e)(8)(v) but cannot 

exceed the amount of the loan and any associated costs and 

fees. The Department realizes that the school’s response 

and any evidence otherwise in the possession of the 

Secretary may reveal that a borrower’s allegation of 

financial harm is too low. 

Accordingly, the Department revised § 

685.206(e)(12)(i) to expressly note that in awarding 

relief, the Secretary shall consider the borrower’s 

application, as described in 685.206(e)(8), which includes 

any payments received by the borrower and the financial 

harm alleged by the borrower, as well as the school’s 

response, the borrower’s reply, and any evidence otherwise 

in the possession of the Secretary, as described in 

685.206(e)(10). The Department did not intend to limit its 

award of relief to the financial harm that the borrower 

alleges. The Department also did not intend to limit its 

ability to award relief to consideration of the financial 

harm that the borrower alleges. 

We acknowledge that borrowers subjected to the same 

misrepresentation may suffer differing degrees of financial 

harm. However, given the Department’s interests as 

explained above, we do not believe it is inequitable to 
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provide each borrower defense applicant with a meritorious 

claim with relief that may account for the borrower’s 

degree of harm or injury and is in accord with the approach 

taken by the courts under common law. 

The Department disagrees that a full relief approach 

should be taken because of any profit made by the Federal 

government on the Federal student aid programs. The 

Department is responsible for the interests of all Federal 

taxpayers whose taxes fund the Federal student aid 

programs, and as stated above, the Department believes an 

approach that balances those interests with those of 

borrowers seeking borrower defense relief is best served by 

taking an approach to relief that would allow for partial 

relief, if warranted, whether the loan program proves 

profitable or not. 

While we understand that some enforcement agencies 

and/or financial regulators may seek “full relief” for 

consumers under Federal or State consumer protection law, 

as pointed out by some commenters, such agencies are not 

directly responsible, as the Department is, for the 

administration of a Federal benefit program funded by 

Federal taxpayer dollars. We also understand that under 

some State consumer protection laws, consumers may be able 
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to receive similar relief. However, we do not believe such 

an approach is appropriate for the borrower defense process 

given the Department’s responsibility to Federal taxpayers. 

The Department does not possess the authority to authorize 

relief beyond the monetary value of the loan made to the 

borrower. We note that nothing in Department’s regulations 

precludes borrowers, who are unsatisfied with the amount of 

relief they receive, from seeking such relief directly from 

their schools through the Federal or State court systems 

under Federal or State consumer protection law. 

We decline at this time to include a specific relief 

methodology for borrower defense claims asserted under the 

misrepresentation standard for loans first disbursed on or 

after July 1, 2020, or to include further conceptual 

examples such as those in Appendix A to 34 CFR 668, part 

685. While the Department will continue to consider the 

borrower’s cost of attendance and the value of the 

education provided by the school for borrower defense 

claims asserted under the substantial misrepresentation 

standard for loans first disbursed on or after July 1, 2017 

and before July 1, 2020, we believe that the proposed 

regulation appropriately provides the Department with the 

flexibility to determine the appropriate measure of relief 
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that should be provided to a borrower defense applicant for 

claims asserted as to loans first disbursed on or after 

July 1, 2020. 

As the Department’s standard for borrower defense 

claims asserted after July 1, 2020 requires borrowers to 

demonstrate financial harm and state the amount of that 

harm, the Department believes that it will be able to make 

appropriate relief determinations in consideration of the 

borrower’s degree of financial harm based upon the specific 

circumstances established by borrower defense applicants. 

The Department will make its own determination of 

financial harm, as defined in § 685.206(e)(4), based on the 

information in the borrower’s application, the school’s 

response, the borrower’s reply, and any evidence otherwise 

in the possession of the Secretary that was provided to 

both the school and the borrower. The Department revised 

the final regulations to reflect that the Department makes 

a determination of financial harm and will award relief 

equivalent to the financial harm incurred by the borrower. 

As explained above, the Department’s award of relief may 

exceed the financial harm alleged by the borrower in the 

borrower defense to repayment application. The 
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Department’s award of relief, however, may not exceed the 

Department’s own determination of financial harm. 

“Financial harm” is defined in § 685.206(e)(4), in 

part, as the amount of monetary loss that a borrower incurs 

as a consequence of a misrepresentation, as defined in § 

685.206(e)(3). Financial harm, thus, will always be 

related to an alleged misrepresentation. For example, an 

alleged misrepresentation may include a significant 

difference between the earnings the institution represented 

to the borrower that he or she would be likely to earn 

after graduation and the borrower’s actual post-graduation 

earnings or aggregate earnings reported by the Department 

for the program in which the borrower was enrolled. 

Pursuant to the definition of financial harm in § 

685.206(e)(4), the Department will determine how much 

relief to award by considering the amount of monetary loss 

that a borrower incurs as a consequence of a 

misrepresentation and the factors outlined in 34 CFR 

685.206(e)(4)(i)-(iv): periods of unemployment after 

graduation unrelated to national or local economic 

recessions, significant differences in cost of attendance 

from what the borrower was led to believe, the borrower’s 

inability to secure employment after being promised 
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employment, and inability to complete the program because 

of a significant reduction in offerings. 

The Department would like to be transparent about 

relief determinations and has revised the regulations to 

expressly state the Department will specify the relief 

determination in the written decision and publish decision 

letters with personally identifiable information 

redacted.111 Accordingly, the borrower and school will know 

how the Department calculated the relief to the borrower. 

Unlike the 2016 final regulations, these final 

regulations do not expressly state that the Department will 

advise the borrower that there may be tax implications as a 

consequence of any relief the borrower receives. Such an 

express provision is not necessary because the Department 

intends to inform the borrower at the outset of the 

borrower defense to repayment process that there may be tax 

implications, likely by posting such information on the 

Department’s website. The Department, however, cannot 

provide tax advice, as the tax implications will vary 

111 Note: It is possible that particular programs and/or schools are so 

small, even including the school or program’s name could be too 

revealing. We will consider an exception in these types of 

circumstances.
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depending on an individual borrower’s circumstances and 

does not wish to mislead borrowers in this regard. 

We disagree that the proposed regulation allowing for 

partial relief, if warranted, would reduce the Department’s 

incentive to monitor schools’ wrongdoing. The Department 

actively monitors schools for their compliance with the 

Department’s regulations as part of its regular operations 

and will continue to do so, regardless of the amount of 

borrower defense relief provided to borrowers. 

With regard to the possible tax implications and 

credit reporting for partial relief awards, the Department 

does not have the authority to determine how a full or 

partial loan discharge may be addressed for tax purposes. 

If a borrower receives a partial loan discharge, then the 

Department will update reports to consumer reporting 

agencies to which the Secretary previously made adverse 

credit reports. The Department has revised 34 CFR § 

685.206(e)(12)(1) to expressly include updating reports to 

consumer reporting agencies as part of the “relief” that 

the borrower will receive and not “further relief” that a 

borrower may receive. 
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We maintain our position from the NPRM112 and the 2016 

final regulations that the amount of relief awarded to a 

borrower during the defense to repayment process would be 

reduced by any amounts that the borrower received from 

other sources based on a claim by the borrower that relates 

to the same loan and the same misrepresentation by the 

school as the defense to repayment. To clarify that 

position, we are incorporating language from § 

685.222(i)(8) on that point into § 685.206(e)(12) of these 

final regulations. 

After careful consideration of the comments, our 

internal determination processes, and our ability to rely 

on the data available to us, we do not support the proposal 

to reduce the amount of relief by the amount of credit 

balances received by the borrower. The Department now 

agrees with the commenters who suggested that, in a 

situation where the borrower is granted full relief, the 

portion of the loan that can be forgiven should not be 

limited to the portion borrowed to pay direct costs to the 

institution. The Department will carefully consider the 

112 83 FR 37263.
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amount of monetary loss that a borrower incurs as a 

consequence of a misrepresentation. 

The currently existing regulations, at 34 CFR 

685.222(i)(2)(i), provide that for claims brought under the 

substantial misrepresentation standard, as stated in 

685.222(d)(1), as to loans first issued on or after July 1, 

2017, the Department factors in the borrower’s cost of 

attendance (COA) to attend the school, as well as the value 

of the borrower’s education. In the preamble to those 

regulations, we justified factoring the student’s COA into 

determinations of relief by explaining, in part, that the 

COA reflects the amount the borrower was willing to pay to 

attend the school based upon the information provided by 

the school and the Federal student loan programs were 

designed to support both tuition and fees and living 

expenses. We also noted that we did not believe that an 

institution’s liability should be limited to the loan 

amount the institution received, because that amount does 

not represent the full Federal loan cost to a student for 

the time spent at the institution. 

We adopt the currently existing regulation’s rationale 

here. While it is true that a student may not have taken 

out some Federal student loans for living expenses absent 
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his or her attendance at the school, the student 

nonetheless received the proceeds of that loan to attend 

the school. The nexus between any act or omission 

underlying a valid borrower defense to repayment claim and 

a student’s total COA while enrolled is sufficiently strong 

to necessitate full relief, where appropriate. 

As a result, in these final regulations, we will not 

exclude credit balances from the relief calculation as to 

loans first disbursed on or after July 1, 2020. Relief 

will not be limited to those portions of a Direct Loan that 

are directly received by the institution. The portions of 

the loan that generated credit balances will be included in 

defense to repayment loan discharges. Additionally, 

treating students who lived on-campus differently than 

those who decided, for whatever personal reasons, to live 

off-campus would create disparate outcomes between these 

two populations of students that would be difficult for the 

Department to justify. 

Because a borrower must make a defense to repayment 

claim within three years of exiting the institution, the 

Department does not believe that the loan discharge or 

collections should be limited to the amount of payments a 

borrower has made during that or any other period of time. 
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Debt relief is based on the total debt associated with the 

enrollment during which the misrepresentation occurred, 

plus accumulated interest. 

Because the Department is no longer differentiating 

between affirmative and defensive claims, we do not believe 

it is necessary to develop different protocols for 

assessing harm in either case. 

Changes: The Department revised § 685.206(e)(8)(v) to 

allow the borrower to state the amount of financial harm in 

the borrower defense to repayment application. The 

Department will specify the relief determination in the 

written decision as provided in 34 CFR 685.206(e)(11)(iii). 

The Department also is revising the language in 

§685.206(e)(8)(vi) with respect to the borrower defense 

application, and §685.206(e)(10) with respect to a school’s 

submission of evidence. 

The Department revised § 685.206(e)(12)(i) to clarify 

that the amount of relief that a borrower receives may 

exceed the amount of financial harm, as defined 

685.206(e)(4), that the borrower alleges in the application 

pursuant to 685.206(e)(8)(v) but cannot exceed the amount 

of the loan and any associated costs and fees. The 
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Department further revised § 685.206(e)(12) to expressly 

note that in awarding relief, the Secretary shall consider 

the borrower’s application, as described in 685.206(e)(8), 

which includes any payments received by the borrower and 

the financial harm alleged by the borrower, as well as the 

school’s response, the borrower’s reply, and any evidence 

otherwise in the possession of the Secretary, as described 

in 685.206(e)(10). The Department also revised the final 

regulations in § 685.206(e)(12)(i) to reflect that the 

Department makes a determination of financial harm and will 

award relief equivalent to the financial harm incurred by 

the borrower. 

The Department revised 34 CFR § 685.206(e)(12)(i) to 

expressly include updating reports to consumer reporting 

agencies as part of the “relief” and not “further relief” 

that a borrower will receive. 

Also, for clarity, we have added to § 685.206(e)(12) 

the language included in § 685.222(i)(8) of the 2016 final 

regulations, regarding a borrower’s relief not exceeding 

the amount of the loan and any associated fees, and being 

reduced by other forms of recovery related to the borrower 

defense. 
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Comments: Several commenters noted that the 

Department requested public comment on potential 

calculations for partial relief but did not include a 

proposal for how the Department envisions partial relief 

might be calculated. These commenters recommended that the 

Department propose a methodology in regulation and obtain 

public comment on the proposal. One group of these 

commenters asserted that a failure to include a proposal 

for calculating partial relief in the proposed regulations 

is a violation of the notice and comment requirements of 

the Administrative Procedure Act. 
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307 

Discussion: The Department disagrees that it should 

or is required to publish an internal methodology for 

partial discharge for borrower defense in the Federal 

Register and seek notice and comment. As noted by the 

commenter, the Department sought public comment on 

potential methods for calculating relief in the NPRM. 

After considering the comments received, the Department 

believes that given the many factors involved in making a 

borrower defense determination, from those relating to the 

availability of data, the specific facts of any individual 

claim, as well as the evolution of the types of claims that 

are being filed, it is appropriate that the Department 

maintain discretion and flexibility to make relief 

determinations on a case-by-case basis as appropriate to 

the individual circumstances of a particular claim. 

The Department also disagrees that it was required to 

include a proposal for a partial relief methodology in the 

2018 NPRM. In the 2018 NPRM, the Department sought public 

comment on methods for calculating partial relief. And, 

after reviewing related comments, the Department is 

declining to adopt any one uniform methodology in these 

final regulations. These actions are in compliance with 
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308 

the Administrative Procedure Act’s notice and comment 

requirements. 

Changes: None. 

Comments: One commenter expressed appreciation for 

the clear statement in proposed 34 CFR 685.206(d)(12)(iii) 

regarding the borrower’s right to pursue relief for any 

portion of a claim exceeding the discharged amount or any 

other claims arising from unrelated matters. However, the 

commenter requested additional clarity in proposed 34 CFR 

685.206(d)(12)(i), as the commenter stated that if only 

partial relief is granted to the borrower, any amounts 

granted outside of the Federal borrower defense to 

repayment process should first be credited toward loan 

amounts that are still owed by the borrower. The commenter 

asserted that a borrower’s obligation to repay discharged 

amounts should be reinstated as a result of non-Federal 

relief only if full relief had been granted in the Federal 

process, or when non-Federal relief exceeds the remaining 

portion of a borrower’s loan after partial relief has been 

provided. 
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309 

Several commenters asked the Department to clarify 

whether financial aid awards related to private student 

loans, veterans benefits, or other losses separate from 

those related to Federal student loans (e.g., educational 

expenses paid out-of-pocket, tuition payment plans, loss of 

state grant eligibility, and payment for childcare or 

transportation) should not be used to offset the discharge 

of Federal student loans. 

Discussion: The Department thanks the commenter for 

its support for the clarification in proposed 34 CFR 

685.206(d)(12)(iii) that a borrower is not limited or 

foreclosed from pursuing legal and equitable relief under 

applicable law for recovery of any portion of a claim 

exceeding that the borrower has assigned to the Secretary 

or any claims unrelated to the borrower defense to 

repayment. This provision is similar to the existing 

provision in 34 CFR 685.222(k)(3) (2017), and the 

Department does not consider this a change in its position. 

The Department does not agree that it is appropriate 

to reinstate an approved borrower defense applicant’s 

obligation to repay on the loan when the borrower has 

received a recovery from another source based on the same 

borrower defense claim, only when the borrower has either 
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310 

received full relief from the Department or has received a 

recovery that exceeds the remaining portion the borrower’s 

Federal loan, if the borrower received a partial borrower 

defense discharge. The proposal echoes the language in the 

Department’s existing regulation at 34 CFR 685.222(k)(1) 

and also does not represent a change in the Department’s 

existing policy. This rule is intended to prevent a double 

recovery for the same injury at the expense of the 

taxpayer. As provided in the NPRM, because the borrower 

defense process relates to the borrower’s receipt of a 

Federal loan, we would reinstate the borrower’s obligation 

to repay on the loan based on the amount received from 

another source only if the Secretary determines that the 

recovery from the other source also relates to the Federal 

loan that is the subject of the borrower defense. 

Recoveries related to private loans and veterans’ benefits, 

for example, would not lead to a reinstatement of the 

borrower’s obligation to repay the Federal loan. 

Changes: None. 
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311 

Withholding Transcripts 

Comments: One group of commenters supported the 

position that a school has the ability to withhold an 

official transcript from a borrower who receives a total 

discharge of his Federal student loan. These commenters 

assert that this has always been the case in instances 

where the borrower was provided a loan discharge through 

the false certification, closed school, or borrower defense 

to repayment provisions. 

Many commenters strongly opposed the Department’s 

assertion that schools have the ability to withhold 

transcripts of borrowers who receive loan discharges. The 

commenters concluded that schools have a moral obligation 

to maintain and provide students access to their academic 

records, especially in the case of education disruption due 

to institutional misrepresentation or unforeseen closure. 

One commenter noted that it is unclear why, or 

whether, a school would have the right to withhold 

transcripts of a student who does not owe a debt to the 

school or to the Federal government. This commenter 

further notes that bankruptcy case law specifically 

prohibits the withholding of academic transcripts after a 

borrower has his student loan debt discharged; the Family 
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312 

Educational Rights and Privacy Act (FERPA) requires that 

students be granted access to at least unofficial 

transcripts; and that policies pertaining to withholding 

transcripts are also a matter of State law and 

institutional policy, not Federal law or regulation, such 

that the Department’s prohibition may be in violation of 

these laws and policies. The commenter also opined that 

including this warning in regulation appears to be a threat 

intended to deter borrowers from filing claims. The 

commenter asserts that this warning is unlikely to deter 

frivolous claims since the consequences do not apply to 

claimants whose loans are not discharged in full. The 

commenter recommends that the Department should not imply 

borrowers who receive discharges should not have access to 

their transcripts when the Department is not aware of the 

school’s policy and has no authority to establish such a 

requirement. 

Another commenter noted that the allowing schools to 

withhold transcripts is a retaliatory directive to schools 

to further harm borrowers who have cleared every hurdle to 

prove that they have been defrauded. 

Discussion: The Department appreciates the commenters 

who pointed out that the 2018 NPRM simply acknowledges 
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313 

current practice, which allows institutions to establish 

their own policies regarding the provision of official 

transcripts to students. The Department agrees that as a 

result of FERPA regulations, an institution is obligated to 

make student’s academic record available to him or her. 

However, FERPA does not require an institution to send a 

borrower a copy of that record or to provide an official 

transcript. 

The Department is not requiring institutions to 

withhold transcripts. We emphasize the need for 

institutions to adhere to applicable State laws and 

policies that may prohibit them from withholding 

transcripts. To make this clear, we are revising the 

regulations to state that the institution may, if allowed 

or not prohibited by other applicable law, refuse to 

verify, or to provide an official transcript that verifies 

the borrower’s completion of credits or a credential 

associated with the discharged loan. 

The Department is aware that students who are provided 

loan relief through bankruptcy may still be able to obtain 

transcripts. A significant difference, however, is that 

the institution is not asked to reimburse the Department 

for any loans taken by the student in the case of a 
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314 

borrower’s subsequent bankruptcy. But the Department will 

seek recovery from the institution for successful borrower 

defense claims. However, for those borrowers applying for 

borrower defense relief that are not also petitioning for 

bankruptcy, the Department believes it is appropriate to 

generally inform borrowers through an acknowledgement in 

the borrower defense application that a school may withhold 

an official transcript, if allowed or not prohibited by 

other applicable law, in the event that the borrower 

receives full relief. Such a provision will help inform 

borrowers of the possibility that the institution may 

refuse to verify or provide an official transcript, if 

allowed or not prohibited by other applicable law. 

The Department is not suggesting that an institution 

should withhold a borrower’s official transcript or that an 

institution’s right to withhold an official transcript is a 

retaliatory act. Borrowers, however, should understand 

that by receiving a full loan discharge, there is a 

possibility that they may not receive an official 

transcript. Understanding this possibility will inform a 

borrower’s decision whether to assert that the education 

they obtained was actually of no value. The higher 

education community consistently makes the case that higher 
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315 

education has inherent value beyond that which can be 

measured in job placements and earnings. The Department 

agrees with that position, which is why we believe that it 

would be the rare student who received no value whatsoever 

from the educational experience. In such rare cases, the 

borrower would have little use for an official transcript 

from the institution, such as for the purpose of 

transferring credits or using the credentials earned while 

in attendance at such an institution.

Changes: We revised the language from proposed 

685.206(d)(3)(vi), now in 685.206(e)(8)(vi), to state that 

the institution may, if allowed or not prohibited by other 

applicable law, refuse to verify, or to provide an official 

transcript that verifies the borrower’s completion of 

credits or a credential associated with the discharged 

loan. As previously stated, the Department also is 

revising the language in §685.206(e)(8)(vi) with respect to 

the borrower defense application and §685.206(e)(10) with 

respect to a school’s submission of evidence. 

Transfer to Secretary of Borrower’s Right of Recovery 

Against Third Parties 
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316 

Comments: None 

Discussion: Like the 2016 final regulations, these 

final regulations provide that upon granting any relief to 

a borrower, the borrower transfers to the Secretary the 

borrower’s right of recovery against third parties.113 

Unlike the 2016 final regulations, these regulations refer 

to “any right to a loan refund (up to the amount 

discharged) that the borrower may have by contract or 

applicable law with respect to the loan or the provision of 

educational services”114 because “provision of educational 

services” is a defined term; the 2016 final regulations 

instead reference the contract for educational services. 

The 2016 final regulations note such a transfer or rights 

from the borrower to the Secretary for the right to recover 

against third parties includes any “private fund,” and 

these final regulations clarify that the transfer applies 

to any private fund, including the portion of a public fund 

that represents funds received from a private party. 

Changes: None. 

113 Compare 34 CFR § 685.222(k) with 34 CFR § 685.206(e)(15). 114 34 CFR § 685.206(e)(15)(i).
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317 

BORROWER DEFENSES – RECOVERY FROM SCHOOLS (Sections 

685.206 and 685.308) 

Institutional Liability Cap 

 Comments: Several commenters suggested that the 

Department’s recovery from institutions for losses related 

to the provision of relief to borrowers for borrower 

defense applications be subject to a maximum limit. One 

commenter suggested that such institutional liability for a 

borrower defense claim be capped at some reasonable level 

and suggested the amount the borrower had paid on the loan 

during the first three years. Another commenter suggested 

that the maximum limit should be the amount paid by the 

student during the first five years from the student’s last 

day of enrollment at the institution. This commenter 

asserted that without such a limit, borrower defense 

applicants would be able to bring claims at any point 

during the repayment of the loan, which could be beyond the 

document retention period for the relevant documents and 

affect the school’s ability to defend itself. 

 Discussion: The Department does not agree that there 

should be a cap on institutional liability for relief 

granted for an approved borrower defense application. The 
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318 

Department has an obligation to protect the interests of 

the Federal taxpayer and borrowers. As a result, the 

Department believes it is appropriate to require an 

institution to pay the amount of relief provided in the 

borrower defense process based upon the institution’s act 

or omission. In the separate recovery proceeding against 

the institution brought under 34 CFR part 668, subpart H, 

the institution will have the opportunity to dispute the 

amount of the liability. 

 We also do not agree that schools will be limited in 

their defense against a borrower defense relief liability 

to the Department without a maximum liability limit or a 

change to the proposed time limit on the Department’s 

ability to recover from the school. The new requirements 

will apply to borrower defense relief granted as to loans 

first disbursed on or after July 1, 2020. We believe that 

schools will adjust their business practices to maintain 

documents for students with loans first disbursed on or 

after July 1, 2020, in anticipation of borrower defense 

claims from those students. 

Changes: None. 
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319 

Limitations Period for Recovering Funds from Schools 

Comments: One group of commenters offered support for 

the Department’s proposal for a five-year limitations 

period for the Department’s ability to recover funds from 

schools in the event of a loan discharge as a result of an 

approved borrower defense application and requested we 

include a definition of “actual notice.” 

One commenter objected to the five-year limitations 

period and suggested that the recovery period should be 

aligned with the three-year record retention requirement. 

Another commenter supported the establishment of a 

time limit for the Secretary to initiate an action to 

collect from the school the amount of any loans discharged 

for a successful borrower defense to repayment claim, but 

recommended that this limit be consistent with the standard 

civil statute of limitations of six years. 

One commenter suggested that the Department maintain 

the language in the 2016 final rules (in 34 CFR 685.206 and 

685.222 (2017)) allowing the Department to recover from a 

school the amount of borrower defense relief awarded by the 

Department, within the later of three years from the end of 

the last award year that the student-applicant attended the 

institution or the limitation period that would apply to 
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320 

the cause of action or standard that the borrower defense 

claim is based, or at any time notice of the borrower 

defense claim is received during those periods. This 

commenter stated that the Department’s proposal to have a 

three-year time limit from the last award year the student 

was enrolled in the institution for such actions related to 

loans first disbursed before July 1, 2019 is contrary to 

the Department’s stated goal of protecting taxpayers. This 

commenter also stated that the Department’s proposed fiveyear time limit from the time of the borrower defense 

adjudication for loans first issued on or after July 1, 

2019 was a strong proposal. 

Another group of commenters also cited the approach in 

the 2016 final regulations, which the commenters implied 

echoes State law concepts such as tolling and discovery to 

statutes of limitation and asked why the Department has 

proposed rescinding such provisions. These commenters 

asserted that the 2016 final regulations seem to allow the 

Department to recoup more money from institutions and 

lessen taxpayer liability and were concerned about the 

budget impact of the proposal. These commenters also asked 

why the Department’s proposal for a five-year limitation 

period for recovery actions based upon borrower defense 
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321 

relief granted for loans first disbursed on or after July 

1, 2019, should not also apply to actions based upon loans 

first disbursed before July 1, 2019. 

Discussion: The Department appreciates the comments 

in support of the five-year limitations period for the 

Department to initiate a proceeding against a school. The 

final regulations provide that such a proceeding will not 

be initiated more than five years after the date of the 

final determination included in the written decision 

referenced in § 685.206(e)(11), and the school will receive 

a copy of the written decision pursuant to § 685.206(e)(11) 

for its records. The written decision will provide 

adequate notice of when the five-year period begins for 

schools.

The Department believes that since an institution will 

be provided the opportunity to respond to the borrower’s 

defense to repayment claim in the course of the borrower 

defense adjudication process, and that claim must be made 

within three years after the student leaves the 

institution, the institution will be made aware of the need 

to retain records relevant to its defense for a borrower 

defense to repayment claim and adjust its business 

practices accordingly. As a result, the Department does 
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322 

not agree that a longer time limit, such as six years, for 

a recovery proceeding is necessary. As explained in the 

2018 NPRM, one reason for the recovery action limitation 

period to be three years is to align with the document 

retention requirements under the Department’s regulations. 

We acknowledge that schools will retain records once aware 

of a need due to potential liability from borrower defense 

applications. The three-year document retention period is 

one, among other justifications, for the limitations 

period.

Further, the Department has decided not to align with 

the typical statute of limitations in civil statutes 

because that period of time is based on when the alleged 

act occurred. For a student enrolled in a bachelor’s or 

graduate program, the student may not have had the 

opportunity to complete the program within that time 

period, and therefore may not understand that the 

institution made misrepresentations during the admissions 

process or enrollment period. Therefore, the Department is 

using established timeframes that are based on when the 

student left the institution rather than when the alleged 

act or omission occurred. The Department believes that a 

borrower should have three years subsequent to leaving an 
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323 

institution during which time he or she can submit a 

defense to repayment application. 

The Department believes it is similarly appropriate to 

establish a timeframe during which it can initiate a 

collection claim against an institution. The Department 

believes that the proposed timeframe establishes clear 

expectations for schools that will provide them with some 

certainty for their planning and operational needs and will 

also allow the Department to meet its responsibility to 

Federal taxpayers. The process by which the Department 

initiates a collection action against an institution is 

separate from the process by which the Department 

adjudicates a defense to repayment claim. Although the 

Department does not anticipate that it would typically take 

that long to initiate collection actions, the Department 

needs sufficient time to initiate that process. The 

Department believes that five years is ample time to 

complete that process and collect from the school the 

amount of the loan discharged. 

The amount the Department may collect from the 

institution is limited to the amount of loan forgiveness 

granted as part of the defense to repayment determination. 

Even if it takes five years for the Department to initiate 
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324 

that collection, the amount collected will be limited to 

the amount of loan forgiveness awarded by the Department at 

the time of the claim adjudication. The Department will 

inform the institution at the same time it notifies the 

borrower of the outcome of the adjudication process. 

For the reasons stated above, we are taking a 

different approach for recovery actions for borrower 

defense relief based upon loans first issued on or after 

July 1, 2020. Upon further consideration, the Department 

has also decided to retain the recovery process time limits 

and requirements in the 2016 final regulations, at 34 CFR 

685.206 and 685.222 (2017), for loans first disbursed 

before July 1, 2020. As these provisions are currently 

effective, we do not believe this approach will 

disadvantage schools that have already made adjustments in 

their document retention policies and procedures in 

anticipation of these recovery provisions. 

The Department also wanted to assure that a school 

will receive timely notice of a borrower’s allegations in a 

borrower defense to repayment application and is revising 

these regulations to state the Department will notify the 

school within 60 days of the date of the Department’s 

receipt of the borrower’s application. Such timely 
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325 

notification will place the school on notice to preserve 

any records relevant to the borrower defense to repayment 

application and begin to prepare its response. 

As was the case in the NPRM, these final regulations 

expressly state that the Department may initiate a 

proceeding against provisionally certified institutions to 

recover the amount of the loan to which the defense applies 

in accordance with 34 CFR part 668, subpart G. Such a 

provision is consistent with 34 CFR part 668, subpart G, as 

provisionally certified institutions are participating 

institutions as defined in 34 CFR 668.2 and receive title 

IV, Federal Student Aid. 

Changes: We have revised 34 CFR 685.206 to reflect 

that the borrower defense standard, adjudication process, 

and recovery proceedings are tied to the date of first 

disbursement of the Direct Loan or Direct Consolidation 

Loan. We also clarified that the five-year limitations 

period on Departmental recovery actions against schools is 

applicable for borrower defense claims asserted as to loans 

first disbursed on or after July 1, 2020. The Department 

also revised 34 CFR 685.206(e)(16)(ii) to state the 

Department will notify the school within 60 days of the 
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326 

date of the Department’s receipt of the borrower’s 

application. 

 

 Comments: None. 

 Discussion: The Department proposed in the 2018 NPRM 

to promulgate a regulation that the school must repay the 

Secretary the amount of the loan which has been discharged 

and amounts refunded to a borrower for payments made by the 

borrower to the Secretary, unless the school demonstrates 

that the Secretary’s decision to approve the defense to 

repayment application was clearly erroneous. Upon further 

consideration, this amendatory language does not align well 

with 34 CFR part 668, subpart G, which provides the rules 

and procedures for the Department to initiate a recovery 

proceeding against a school. Additionally, the Department 

stated in the preamble of the 2018 NPRM: “The burden of 

proof rests with the Department, and the school has an 

opportunity to appeal the decision of the hearing official 
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327 

to the Secretary.”115 A clearly erroneous standard is 

inconsistent with the Department’s intention and statement 

that the burden of proof lies with the Department. 

Accordingly, the Department is withdrawing this proposed 

regulation. 

 Changes: The Department withdraws the proposed 

regulation that the school must demonstrate the Secretary’s 

decision to approve the defense to repayment application 

was clearly erroneous. 

PRE-DISPUTE ARBITRATION AGREEMENTS, CLASS ACTION WAIVERS, 

AND INTERNAL DISPUTE PROCESSES (Sections 668.41 and 

685.304) 

Legal Authority and Basis for Regulating Class Action 

Waivers and Arbitration Agreements 

115 83 FR 37263.
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Comments: A group of commenters argued that the HEA 

grants the Department legal authority and wide discretion 

to place conditions upon the receipt of title IV funding by 

participating schools, including restricting or prohibiting 

the use of pre-dispute arbitration agreements or class 

action waivers. 

A number of commenters challenged the assertion in the 

2018 NPRM that the 2016 final regulations’ limitations on 

the use of mandatory arbitration and class action waivers 

were not consistent with law. These commenters disagreed 

with the Department’s citation to the Supreme Court’s 

decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 

(2018) and the reference to a congressional resolution 

disapproving a rule published by the CFPB that would have 

regulated certain pre-dispute arbitration agreements. 

These commenters argued that neither the Supreme Court 

decision, nor Congress’ action, has any bearing on the 

authority of the Department to include contractual 

conditions relating to arbitration as part of a program 

participation agreement or contract. In addition, the 

commenters noted that Congress did not take any action to 

disapprove the 2016 final regulations. 
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329 

Discussion: The Department agrees with the commenters 

who argued that the HEA grants the Department legal 

authority and wide discretion to place conditions upon the 

receipt of title IV funds. That authority includes 

restricting, prohibiting, and, importantly, encouraging the 

use of pre-dispute arbitration agreements and class action 

waivers. 

 The Department respectfully disagrees with the 

commenters’ assertion that the 2018 NPRM’s reliance on the 

Epic Systems decision and the congressional resolution 

disapproving the CFPB rule were invalid. The Department 

cited Epic Systems because it is consistent with 

precedential decisions in Federal court in favor of 

establishing “a liberal federal policy favoring arbitration 

agreements”116 and decisions against prohibitions on class 

action waivers.117 Together, these three cases stand for 

the proposition that, absent a contrary congressional 

mandate, Federal policy favors arbitration agreements. 

 Given the Court’s precedents, Congress’ resolution 

disapproving the CFPB’s rule, and our reweighing of the 

116 CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012). 117 AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 347-51 (2011)
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330 

benefits and costs regarding pre-dispute arbitration 

clauses and class action waivers, the Department has 

decided to bring its policies to align more closely with 

the “liberal federal policy favoring arbitration 

agreements.” The HEA provides the authority and discretion 

for the Department to make that policy shift. It is our 

view, as explained in the 2018 NPRM, that arbitration 

agreements and class action waivers, when coupled with 

student protections promoting informed decision making, 

preserve reasonable transparency, and cooperative dispute 

resolution potential that is positive for both students and 

institutions. 
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331 

Changes: None. 

General Support for Class Action Waivers, Pre-Dispute 

Arbitration Agreements, and Internal Dispute Processes 

Comments: Many commenters expressed support for the 

regulations pertaining to the use of pre-dispute 

arbitration agreements, class action waivers, and internal 

dispute processes. These commenters frequently noted that 

arbitration and internal dispute processes can provide a 

path to resolution that is reasonable and fair to both the 

student and the school, while reducing potential costs to 

taxpayers. These commenters also underscored the 

importance of ensuring students were properly informed of 

their options and given the necessary information regarding 

how to proceed. 

A group of commenters who wrote in support of the 

proposed regulations also suggested a change to the 

regulatory language to distinguish between schools that use 

such pre-dispute arbitration agreements and waivers for use 

of recreational facilities or parking lots or similar nonenrollment activities and those that require such 

agreements as a condition of enrollment. 
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Discussion: The Department appreciates the support 

for the proposed regulations from many of the commenters. 

The Department agrees that it is very important that 

students are properly informed of their options and given 

the necessary information regarding how to proceed. We 

also appreciate the detailed comments and suggestions on 

the proposed rules relating to mandatory arbitration and 

class action waivers. 

We agree with the commenters who argued that 

arbitration may provide a method for borrowers and schools 

to address a student’s concerns without the significant 

expense and time commitment that are common to court 

litigation. It is well established that alternative 

dispute resolution (ADR) processes like arbitration are 

more likely to result in savings to the parties, without 

reducing the parties’ satisfaction with the result.118 

We also agree with the commenters who suggested that 

allowing arbitration will better ensure that the school, 

rather than the taxpayer, will bear the cost of the 

118 Hensler, Deborah R., “Court-Ordered Arbitration: An Alternative 

View,” University of Chicago Legal Forum, Volume 1990, Issue 1, Article 

12, 

https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1074&co

ntext=uclf. 
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school’s actions. . As a result, a decision in favor of 

the student would be the school’s responsibility. In 

addition, depending on the particular circumstances of a 

claim, a student potentially could be awarded greater 

relief, including refunds of cash payments, when 

appropriate, as a result of an arbitration decision in the 

student’s favor. 

With regard to the regulatory distinction for schools 

that use pre-dispute arbitration agreements and waivers for 

the use of recreational facilities, parking lots, or other 

similar activities, the Department agrees with the 

commenter that the regulations should distinguish between 

schools that use pre-dispute arbitration agreements as a 

condition of enrollment and those that do not. The 

Department makes this distinction because the regulated 

type of agreements have a clear relationship with the 

educational services provided by the institution. The 

Department also believes that a change reflecting the 

commenter’s suggestion would improve consistency between §§ 

668.41 and 685.304. 

Section 668.41(h)(1) limits arbitration disclosure 

requirements to cases where agreements are used as a 

condition of enrollment. The commenter recommended 
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duplicating that language in §685.304, specifically in 

§685.304(a)(6)(xiii), (xiv), and (xv) replacing “if the 

school” with “if, as a condition of enrollment, the 

school.” Inclusion of the commenter’s suggested language 

would make it clearer in §685.304 that the agreements are 

related exclusively to enrollment agreements. 

On the other hand, the Department’s proposed language 

does include “to pursue as a condition of enrollment” in 

§685.304(a)(6)(xiii); “to enroll in the institution” in 

§685.304(a)(6)(xiv); and “to enroll in the institution” in 

§685.304(a)(6)(xv). We believe deleting those phrases and 

replacing them with the suggested language would be clearer 

and provide consistency between §§668.41 and 685.304. In 

addition, although not specifically raised by a commenter, 

we add language to clarify that our changes to the entrance 

counseling requirements apply for loans disbursed on or 

after July 1, 2020. This clarifying change is consistent 

with the approach we are taking throughout these final 

regulations. 

Changes: The Department adopts the changes suggested 

by the commenter to replace “if the school” with “if, as a 

condition of enrollment, the school” in 

§685.304(a)(6)(xiii), (xiv), and (xv), and deleting the 
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335 

previously included references to enrollment in those 

sections. In addition, we are adding the phrase “For loans 

first disbursed on or after July 1, 2020” to the beginning 

of §685.304(a)(6)(xiii), (xiv), and (xv). 

General Opposition to Class Action Waivers and PreDispute Arbitration Agreements 

Comments: Many commenters expressed opposition to the 

regulations pertaining to the use of pre-dispute 

arbitration agreements and class action waivers. Many 

commenters argued that permitting participating 

institutions to use mandatory pre-dispute arbitration 

agreements and class action waivers, as part of an 

enrollment or other agreement, denies students their 

rights, including their constitutional right, to be heard 

in court. They further asserted that class action 

restrictions prevent students from working together to 

assert their legal rights and helps institutions “avoid 

liability.” One commenter asserted that a student does not 

hold the bargaining power to reject a forced arbitration 

clause. 
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Commenters stated that the Department’s claim that 

arbitrations are more efficient and less adversarial than 

traditional court proceedings was “highly dubious.” 

Other commenters argued that unscrupulous schools have 

used mandatory arbitration, class action waiver, and 

internal dispute resolution provisions to discourage 

borrowers from raising their claims and hide evidence of 

illegal school conduct from the public, the result of which 

has been an unfair shifting of the burden of the cost of 

illegal conduct from schools to students and taxpayers. 

A group of commenters disputed the Department’s 

assertion that allowing schools to mandate that students 

sign pre-dispute arbitration agreements and class action 

waivers, or agree to engage internal dispute processes, 

helps to provide a path for borrowers to seek remedies from 

schools before filing a borrower defense claim. These 

commenters argued that allowing schools to require students 

to sign such agreements or agree to such processes limits 

borrowers’ options in seeking redress, limits their ability 

to gather the types of evidence needed to support borrower 

defense claims, and provides protection to schools that act 

against the interests of their students. These commenters 

noted that there is usually no or very limited discovery 
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337 

during arbitration, and a student cannot discover documents 

detrimental to the school. 

Another group of commenters stated that students would 

be at a distinct legal disadvantage against potentially 

large for-profit school chains that can afford high-quality 

legal counsel. The commenters referenced research that 

shows these agreements are typically used by organizations 

where there was already a significant power imbalance in 

favor of the employer or school. They further noted that 

the Economic Policy Institute has found that the use of 

mandatory arbitration among employers is much more common 

in low-wage workplaces and in industries that are 

disproportionately female and minority. Other commenters 

echoed these points, adding that class action waivers 

effectively ensure that the most economically disadvantaged 

will face a legal challenge skewed to the advantage of 

schools and deprive the Department of a vehicle that would 

expose the most fraudulent schools. 

A commenter representing student veterans noted that 

veterans have a substantial interest in being able to 

submit complaints to Federal regulators, so that they can 

adequately highlight gaps or abusive practices in the 

market related to misrepresentations or fraud by colleges 
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338 

and universities and financial products, such as student 

loans. The commenter noted that enforcement agencies have 

historically relied on consumer complaints like these to 

bring actions against schools. 

Another commenter representing veterans suggested that 

the regulations be amended to provide students the right 

to: (1) choose to arbitrate claims once a dispute arises, 

and (2) exercise their constitutional right to adjudicate 

claims before impartial judges and juries. The commenter 

further suggested the Department revise the proposed 

regulations to include a provision from the 2016 final 

regulations that prohibits a school from “compel[ing] any 

student to pursue a complaint based on a borrower defense 

claim through an internal dispute process before the 

student presents the complaint to an accrediting agency or 

government entity authorized to hear the complaint.” 

One commenter noted that the U.S. Department of 

Defense has raised alarm about the dangers of arbitration, 

noting in a 2006 report that “loan contracts to 

Servicemembers should not include mandatory arbitration 

clauses or . . . require the Servicemember to waive his or 
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339 

her right of recourse, such as the right to participate in 

a plaintiff class [action lawsuit].”119 

Another commenter expressed concern that schools 

requiring pre-dispute arbitration agreements as a condition 

of enrollment would not be held accountable to a Federal 

agency. 

One commenter suggested that the Department ban the 

use of Federal funds for schools mandating use of 

arbitration or class action waiver agreements. 

Several other commenters suggested that the Department 

did not sufficiently justify in the NPRM this change in 

policy. One commenter noted the Department previously 

stated that “[h]ad students been able to bring class 

actions against” certain specific institutions “it is 

reasonable to expect that other schools would have been 

motivated to change their practices to avoid facing the 

risk of similar suits.”120 

 

119 Department of Defense, “Report on Predatory Lending Practices 

Directed at Members of the Armed Forces and Their Dependents,” August 

9, 2006, 

http://archive.defense.gov/pubs/pdfs/Report_to_Congress_final.pdf. 120 81 FR 39383.
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Discussion: The Department understands the concerns 

expressed by commenters regarding the arbitration 

provisions of these final regulations. The Department has 

weighed the commenters’ expressed concerns against the 

potential benefits of arbitration and believes that the 

best approach is to ensure a regulatory framework that 

requires that students have sufficient notice of whether 

the school mandates arbitration and to allow the student to 

decide whether to enroll at that institution or another. 

The Department values the ability of students to make 

informed, freely chosen decisions regarding how they spend 

their education dollars, time, and efforts. This includes 

students, who may be concerned about the fairness of such a 

process. The Department is endeavoring to protect all 

students, including by ensuring those who are concerned 

about the fairness of such a process have the power to 

reject a forced arbitration clause by taking their 

financial aid dollars to institutions that do not mandate 

internal dispute processes, arbitrations, or bar class 

actions. As with any major life or financial decision the 

students will make, it is best for students to approach the 

choice with as much information as possible and conduct a 

unique-to-them, cost-benefit analysis on their own terms, 
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341 

weighing what is important to them and what they are 

willing to accept. These final regulations require that 

institutions play their part in keeping their potential 

students informed. 

 The Department does not believe that class action 

waivers and pre-dispute arbitration agreements are 

inherently “unfair,” as the commenters suggest, nor are the 

benefits relied upon by the Department in the 2018 NPRM 

“highly dubious.” Similarly, the use of mandatory 

arbitration among employers with certain worker populations 

does not “effectively ensure” that students, including 

minorities and females, will face a legal challenge skewed 

against them. It is true that arbitration proceedings do 

not have the same extensive discovery procedures provided 

for in traditional litigation in court. However, as cited 

by the American Bar Association, arbitration provides 

significant advantages over a court proceeding, including: 

party control over the process; typically lower cost and 

shorter resolution time; flexible process; confidentiality 

and privacy controls; awards that are fair, final, and 

enforceable; qualified arbitrators with specialized 
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342 

knowledge and experience; and broad user satisfaction.121 

Further, in 2012, the ABA found that the median length of 

time from the filing of an arbitration demand to the final 

award in domestic, commercial cases was just 7.9 months, 

whereas the filing-to-disposition time in the U.S. District 

Court for the Southern District of New York was 33.2 months 

and 40.8 months in the Second Circuit Court of Appeals.122 

Arbitration does, in fact, help “provide a path” for 

borrowers to acquire relief in an efficient, costeffective, and quicker manner than traditional litigation. 

Contrary to the commenter’s assertions, mandatory 

arbitration clauses and class action waivers do not help 

institutions “avoid liability,” but instead provide more 

speedy recovery and potentially greater relief to students 

impacted by the institutions’ alleged conduct, as 

determined by an experienced legal professional as factfinder. Rather than discouraging borrowers from raising 

claims and, as a result, hiding illegal conduct, 

121 Sussman, Edna, and John Wilkinson, “Benefits of Arbitration for 

Commercial Disputes,” American Bar Association, March 2012, 

https://www.americanbar.org/content/dam/aba/publications/dispute_resolu

tion_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf. 122 Sussman and Wilkinson, 

https://www.americanbar.org/content/dam/aba/publications/dispute_resolu

tion_magazine/March_2012_Sussman_Wilkinson_March_5.authcheckdam.pdf. 
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arbitration provides a more cost-effective and accessible 

conflict resolution path than traditional court 

proceedings. Neither arbitration agreements nor class 

action waivers limit borrowers’ options for redress in 

reporting a complaint about an institution to the 

Department, an accreditor, or any other governmental entity 

(including the CFPB, with respect to student loans). 

Therefore, even in the case of a mandatory arbitration 

agreement, the Department can still learn about illegal 

actions on the part of an institution. 

Institutions will continue to be held accountable to 

the Department because the student can still file a 

borrower defense claim with the Department, even if the 

borrower receives an unfavorable arbitration decision, as 

the borrower submits a borrower defense to repayment claim 

with the Department, not the school, and the Department 

adjudicates the claim in accordance with its own regulatory 

requirements. 

We have revised the regulations at 668.41(h)(1)(i) to 

require, in schools’ plain language disclosures regarding 

their pre-dispute arbitration agreements and/or class 

action agreements required as a condition of enrollment, a 

statement that the school cannot require students to limit, 
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344 

relinquish, or waiver their ability to pursue filing a 

borrower defense claim, pursuant to 685.206(e) at any time. 

The Department agrees that a student must always be allowed 

to voice concerns or register complaints with the 

Department, if the borrower’s allegations meet the criteria 

for such a claim. Unequivocally, arbitrator determinations 

are not binding on the Department. 

The Department rejects the commenter’s suggestion that 

it ban the use of Federal funds for schools that mandate 

arbitration and class action waivers. As discussed, 

Federal policy favors arbitration, and the Department is 

not convinced by the commenter’s arguments to deviate here 

from that policy. The Department rejects the suggestion in 

the 2016 NPRM that class actions against certain 

institutions would have motivated other institutions to 

change their practices. In fact, it is possible that many 

institutions changed their approach in light of allegations 

made against those certain institutions, including those 

made by attorneys general, regardless of whether students 

had been able to bring class actions. Under those 

specific circumstances cited in the 2016 NPRM, the State of 

California found that the institution misrepresented job 

placement rates and the transferability of credits to 
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345 

students, advertised programs that were not offered, and 

failed to disclose a relationship with a preferred student 

loan lender.123 Further, the Department focuses its efforts 

on appropriately regulating the “good actors,” not 

necessarily overcorrecting or hyper-regulating the entire 

sector to address outlier instances of institutional 

misconduct. 

With respect to the Economic Policy Institute study 

cited by one commenter and the other commenters who echoed 

the concerns highlighted in the study, if the Department’s 

final regulations would put students at a “distinct legal 

disadvantage” against schools that “can afford high quality 

legal counsel,” it is difficult to understand how this same 

concern would not apply to a complex, expensive court 

proceeding. Arbitration may frequently go further than a 

traditional trial in leveling out the practical, real-world 

123 Final Judgment, State of California v. Corinthian Colleges, Inc., et. 

al., No. CGC-13-534793 (Superior Court of California, County of San 

Francisco). Note: In 2018, the California Attorney General announced a 

settlement with Balboa Student Loan Trust providing debt relief for 

students who took out private loans to attend Corinthian Colleges. 

Final Judgment and Permanent Injunction, State of California v. Balboa 

Student Loan Trust, No. BC-709870 (Superior Court of California, County 

of Los Angeles).
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346 

legal disadvantages between the institution and the 

student. 

The Department does not adopt the suggestion by the 

commenter representing student veterans. We would like to 

thank the commenter for bringing to our attention the 

Department of Defense’s 2006 Report. However, that report 

draws its conclusions from concerns regarding predatory 

lending practices, including payday loans, car title loans, 

tax refund anticipations loans, and unsecured loans focused 

on the military and rent-to-own.124 As a result, we do not 

believe that the conclusions that the report reaches are 

applicable in the context of these final regulations. 

Further, these final regulations do not require a borrower 

to “waive his or her right of recourse.” As stated 

repeatedly, under these final regulations, borrowers, 

including student veterans, who meet the eligibility 

requirements maintain the right to file with the Department 

claims for loan discharges arising from borrower defense to 

repayment, false certification, and closed schools. 
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347 

The Department also continues to believe that the 

regulatory triad provides sufficient opportunities to 

review an institution, conduct oversight, and sanction an 

institution appropriately. Student complaints will 

continue to alert members of the triad to engage in 

oversight reviews. 

Changes: The final regulations at 668.41(h)(1)(i) 

have been revised to require, in schools’ plain language 

disclosures regarding their pre-dispute arbitration 

agreements and/or class action waivers required as a 

condition of enrollment, a statement that a school cannot, 

in any way, require students to limit, relinquish, or waive 

their ability to pursue filing a borrower defense claim, 

pursuant to 685.206(e), at any time. 

Arbitration Agreements 

Comments: Since most arbitration proceedings and 

results are confidential, several commenters noted that the 

regulatory change could enable a lack of transparency from 

schools by allowing fraudulent practices to continue even 

after students discovered and challenged them. 

Another commenter noted that most students enter into 

a pre-dispute arbitration agreement before any harm occurs. 

As a result, these students are not able to make an 
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348 

informed choice about whether to surrender legal rights and 

remedies. 

Another group of commenters recommended that the 

Department definitively state in the regulations that no 

arbitration agreement may abrogate a borrower’s right to 

file a Federal borrower defense to repayment claim, and 

that the borrower may initiate such a claim. Moreover, 

they suggested that the time a borrower commits to an 

arbitration process should toll the time limit for filing a 

discharge claim. 

One commenter asserted that arbitrators have a 

pecuniary incentive to rule in favor of a corporation. 

This commenter noted that arbitrators are paid based on the 

volume of cases and hours spent per case. Arbitrators thus 

have a strong financial incentive to rule in favor of the 

party on whom they depend for additional cases. This 

commenter further asserted that arbitration can cost more 

in “upfront” fees, as much as 3,009 percent more, than 

litigation. To support this point, the commenter relied 

upon two American Arbitration Association (AAA) studies, 

the CFPB’s 2015 “Arbitration Study: Report to Congress, 

Pursuant to Dodd-Frank Wall Street Reform and Consumer 
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349 

Protection Act,” and a Public Citizen study entitled “The 

Costs of Arbitration.”125

Another commenter noted that arbitration does not 

usually allow for an appeal. According to this commenter, 

the Federal Arbitration Act allows the losing party 90 days 

to appeal an arbitration award on narrow grounds, and a 

court essentially vacates an arbitration award for a 

“manifest disregard of the law.” 

One commenter further suggested that the likely result 

of an arbitration may conflict with cohort default rate 

restrictions. The commenter noted that the 2018 NPRM 

states that “[a]rbitration may . . . allow borrowers to 

obtain greater relief than they would in a consumer class 

action case where attorneys often benefit most.” The 

commenter asserts that, if the Department believes this is 

the case, the practice may run counter to other regulations 

125 American Arbitration Association, “Consumer Arbitration Rules,”

January 1, 2016,

https://www.adr.org/sites/default/files/Consumer%20Rules.pdf; and 

“Commercial Arbitration Rules and Mediation Procedures,” July 1, 2016

https://www.adr.org/sites/default/files/Commercial%20Rules.pdf; 

Arbitration Study: Report to Congress, Pursuant to Dodd-Frank Wall 

Street Reform and Consumer Protection Act § 1028(a), CFPB, Appendix A 

at 43 (2015), available at 

http://files.consumerfinance.gov/f/201503_cfpb_arbitration-studyreportto-congress-2015.pdf; Public Citizen, “The Costs of Arbitration,” p. 2, 

April 2002, available at https://www.citizen.org/documents/ACF110A.PDF.
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that prevent schools from “[making] a payment to prevent a 

borrower’s default on a loan” for purposes of calculating 

the cohort default rate. 
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Discussion: The Department appreciates the 

commenters’ concerns regarding the allowance of pre-dispute 

arbitration agreements in the final regulations and the 

effect of those agreements on transparency. 

In making this policy determination, the Department 

considered many factors, including the commenter’s concern 

about transparency. Our primary motivation for this policy 

change is to provide borrowers, who believe they have been 

wronged, an opportunity to obtain relief in the quickest, 

most efficient, most cost-effective, and most accessible 

manner possible. The Department acknowledges that 

arbitration proceedings are not public forums in the same 

way as traditional court proceedings. 

However, those public hearings, while transparent, 

have serious drawbacks: prohibitive costs, time delays, 

access for laypersons, among many others. Litigation can 

also have a serious negative impact on an institution’s 

reputation, even when ultimately the court rules in the 

institution’s favor. In our weighing of these factors, the 

Department has chosen to emphasize speedy relief and 

accessibility. 
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We also note that if the borrower is unsatisfied – due 

to the confidential nature of the arbitration proceeding or 

for any other reason – the final regulations do not 

preclude the borrower from pursuing other avenues for 

relief which they may find to be more transparent. 

An eligible borrower may file a borrower defense to 

repayment claim regardless of any decision against a 

borrower in an arbitration proceeding and, under revised 

668.41(h)(1)(i), a school cannot require students to limit, 

relinquish, or waiver their ability to pursue filing a 

borrower defense claim. The Department acknowledges that 

the borrower may file a borrower defense to repayment 

application with the Department at the same as initiating 

the arbitration proceeding with the school. 

Regarding arbitration awards conflicting with cohort 

default rate restrictions, payment to the student would not 

violate the prohibition on an institution making a payment, 

even if the borrower would have otherwise defaulted on the 

loan. If a school loses in arbitration, making a payment 

to a student as a result, that payment would be made to 

resolve a student’s complaint with the school, whether 

through settlement or an order from the arbitrator. 

Additionally, the Department believes that institutions 
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should be allowed to repay a student’s loan if, for 

example, during the first year of study it becomes clear to 

the institution that the student cannot benefit from the 

education provided. In such circumstances, the Department 

does not wish to discourage the institution from repaying 

the student’s loans. 

As discussed elsewhere in this document, the 

Department believes that, in reweighing the issues and 

subsequent legal developments, these final regulations 

provide students with information that they need to empower 

themselves to understand the legal rights and available 

remedies they are giving up, even before a dispute arises. 

Upon extensive review, the Department finds that it is a 

much more desirable policy to incentivize informed 

customers to make rational decisions that they think are 

best for them. The Department will not dictate to students 

what they ought to want. Mandatory arbitration clauses 

permit relatively inexpensive and expeditious resolution of 

customer grievances. Considering the burdens attending 

litigation, arbitration adjudicates claims relatively 

quickly, cheaply, and, concurrently, gives the “customers” 

what they want. The underlying, well-considered 

justification for all this is that Department has elected 
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not to substitute its own subjective and paternalistic 

judgment in place of the student’s own wishes about their 

legal rights and remedies. 

Neither an arbitration agreement nor an arbitrator’s 

decision can abrogate a borrower’s right to file a borrower 

defense claim. The Department notes that students who are 

not satisfied with the arbitrator’s determination are still 

free to file a borrower defense claim with the Department. 

We have incorporated a provision, in § 668.41(h)(1), that 

states that an institution’s disclosure to students, where 

an explanation of class-action waivers and mandatory predispute arbitration agreements is provided, must include a 

statement that the borrower need not participate in any 

internal dispute resolution processes prior to filing a 

borrower defense claim. 

The Department strongly disagrees with the commenter’s 

statement that an arbitrator’s pecuniary interests would 

taint the arbitration proceeding. The Department notes 

that a failure to disclose facts that a reasonable person 

would consider likely to affect the impartiality of the 

arbitrator would be a violation of the Arbitrator’s Code of 

Ethics as well as a violation of the Uniform Arbitration 
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Act (Revised).126 The Code of Ethics for Arbitrators in 

Commercial Disputes provides that an arbitrator should: (1) 

uphold the integrity and fairness of the arbitration 

process; (2) disclose any interest or relationship, arising 

at any time, likely to affect the impartiality, or which 

might create an appearance of partiality or bias; (3) avoid 

impropriety or the appearance of impropriety in 

communicating with the parties or their counsel; (4) 

conduct the proceedings fairly and diligently; (5) make 

decisions in a just, independent, and deliberate manner; 

and (6) be faithful to the relationship of trust and 

confidentiality inherent in the office.127

Further, this commenter asserted that arbitration 

costs more in “upfront” fees than litigation. Neither AAA 

study cited by the commenter supports this proposition. 

126 “The Code of Ethics for Arbitrators in Commercial Disputes,” American 

Arbitration Association, Effective March 1, 2004, 

https://www.adr.org/sites/default/files/document_repository/Commercial_

Code_of_Ethics_for_Arbitrators_2010_10_14.pdf; Uniform Arbitration Act 

(Revised), National Conference of Commissioners on Uniform State Laws, 

2000, https://www.uniformlaws.org/viewdocument/final-act1?CommunityKey=a0ad71d6-085f-4648-857ae9e893ae2736&tab=librarydocuments; Note: The Uniform Arbitration Act 

has been adopted in 35 jurisdictions and 14 jurisdictions have adopted 

substantially similar legislation. 

127 American Arbitration Association, 

https://www.adr.org/sites/default/files/document_repository/Commercial_

Code_of_Ethics_for_Arbitrators_2010_10_14.pdf. 
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The CFPB study is the precise document that the Department 

relied upon, in part, in the 2016 final regulations’ 

rationale for the pre-dispute arbitration and class action 

waiver provisions. Congress’s resolution disapproving the 

CFPB final rule could be read to reaffirm the strong 

Federal policy in support of arbitration. As a result, we 

have followed Congress’ direction in not following the 

CFPB’s final rule’s concepts in these regulations. 

The commenter relies on a 2002 Public Citizen study 

for the statistic that total arbitration costs incurred by 

a plaintiff’s use of the AAA could increase by as much as 

3,009 percent as compared with filing that same claim in 

court.128 This claim relies upon a comparison between the 

costs of initiating a lawsuit in court to the fees 

potentially charged to a plaintiff for initiating an 

arbitration. The study compares court filing fees in the 

Circuit Court of Cook County to fees charged by the AAA. 

Although it is true that court filing fees are lower than 

arbitration initialization fees, this calculation does not 

take into account the additional potential costs related to 

128 Public Citizen, “The Costs of Arbitration,” 

https://www.citizen.org/documents/ACF110A.PDF.
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litigation, including attorney’s fees and costs associated 

with the discovery process, fees charges by expert 

witnesses, travel expenses, and other miscellaneous 

costs.129 

For example, the current filing fee to initiate a 

civil action in the Circuit Court of Cook County, Illinois 

is $368.130 However, for most individuals, filing a civil 

action usually requires them to obtain legal services or 

representation, which adds significantly to the cost.131 

129 See, e.g., Epic Systems Corp. v. Lewis, 138 S.Ct. 1612, 1621 (2018) 

(referring to the Federal Arbitration Act (FAA), 9 USC § 2, and citing 

Scherk v. Alberto–Culver Co., 417 U.S. 506, 511 (1974)) (“[I]n 

Congress’s judgment arbitration had more to offer than courts [once] 

recognized—not least the promise of quicker, more informal, and often 

cheaper resolutions for everyone involved.”) (emphasis added). 

Notably, “the virtues Congress originally saw in arbitration, its speed 

and simplicity and inexpensiveness” should not, in the Supreme Court’s 

view, “be shorn away;” as a corollary, “arbitration [ought not to] 

look[] like the litigation” the FAA “displace[d].” Epic Systems, 138 

S.Ct. at 1623 (emphasis added); see also AT&T Mobility LLC v. 

Concepcion, 563 U.S. 333, 347, 348 (2011). Note: It could be argued 

that the calculation in the study does not take into account the many 

other additional potential costs of both litigation and arbitration. 

Regardless the cost, however, it is incontrovertible that Congress has 

found to favor arbitration. 130 Clerk of the Court, Cook County, “Court Fees and Costs 705 ILCS 

105/27.2a,” Effective January 1, 2017, 

http://www.cookcountyclerkofcourt.org/Forms/pdf_files/CCG0603.pdf. 131 See: Paula Hannaford-Agor, “Measuring the Cost of Civil Litigation: 

Findings from a Survey of Trial Lawyers,” Voir Dire, Spring 2013, 

https://www.ncsc.org/~/media/Files/PDF/Services%20and%20Experts/Areas%2

0of%20expertise/Civil%20Justice/Measuring-cost-civil-litigation.ashx. 
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Under the commercial arbitration rules of the AAA, the 

current initial filing fee for a claim of less than $75,000 

is $925.132 Admittedly, that number is higher than the 

court filing fee, without counting attorney’s fees. 

However, it is a far cry from the 3,009 percent cited by 

the commenter. Consequently, in reality, the problems the 

commenter describes are not nearly as stark as advertised. 

The Department disagrees with this same commenter’s 

assertion that “individual rights” would be curtailed by an 

arbitration’s “severely limited right to appeal.” The 

Department notes that no constitutional right to appeal 

exists in a civil proceeding. In addition, a borrower has 

the right to file a borrower defense to repayment claim 

irrespective of the arbitrator’s determination and still 

may have an avenue for relief through the Department’s 

process. 

A commenter suggested tolling the limitations period 

for a borrower defense claim for the time period in which 

the student and the institution are in active arbitration 

132 American Arbitration Association, “Commercial Arbitration Rules and 

Mediation Procedures: Administrative Fee Schedules,” May 1, 2018, 

https://www.adr.org/sites/default/files/Commercial_Arbitration_Fee_Sche

dule_1.pdf. 
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proceedings. The Department finds this suggestion 

reasonable and believes it may incentivize institutions to 

more quickly resolve arbitrations--providing relief to 

wronged borrowers more quickly--and not drag out 

proceedings in order to consume the current limitations 

period. 

As a result, we adopt changes to the final regulations 

to toll the limitations period beginning on the date that 

the student files a request for arbitration and ending when 

the arbitrator submits a final determination to the 

parties. 

Changes: We have added language to § 668.41(h)(1) to 

specify that schools must, in their plain language 

disclosures, state that borrowers not need to participate 

in arbitration or any internal dispute resolution process 

offered by the institution prior to filing a borrower 

defense to repayment application with the Department. This 

plain language disclosure must also state that any 

arbitration, required by a pre-dispute arbitration 

agreement, pauses the limitations period for filing a 

borrower defense to repayment application for the length of 

time that the arbitration proceeding is under way. 
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The Department also includes language in 

§685.206(e)(6)(i) to state that, for loans first disbursed 

on or after July 1, 2020, the limitations period will be 

tolled for the time period beginning on the date that a 

written request for arbitration, in connection with a predispute arbitration agreement, is filed, by either the 

student or the institution, and concluding on the date the 

arbitrator submits, in writing, a final decision, final 

award, or other final determination, to the parties. 

Class Action Waivers 

Comments: One commenter noted that class actions are 

an important part of resolving disputes in cases of 

widespread damages, especially in cases where individual 

damages may not be substantial or when individuals may not 

have the resources to seek representation for their 

complaints. 

A group of commenters stated that the preamble to the 

2018 NPRM did not adequately explain why class action 

waivers should be allowed, and did not reassure the public 

that such a waiver cannot affect a borrower’s ability to 

file a claim or to use a class action lawsuit to help 

support a claim of misrepresentation. They asserted that 

class action lawsuits may also serve to alert the 
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361 

Department that a pattern of misrepresentation may be 

present. 

Discussion: The Department appreciates the comments 

regarding the use of class action waivers. The commenter’s 

concern regarding an individual’s ability to acquire 

representation is mitigated by the Department’s proposal to 

allow students and schools to employ internal dispute 

resolution options, where legal representation is not 

necessary, before the filing of a borrower defense claim. 

Further, as stated in an earlier section, nothing in these 

final regulations burdens a student’s ability to file a 

borrower defense to repayment application, or any claim 

with a government agency, even after an arbitrator submits 

a finding against the student’s claim. 

 We appreciate the commenter’s concerns regarding 

transparency and alerting the Department to potential 

institutional wrongdoing. In the discussion regarding 

arbitration and class action waivers in the 2018 NPRM, the 

Department explained the benefits of our position, 

including allowing borrowers to obtain greater relief, 

reducing the expense of litigation for both students and 

institutions, and easing the burden on the U.S. court 
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362 

system.133 We are concerned that the adjudication of class 

action lawsuits benefit the wrong individuals, that is, 

lawyers and not wronged students.134 For these reasons, the 

Department has concluded that allowing class action waivers 

would benefit both institutions and students by fasttracking dispute resolutions in a lower cost and more 

efficient. 

Changes: None. 

Plain Language Disclosures 

Comments: Several commenters who supported the 

proposed regulations requested that we develop standardized 

information that schools can provide to students regarding 

pre-dispute arbitration and class actions. The commenters 

suggest that this would ensure that all schools provide 

students with the same or similar plain language 

information. 

One commenter suggested a number of specific changes 

to the disclosure requirements, including the creation of 

common disclosures. The commenter recommended that the 

133 83 FR 37245. 134 For more information on this topic, see: James R. Copland, et.al., 

“Trial Lawyers, Inc. 2016,” Manhattan Institute, 

https://media4.manhattan-institute.org/sites/default/files/TLI0116.pdf. 
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363 

Department work in consultation with the CFPB to develop 

and consumer-test common, plain-language disclosures about 

arbitration clauses and class action waivers that would be 

supplemented with specific information from the school 

about its own processes. The commenter suggested that the 

disclosures should, at a minimum, note that pre-dispute 

arbitration clauses and class action waivers are not 

required at all schools of higher education and clearly 

state that students will not be able to exercise their 

right to sue their school if they have concerns about their 

academic experience at the school. The commenter also 

suggested that the Department ensure the disclosures made 

by schools are prominent and readily available to current 

and prospective students. The commenter recommended that 

the Department require that disclosures be listed on all 

pages of the school’s website that include information 

about admissions, tuition, or financial aid; post the 

disclosure on the homepage itself, rather than on a subpage, with the headline portion of the disclosure in an 

easily readable, prominent format; and enforce the 

disclosure requirements as part of its regular audit and 

program review processes. 
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364 

This commenter also expressed concern that the 

regulations would not require schools to submit fulsome 

information about arbitration proceedings at the school. 

If such a requirement is not included in the final 

regulations, the commenter recommended the Department 

instead require that schools submit basic details on at 

least a quarterly basis that would allow the Department to 

know if further investigation may be necessary. 

Specifically, the commenter suggested that we should 

require schools to report the total number of arbitration 

proceedings on borrower defense-related topics conducted 

during the previous quarter and provide a high-level 

summary of each such proceeding, including the nature of 

the complaint and its resolution (including whether the 

student completed the arbitration proceeding; whether the 

student is still enrolled in the school, has graduated, or 

has withdrawn; and the dollar amount or other forms of 

relief awarded to the student in each). 

Commenters expressed concern that disclosures fail to 

change the fact that students must accept the schools’ 

harmful contract terms or not attend the school. They 

asserted that students are unlikely to appreciate the 

rights they are giving up. Commenters argued that 
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365 

disclosures are “ineffective” and that an “information 

only” approach was not sufficient. 

Another commenter noted that requiring schools to make 

disclosures not just on their websites, but also “in their 

marketing materials,” is not a requirement that is included 

in the actual regulatory language that the Department 

proposed. 

Discussion: The Department appreciates the many 

suggestions and recommendations from commenters about 

elements to include in disclosure materials, potential 

consultation partners, location of disclosures on 

institutional websites, as well as reported items, 

frequency, and submission requirements. 

 The Department believes that government does not know 

what is best for a particular student, nor can bureaucrats 

in Washington know what is better for a student than the 

student knows for herself. The Department does not believe 

that students who enroll at institutions that use 

arbitration agreements and class action waivers are forced 

to attend those institutions or are unaware that other 

postsecondary options — some of which do not require such 

agreements — are available. 
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366 

As explained in the 2018 NPRM, we are rescinding §§ 

685.300(g) and (h) – which required schools to submit 

arbitral and judicial records to the Department — in an 

effort, in part, to reduce the administrative burden both 

on institutions and on the Department. Notably, these 

provisions required a significant amount of paperwork to be 

submitted to the Department, and we no longer believe that 

the value of these submissions outweighs the costs and 

burdens associated with them. Additionally, the Department 

is concerned about the long-term viability of these 

provisions and the deleterious effects that they may have. 

Publicizing arbitral documents would upend the arbitration 

process and could lead to institutions being less open 

during arbitration proceedings. On the other hand, 

publicizing these documents would potentially subject 

institutions to continuous liability for conduct that it 

has long since corrected – an outcome the Department wishes 

to avoid. The provisions also would require the Department 

to constantly monitor these submissions and would create an 

onerous, unnecessary administration burden for the 

Department when it should be dedicating its resources in 

this area to the adjudication of borrower defense to 

repayment claims. 
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367 

Similarly, the Department understands the commenter’s 

suggestion that developing standardized information for 

schools to provide to students regarding pre-dispute 

arbitration and class action waivers would be helpful. 

However, the Department believes that any language 

developed by the Department, or any standardized form, 

would not sufficiently respond to each institution’s unique 

circumstances or reflect a school’s particular interests or 

approach, and therefore could interfere with the 

Department’s goal of allowing borrowers as well as 

institutions to select the appropriate dispute resolution 

process. 

The Department agrees that any disclosures should be 

easy to find and provided in clear, easy-to-understand, 

plain language. In the final regulations, at § 

668.41(h)(1), we have added language directing institutions 

to include plain language disclosures in 12-point font, or 

the equivalent on their mobile platforms, on their 

admissions information webpage and in the admissions 

section of the institution’s catalogue. We believe these 

specified locations and manner for posting the information 

balance the need for notification without becoming overly 

burdensome. 
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368 

 As discussed in the previous section, the Department 

rejects the assertion that students are unable to 

appreciate the rights they are giving up and the rights 

they are gaining. The Department believes that students, 

when armed with information, should have the right and 

opportunity to select an institution or program that will 

best meet their needs, whatever those needs may be. In 

addition, the Department believes that these final 

regulations help achieve that aim. We believe that the 

more detailed disclosure items in entrance counseling 

requirements in § 685.304, in concert with the plain 

language disclosures in § 668.41, will work well to provide 

students with the information they need to become more 

informed about the choices they are making, both before and 

after they enroll in a school. 

The final regulations were revised to expressly 

provide that all disclosures must be in 12-point font on 

the institution’s admissions information webpage and in the 

admissions section of the institution’s catalogue. The 

Department erred on the side of specifying where the 

disclosures should be placed to provide greater clarity and 

certainty in these final regulations. 
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369 

Changes: The Department revised § 668.41(h)(1) to 

expressly state where the institution must include the 

requisite disclosures. 

Entrance Counseling 

Comments: Some commenters who supported the 

disclosure requirement for schools that require their 

students to sign pre-dispute arbitration agreements or 

class action waivers objected to the requirement to include 

this information in entrance counseling. These commenters 

asserted that including the information in entrance 

counseling would not provide any additional value. 

One commenter recommended that the Department require 

schools to verify that students who obtained loan 

counseling through an interactive tool also receive an 

arbitration/class action waiver disclosure through a 

separate avenue. The commenter suggested the Department 

should require that schools obtain the student’s signature 

to verify that the student received and read the loan 

counseling materials. This commenter further suggested 

that, since it already has an experiment in progress on 

loan counseling, the Department should also consider the 

lessons learned from participating schools to continually 

improve these requirements, and assess whether any of the 
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370 

participating schools have arbitration clauses or class 

action waivers to evaluate those schools’ outcomes 

specifically and separately from the overall treatment 

group. 

One commenter asserted that counseling will not remedy 

their concern about unequal bargaining power between the 

student and the institution. The commenter argued that the 

Department’s disclosure requirements are inadequate because 

the proposed rule does not address the qualifications to 

serve as a counselor and does not specify the method of 

counseling. 

Discussion: The Department appreciates the 

suggestions from commenters regarding the regulatory 

provision that institutions that require students to sign 

pre-dispute arbitration agreements or class action waivers 

as a condition of enrollment include information in the 

borrower’s entrance counseling regarding the school’s 

internal dispute and arbitration processes. We believe 

that students should receive entrance counseling on the 

school’s internal dispute and arbitration processes. While 

we regard the inclusion of this counseling as a best 

practice, we will not require it through regulation. The 
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371 

Department will not require schools to verify that students 

received arbitration or class action waiver counseling 

through a separate tool or to obtain a student’s signature 

to verify that the student received and read the counseling 

materials. We believe that the commenter’s suggested 

options could prove too burdensome for institutions and the 

Department and that this level of monitoring would not 

necessarily be helpful or cost-effective. 

In addition, the Department has no current plans to 

assess schools that employ arbitration clauses or class 

action waivers specifically or separately in any Department 

experimental site. The Department will take into account 

any lessons learned from ongoing experimental site projects 

and incorporate them into future rulemaking efforts, as 

appropriate. 

The Department disagrees with the commenter’s 

objection that including information regarding pre-dispute 

arbitration agreements or class action waivers in entrance 

counseling would not provide any additional value to the 

students. We believe that the value added for students, 

especially at §§ 685.304(a)(6)(xiv) and (xv), is keeping 

them informed about the agreements they are becoming a 
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372 

party to and about the internal dispute resolution options 

afforded to them by the school. 

The Department did not propose the additional 

counseling requirements to remedy concerns about the 

relative bargaining power between the institution and the 

borrower, but rather to help borrowers have the information 

they need about pre-dispute arbitration agreements and 

class action waivers. The Department believes, first and 

foremost, that providing disclosure information to students 

is in their best interests and will empower students to 

make informed decisions about their academic choices. We 

believe that the requirement in §685.304(a)(5) that an 

individual with expertise in the title IV programs is 

reasonably available shortly after the counseling to answer 

questions, addresses some of the commenter’s concerns about 

employee qualifications. 

Changes: None. 

CLOSED SCHOOL DISCHARGES (685.214) 

Option to Accept a Teach-Out Opportunity or Apply for 

Closed School Discharge 

Comments: While sharing the Department’s desire to 

encourage closed and closing schools to implement teach-out 

plans for their students, many commenters believed that 
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373 

borrowers enrolled at closed or closing schools should have 

the option to accept a teach-out plan or apply for a closed 

school discharge. 

Another commenter stated that there are many reasons a 

student would opt for a discharge rather than a teach-out, 

including: the low quality of education provided 

previously; a preference not to continue; the teach-out 

school has a poor reputation; or the same program is 

available at a local community college or other 

institution. 

Discussion: After considering the commenters’ 

arguments, the Department now agrees that students should 

have the option to pursue a closed school loan discharge by 

submitting an application, transfer to another institution, 

or accept the teach-out plan offered by their institution, 

which may include a teach-out plan offered by the closing 

institution or a plan from a teach-out partner. 

If the orderly closure or the teach-out plan has been 

approved by the school’s accrediting agency and, if 

applicable, the school’s State authorizing agency, once a 

student accepts a teach-out plan offered by the institution 

or its partner, the student would not be eligible for a 
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374 

closed school loan discharge unless the school fails to 

materially adhere to the terms of the teach-out plan or 

agreement with the student. 

 Changes: In light of the commenter’s suggestions, 

proposed § 685.214(c)(1)(ii) (now § 685.214(c)(2)(ii)) has 

been revised as follows: “Certify that the borrower (or the 

student on whose behalf the parent borrowed) has not 

accepted the opportunity to complete, or is not continuing 

in, the program of study or a comparable program through 

either an institutional teach-out plan performed by the 

school or a teach-out agreement at another school, approved 

by the school’s accrediting agency and, if applicable, the 

school’s State authorizing agency.” 

Automatic Closed School Discharges 

Comments: A number of commenters, who opposed 

granting automatic closed school discharges, stated that 

the practice is not good for the school, the government, or 

the taxpayer. 

Several commenters supported providing automatic 

closed school discharges to borrowers without requiring an 

application, as was provided for in the 2016 final 

regulations. Under the 2016 final regulations, the 

Department would automatically discharge a borrower’s loans 
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375 

if the borrower does not re-enroll in another school or 

transfer their credits within three years of their school’s 

closure. These commenters believed that not including the 

automatic discharge provision in our proposed regulations 

after the rule had been in effect would adversely affect 

students already navigating the complicated school closure 

process. One commenter expressed the view that, without 

the automatic loan discharge, borrowers will find it almost 

impossible to have their loans discharged. 

A group of commenters requested information regarding 

how the Department’s regulatory impact analysis of its 

proposed rescission of the automatic closed-school 

discharge provision of the 2016 final regulations took into 

account the actual application rate of eligible students 

under current closed-school discharge provisions. 

One commenter recommended that students that attended 

schools that have been found to have engaged in fraud or 

misrepresentation and fined by the Federal government 

should have a right to an automatic discharge going back at 

least five years from the closing of the school. 

 One commenter noted that the Department provided three 

justifications for its decision not to include an automatic 

discharge provision in the NPRM. In this commenter’s view, 
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376 

none of the justifications are sufficient under the APA for 

this policy change. 

Another commenter noted that automatic discharges 

would help to address the disparities that are especially 

detrimental to borrowers of a specific minority group and 

hinder their ability to obtain relief through the court 

system or through administrative proceedings. 

Other commenters expressed the view that, in the 

absence of quality information or direction, rescinding the 

automatic discharge provisions severely limits the ability 

of borrowers to find a pathway to relief. 

Some commenters noted that the Department stated that 

one of the reasons that automatic discharges might be 

detrimental to borrowers is that schools may withhold 

transcripts from borrowers who receive automatic closed 

school discharges. The commenters argued that this is an 

unsubstantiated assertion, not backed up by evidence. 

One commenter stated that the Department has used 

flawed reasoning in stating that an unknowing borrower 

granted an automatic closed school discharge may lose the 

ability to obtain an official copy of their transcript. 

According to this commenter, the Department’s reasoning is 

flawed because: relevant case law demonstrates that 
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377 

withholding transcripts is unconstitutional at public 

colleges; such withholding could violate State law property 

rights; the change is unsubstantiated by any evidence of 

customary practice; and the Department neglected to 

consider less arbitrary actions to ameliorate the stated 

concerns. 

Discussion: The Department believes that providing 

automatic closed school discharges to borrowers runs 

counter to the goals of these final regulations, which 

include encouraging students at closed or closing schools 

to complete their educational programs, either through an 

approved teach-out plan, or through the transfer of credits 

separate from a teach-out. 

The Department does not agree that we do not provide 

quality information and direction to students who are 

enrolled in a closed or closing school. The Department 

takes its responsibility to keep students at a closed or 

closing school well-informed seriously, as do State 

authorizing bodies and accreditors, and we direct the 

commenter to the FSA website, where we have posted an 

explanation of the criteria for a closed school loan 

discharge, a description of the discharge process and the 

proper steps to take, answers to the most frequently asked 
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378 

questions, fact sheets on closed or closing institutions, 

schedules for live webinars presented by FSA, information 

on transfer fairs, and more. While the Department 

encourages schools to post the “Loan Discharge Application: 

School Closure” form on their institutional website,135 as 

discussed in more detail below, we are rescinding 

§668.14(b)(32), which requires closing institutions provide 

information about closed school discharge opportunities to 

their students, because it is the Department’s, not the 

school’s, burden to provide this information to students. 

 We do not agree that without an automatic discharge it 

would be almost impossible for a borrower to qualify for a 

closed school discharge. The application process for a 

closed school discharge is not overly burdensome or 

difficult to navigate, and it is generally not difficult 

for the Department to make determinations of borrower 

eligibility for closed school discharges based on the 

announcement date and enrollment information regarding the 

borrower. 

135 “Loan Discharge Application: School Closure,” 

https://ifap.ed.gov/dpcletters/attachments/GEN1418AttachLoanDischargeAp

pSchoolClosure.pdf. 
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We also do not agree with the proposal that automatic 

closed-school discharges be available with a look-back 

period of five years. We believe that five years is too 

long, even in the case of a school against which the 

Department has assessed liabilities. We believe that a 

five-year period would include many students who left the 

school for reasons completely unrelated to the school’s 

closure or the quality of instruction provided. If a 

closed school engaged in misrepresentation or other 

fraudulent practices, and the borrower was enrolled outside 

the window of eligibility for a closed school discharge, 

the appropriate remedy for the borrower is to apply for a 

borrower defense discharge. Also, under exceptional 

circumstances, the Secretary retains the right to extend 

the closed school loan discharge period. 

 In the NPRM, the Department articulated its reasons 

for not including in these final regulations provisions for 

automatic closed school discharges, which were not part of 

our regulations prior to 2016.136 The Department continues 

to believe that the closed school loan discharge 

136 83 FR 37267-37268.
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380 

application is the most accurate and fairest method to 

initiate the discharge process and make initial 

determinations on the potential claim. 

 Additionally, as discussed in the 2016 final 

regulations and the 2018 NPRM, the Department evaluated the 

potential impact of the automatic discharge provision using 

a data set of borrowers from schools that closed between 

2008 and 2011 so re-enrollment could be evaluated. This 

accounted for those that filed for a closed school 

discharge in the window since their school’s closure. 

Significantly, under the APA, an agency “must show 

that there are good reasons for the new policy,” but it 

need not show that “the reasons for the new policy are 

better than the reasons for the old one.”137 As detailed 

again throughout this section, the Department does not 

believe that including automatic closed school discharges 

in the regulations is the best approach when considering 

all of the relevant factors. The Department believes that 

it is incumbent upon the borrower to make the decision as 

to whether it is in his or her best interest to retain the 

137 FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). 
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381 

credits earned at the closed school or receive a closed 

school loan discharge. 

While there may be disagreement about whether 

automatic closed school loan discharge is better for 

borrowers than closed school loan discharges provided to 

students who apply for such a benefit, the Department has 

met the required legal standard for proposing and making 

this change. Given that automatic closed school loan 

discharges did not exist in our regulations until recently, 

we do not believe that this provision has become such an 

integral part of the program that it cannot function, and 

students cannot be served, without inclusion of an 

automatic discharge provision. As stated in the NPRM, 

the Department continues to believe that it is not overly 

burdensome for borrowers to apply for a closed school loan 

discharge, and that they should retain the choice of 

whether to apply. 

The final regulations make no distinctions between 

borrowers based on race. We do not believe that the 

provisions of the final regulations will penalize any one 

racial group over another, as all borrowers will be subject 

to the same requirements. 
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Closed school discharge requests are rarely 

adjudicated through the court system and rarely require 

borrowers to participate in administrative proceedings. In 

most cases, to apply for a closed school discharge, an 

eligible borrower is only required to complete the closed 

school discharge application form and submit it to the 

Department. 

 The Department is neither requiring nor encouraging 

institutions to withhold a transcript in the event of a 

closed school loan discharge, the Department notes that 

institutions may have the authority, subject to certain 

State laws, to develop policies and outline circumstances 

under which a student may be denied an official 

transcript.138 A student’s right to a transcript under 

certain laws does not necessarily entitle that student to 

an official transcript. 

 However, the possibility of a school withholding 

transcripts was only cited as one reason not to provide for 

automatic closed school discharges. As noted above, 

138 Note: The Department discusses the issues regarding the withholding 

of transcripts in more detail in the “Relief” section of these Final 

Regulations.
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granting automatic closed school discharges may be 

detrimental to schools and taxpayers since borrowers would 

not be required to state that they do not intend to 

transfer their credits to another institution to complete 

their program. Students could intentionally delay 

reenrollment at a new institution for three years in order 

to retain the credits already completed, but eliminate the 

debt associated with earning those credits. There are 

large costs to institutions and taxpayers when students 

retain the right to transfer their credits and also receive 

a closed school loan discharge. The Department wishes to 

emphasize to all borrowers that taking student loans has 

significant associated consequences, and that all borrowers 

who take loans should do so with the understanding that 

they are expected to repay their loans. 

Finally, given that there may be tax implications or 

other negative effects on the borrower, while some 

borrowers may appreciate an automatic discharge provision, 

we believe that closed school loan discharges should only 

be available by application. Some borrowers may be 

satisfied with the education they received prior to the 

school’s closure and may have left the school in order to 

meet certain family or work obligations, but wish to 
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transfer those credits in the future in order to complete 

their program at another institution. 

Changes: We are revising § 685.214(c)(3)(ii) to 

specify that the automatic closed school discharge 

provision will apply for schools that closed on or after 

November 1, 2013 and before July 1, 2020. 

Extending the Window to Qualify from 120 Days to 180 

Days 

Comments: Several commenters supported extending the 

window of time during which a student must have withdrawn 

prior to a school’s closure to receive a closed school 

discharge to 180 days. However, some commenters believed 

that the additional changes proposed by the Department 

eliminate any benefit of this change. One commenter viewed 

it as an “empty gesture,” and noted that the Secretary 

already has the authority to extend the window to 180 days 

under exceptional circumstances. 

Some commenters supportive of the expansion 

recommended that the window be increased to at least one 

year. 
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A number of commenters requested data that the 

Department considered in assessing the impact of extending 

the eligibility period from 120 to 180 days. 

Other commenters opposed the proposed expansion. 

These commenters believed that closed school discharge 

claims should be based on why the student decided to 

withdraw from the closing school, not when. One commenter 

believed that allowing borrowers to qualify for closed 

school discharges based on when they withdrew from the 

school and not why they withdrew is inconsistent with the 

statute. In these commenters’ views, the statute expressly 

ties a student’s eligibility for a closed school loan 

discharge to the school’s closure. These commenters noted 

that if a borrower withdrew from a school for personal 

reasons it may be documented in the school records and they 

argued that since these students left the institution for 

reasons unrelated to the school’s closure they should not 

qualify for the discharge. Another commenter opposed to 

the expansion noted that extending the window creates 

increased liability for taxpayers to forgive the loans of 

students whose withdrawal was unrelated to the closure, 

such as personal circumstances or academic dismissal. 
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Another commenter stated that if a borrower withdraws 

before the school closes, the borrower has not suffered any 

loss due to the school’s closure. 

A commenter, who is opposed to the expansion, noted 

that 20 USC § 1087(c), the statute that authorizes closed 

school loan discharges, specifies that a borrower is 

eligible for a closed school loan discharge only if he or 

she “is unable to complete the program in which [he or she] 

is enrolled due to the closure of the institution.” This 

commenter claimed that the statute required a causal 

connection between the student’s inability to complete the 

program and the closure of the institution. The commenter 

contended that the Department’s current regulations 

conflict with section 1087(c) because the regulations allow 

a borrower to obtain a closed school loan discharge based 

on when the student withdrew and without regard to the 

reason for the withdrawal. The commenter noted that a 

borrower could apply for a closed school discharge even if 

the borrower voluntarily withdrew before the closure 

decision had been announced or even made. The commenter 

asserted that, by expanding the loan discharge window, the 

Department would likely see an increase in the frequency 

with which closed school discharges are granted. 
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 One commenter noted that if the Department extends the 

window to 180 days, conforming changes would need to be 

made in associated regulations. 

Discussion: The Department thanks the commenters that 

supported extending the closed school discharge window to 

180 days. 

Although some commenters believed that other changes 

reduce the importance of the extension, we expect that more 

borrowers will qualify for closed school discharges as a 

result of the extension, and we believe this is an 

important benefit. While it is accurate that the Secretary 

already has the authority to extend the window, borrowers 

at closing schools cannot know in advance whether an 

extension will be provided. Specifying the window of 180 

days in the regulations allows more borrowers to make 

better informed decisions regarding whether to continue 

attending the school while also allowing them to benefit 

from the intended purpose of the regulations, without the 

need for a determination as to whether exceptional 

circumstances exist. 

The Department relied on its experience, as well as 

information from others involved in school closures, when 
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proposing to extend the eligibility period for a closed 

school discharge. The Department has received numerous 

requests from state attorneys general, members of Congress, 

and former students and employees from closed schools to 

extend the look-back period beyond 120 days when a school 

closes. Together, this information validates the 

Department’s belief that the longer period is needed. 

In the event that a closing institution is engaging in 

a teach-out plan in which it provides the teach-out 

services directly, the 180-day look-back period will begin 

on the actual date of the campus closure. However, 

students who elect a closed school loan discharge at the 

beginning of the teach-out period remain eligible for a 

closed school loan discharge under the exceptional 

circumstances provision, if the teach-out is longer than 

180 days. A student should not feel compelled to continue 

enrollment at an institution after the announcement of a 

teach-out simply to be sure that he or she is enrolled less 

than 180 days prior to the date of closure. 

 We do not agree with the recommendation to extend the 

window to a full year. The purpose of the 180-day window 

is to provide borrowers access to a closed school discharge 

even if they choose to leave a school that is clearly 
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389 

showing signs of a loss of quality or institutional 

instability 180 days prior to closing. 

Based on our experience in handling closed school 

situations, we believe that 180 days provides an 

appropriate period to assume that a student has left the 

school due to a loss of quality. However, if we determined 

that a school experienced deteriorating educational quality 

for a longer period before it finally closed, the Secretary 

could use her authority, as referenced above, to increase 

the window of eligibility for a closed school discharge. 

We have made this exceptional circumstance explicit in the 

final regulations. 

 We do not agree with the commenters who contended that 

the Department should make a determination as to why the 

borrower withdrew and not grant closed school discharges to 

borrowers who withdrew for personal reasons prior to the 

school closing. We do not believe that the statute 

requires a determination of the motives of a borrower for 

leaving a school to establish the borrower’s eligibility 

for a closed school discharge. Moreover, the Department 

could not accurately make such determinations. Personal 

reasons, by their very nature, are individualized. They 

are not likely to be documented in a consistent, reliable 
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390 

manner and it is not always clear what factors ultimately 

lead anyone to take action. 

 We disagree with some commenters’ analysis of the 

requirements in 20 USC § 1087(c). The HEA provides that a 

borrower may receive a closed school discharge if the 

borrower “is unable to complete the program in which the 

student is enrolled due to the closure of the institution” 

(sections 454(g)(1) and 437(c)(1)), but does not establish 

a period prior to the closure of the school during which a 

borrower may withdraw and still qualify for a closed school 

discharge. The Department has long interpreted the statute 

to allow discharge for students who withdrew a short time 

before a school closure, in recognition that a precipitous 

closure may be preceded by degradation in academic quality 

or student services. These final regulations are in line 

with the Department’s previous interpretations. 

 The Department disagrees with the commenter who stated 

that a borrower who withdraws from a school that is on the 

verge of closing has not suffered any loss due to the 

school’s closure. As noted, a closing school’s educational 

environment may deteriorate, especially as the remaining 

student population contracts. A borrower who withdraws 

from a school prior to the actual closure date due to 
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391 

deteriorating conditions has suffered a loss, whether 

monetary, time, or other hardship. When the borrower 

enrolled in the school, they had every reason to expect the 

school to remain in existence for the duration of their 

education program. Had the borrower known that the school 

would close before they completed the educational program, 

the borrower would most likely have enrolled at a different 

school. 

 Although the expansion of the window to 180 days may 

result in greater costs to taxpayers, we believe that any 

increased cost is more than offset by the benefit that it 

provides to borrowers who, through no fault of their own, 

find that they have incurred education debt for attendance 

at a school that is closing. In addition, the 180-day 

period covers any gaps between the spring and fall 

semesters, since the previous 120-day period could put 

students in a position of exceeding that window simply for 

not enrolling in summer classes. We believe that the 

totality of these regulations will encourage borrowers at 

closed or closing schools to complete their education 

program through teach-outs, rather than to take the closed 

school discharge. This is the Department’s preferred 
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392 

policy because it incentivizes and prioritizes educational 

attainment. 

Changes: Because we are extending the window to 180 

days, applicable to loans first disbursed on or after July 

1, 2020, we are adding a new § 685.214(g) and have made 

conforming changes to § 685.214(f)(1). 

Exceptional Circumstances 

Comments: Several commenters recommended that the 

Department retain the existing list of exceptional 

circumstances under which it can expand the eligibility 

window. These commenters believed that the Department 

should not tie its own hands and foreclose its future 

ability to assist students dealing with an abrupt school 

closure. 
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393 

One commenter noted that the Department provided no 

rationale for the change, except in the case of the 

reference to a loss of accreditation. The commenter stated 

that there was no analysis of how this provision would 

interact with State laws. The commenter also believed that 

the proposed language on accreditation was unnecessarily 

detailed and could accidentally exclude some circumstances, 

such as voluntary withdrawal from accreditation without 

closure. The commenter believed that the elimination of 

the example of the institution’s discontinuation of the 

majority of its programs would encourage institutions to 

keep open one small program to avoid paying for closed 

school discharges. 

Another commenter stated that the existing extenuating 

circumstance language provides clear indicators that help 

to determine what would rise to the level of an exceptional 

circumstance. The commenter noted that the regulation is 

already structured as a non-exhaustive list and stated that 

the Department provided no justification for removing some 

of the items from the list. This commenter also 

recommended, in addition to restoring the list of 

exceptional circumstances that is in the current 

regulations, that the Department add the institution’s loss 
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394 

of title IV eligibility to the list of exceptional 

circumstances. The commenter stated that, much like the 

loss of accreditation, the loss of Federal financial aid 

eligibility indicates a severe circumstance outside of 

closure that can severely affect a student’s ability to 

attend the institution. 

Another commenter stated that, if the Department 

intends to make these types of changes, it must make clear 

to the public that it is doing so and must also provide a 

good reason for the change. 

Another commenter supported the proposal to narrow the 

list of the exceptional circumstances under which the 

Department can expand the window beyond 180 days. 

 

Discussion: We thank the commenter who supported 

narrowing the list of exceptional circumstances. 

The Department appreciates the opportunity to clarify 

our reasoning for the changes proposed in the NPRM to the 

non-exhaustive list of exceptional circumstances for 

extending the closed school discharge window. The 

Department proposed removing the reference in the existing 

list of extenuating circumstances to a school discontinuing 

the majority of its academic programs because closed school 
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395 

discharges are based on a school closing, not on the school 

discontinuing some academic programs, but continuing to 

offer others. We proposed removing the reference to 

findings by a State or Federal government agency that the 

institution violated State or Federal law because such 

violations do not necessarily lead to closure or have any 

bearing on why a school has closed. 

The proposed revisions to the language regarding 

accreditation and State authorization were intended to 

provide more clarity and useful detail to these examples. 

The accreditation example does not address the situation of 

a school voluntarily withdrawing from accreditation because 

we do not believe that situation occurs frequently enough 

to warrant a mention in this list. 

Upon further consideration, we agree with the 

recommendation made by the commenter to add the loss of 

title IV eligibility as an exceptional circumstance. The 

Department adopts the commenter’s reasoning that the loss 

of Federal financial aid eligibility in conjunction with an 

impending school closure indicates a severe circumstance 

that can severely affect a student’s ability to attend the 

institution. 
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396 

The Department included an exceptional circumstance 

where the teach-out of the student’s educational program 

exceeds the 180-day look back period. The Department seeks 

to avoid the perverse outcome of requiring a student to 

enroll in a longer-than-180-days teach-out that they did 

not want, in order to reach the 180-day look back date. 

 As noted above, the list remains non-exhaustive, so 

removing these items does not tie the hands of the 

Secretary in future situations in the event of a school 

closure. We believe that the list provides sufficient 

indicators for future determinations of when “exceptional 

circumstances” occur. 

 Changes: The non-exclusive list of exceptional 

circumstances in § 685.214(c)(1)(i)(B) (now redesignated § 

685.214(c)(2)(i)(B)) has been revised to include: “the 

revocation or withdrawal by an accrediting agency of the 

school’s institutional accreditation; the revocation or 

withdrawal by the State authorization or licensing 

authority of the school’s authorization or license to 

operate or to award academic credentials in the State; the 

termination by the Department of the school’s participation 

in a title IV, HEA program; or the teach-out of the 
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397 

student’s educational program exceeds the 180-day look-back 

period for a closed school loan discharge.” 

Imposition of Retroactive Requirements 

Comments: A group of commenters contended that the 

teach-out proposal would impermissibly impose retroactive 

requirements on current and past borrowers. These 

commenters noted that there is no time limit on when a 

borrower may submit a closed school discharge claim and 

argued that it would be legally impermissible to apply the 

new requirements to loans made before the effective date of 

the regulations. These commenters also noted that the 

Department has notified current borrowers of the existing 

requirement and argued that there is no legal basis to 

change those requirements for those borrowers. These 

commenters also contended that the retroactivity issue is 

particularly applicable to the FFEL program in which no new 

loans have been made since 2010. 

Discussion: We appreciate the commenters’ concerns. 

We agree that the changes to the closed school discharge 

regulations, including those pertaining to teach-outs, 

should not apply to current loans. The NPRM did not 

specify an effective date for those changes, but we 

acknowledge that our proposal caused some confusion by 
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398 

including changes to the FFEL regulations in this area. 

The changes to the closed school discharge regulations will 

apply only to new loans made after the effective date of 

these regulations: July 1, 2020. Since no new loans are 

being made under the FFEL or Perkins Loan programs and the 

outstanding loans in those programs will not be affected by 

these changes, we are not making changes to those program 

regulations in this area. 

Changes: We have revised § 685.214(c) and (f) and 

added a new paragraph (g) to specify that the changes being 

made to the closed school discharge regulation applies only 

to loans first disbursed on or after July 1, 2020. We also 

are not making the revisions we proposed in the NPRM to the 

FFEL (section 682.402) and Perkins (section 674.33) closed 

school discharge regulations. 

Teach-Out Plans, Orderly Closures, and Transfer of 

Credits 

Comments: Several commenters supported the proposed 

change to the regulations that would require borrowers 

applying for a closed school discharge to certify that the 

school did not provide the borrower an opportunity to 
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399 

complete their program of study through a teach-out plan 

approved by the school’s accrediting agency and, if 

applicable, the school’s State authorizing agency. 

Many commenters also expressed strong support for the 

proposed revisions to the closed school discharge 

regulations that would provide that a borrower would 

qualify for a closed school discharge if a school failed to 

meet the material terms of the teach-out plan approved by 

the school’s accrediting agency and, if applicable, the 

school’s State authorizing agency, such that the borrower 

was unable to complete the program of study in which they 

were enrolled. 

Some commenters expressed concerns that accreditation 

agency standards for teach-out agreements are not uniform. 

One commenter noted that this proposal would encourage 

schools to follow their State or accreditor’s teach-out 

process. This commenter stated that students, and 

taxpayers alike, are best protected from financial harm 

when schools provide the best path for students to complete 

their program of study rather than abruptly closing their 

doors. 

Another commenter noted that the proposed regulations 

would provide a strong incentive for schools to provide 
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400 

students with an opportunity to complete their program 

through an approved teach-out that takes place at the 

closing institution or at another school. Another 

commenter suggested that without the teach-out “safe 

harbor” rule, borrowers would be encouraged to submit 

fraudulent closed school discharge claims. This commenter 

argued that schools that are closing make a considerable 

commitment to teach out their students and that since the 

borrower will have an opportunity to leave the school with 

their planned credential, there is no need for a loan 

discharge in these cases. 

One commenter supported the proposal to require 

borrowers applying for a closed school discharge to certify 

that the school did not provide the borrower with an 

opportunity to complete their program of study, regardless 

of whether the student took advantage of the teach-out. 

This commenter recommended that the Department obtain 

information on approved teach-out plans from accreditors 

and State authorizing agencies and use this information to 

deny discharges to students who attended those schools, 

instead of relying on self-certification. 

One commenter argued that the proposed regulations 

would create an incentive for the orderly teach out of a 
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401 

school that is planning to close, thus offering an 

important protection for students, taxpayers, and schools. 

Another commenter argued in support of the proposed 

regulations that the Department should not penalize a 

school that creates a teach-out program to help current 

students finish a program of study. In this commenter’s 

view, if a school puts in the effort to establish a teachout agreement, it shows that the school ultimately has 

their students’ best interests at heart by giving them the 

opportunity to complete their program of study. 

Another commenter noted that the proposed changes 

would be consistent with existing regulations, which do not 

allow students who transferred credits from a closed school 

to another school and who finished the program elsewhere to 

qualify for a closed school loan discharge. 

Another commenter stated that the proposed regulations 

are consistent with the statutory requirements in 20 USC 

1087(c), the section of the statute that authorizes closed 

school loan discharges, if the borrower “is unable to 

complete the program in which [he or she] is enrolled due 

to the closure of the institution.” In this commenter’s 

view, the statute demands a causal connection between the 

student’s inability to complete the program of study and 
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402 

the institution’s closure. A student’s failure to complete 

must be “due to” the closure. 

Several commenters contended that in a fully approved 

teach-out plan, faculty and staff often go above and beyond 

to serve students through completion of their program. 

These commenters argued that this considerable commitment 

by the school toward its students, and the fact the student 

will leave with his or her planned credential, means there 

is no need for a loan discharge in these cases. 

 Several commenters opposed the proposed changes to the 

closed school loan discharge provisions, as well. While 

one of these commenters agreed that more schools should 

offer teach-out plans, the commenter also stated that the 

quality of teach-out plans varies widely and the process 

for determining an acceptable teach-out plan lacks rigor 

and consistency. The commenter contended that the 

Department acknowledged this inconsistency and lack of 

quality in its announcement that it intended to start a 

negotiated rulemaking process concerning teach-out plans. 

The commenter also noted that, for some students, 

completing the credential through a teach-out plan may be 

undesirable. 
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403 

Many commenters stated that students who attended a 

closed school have a right to have their debt cancelled, 

even if the closed school offers an option to enroll at 

another school or location. The commenters stated that 

borrowers at closed schools should not be forced to 

transfer to another school. 

One commenter recommended maintaining the current 

policy on closed school discharges, or, alternatively, 

establishing standards for degree program comparability in 

teach outs. The commenter recommended that the regulations 

specify such factors as program length, costs and aid, 

programmatic accreditation, and quality to determine 

program comparability. 

One commenter stated that the proposed changes would 

close the window on many adult learners that do not have 

the money to transfer to another program. 

One commenter opposed to the proposed changes to the 

closed school discharge requirements relating to teach outs 

stated that students may be wary of a teach-out option if 

it is being provided by a school that is about to close. 

These students may be uncertain of the value of 

participating in the teach-out, compared to the value of 

starting fresh elsewhere. 
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404 

One commenter stated that the proposed regulations 

ignore the fact that a teach-out program may not meet a 

student’s needs, or may not properly match their program of 

study, or may be at a school that isn’t realistic for a 

student to attend. As another commenter noted, there are 

any number of reasons a student will choose a particular 

educational program. Some of those reasons may be related 

to the school’s location and class schedule, or other 

factors relevant to that student’s unique situation. In 

addition, there is no guarantee that the teach-out program 

is a high-quality program. The commenter noted that the 

student may be jumping from one bad program to another at 

the behest of the failing institution. 

Another commenter opposed to the proposed changes 

argued that under the proposed regulations borrowers would 

be treated differently in different States, as States and 

accreditors must approve teach-out plans. The commenter 

believed that this is inconsistent with the rationale used 

in the NPRM for adopting a single Federal evidentiary 

standard for borrower defense claims. The commenter noted 

that accrediting agencies and States have complex and 

conflicting policies, which would result in inconsistent 

results based on geography, quality, and other factors. 
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405 

The commenter noted that the proposed regulations assume 

that teach outs are always the best option, but expressed 

the view that this may not be true in all cases, especially 

at the beginning of a long program. The commenter noted 

that there may be problems with teach outs such as 

exclusions, potential additional cost, geographic 

proximity, record keeping and transcripts, and transfer of 

student aid. The commenter noted that teach outs are nonbinding and institutions may renege on them, and teach-out 

agreements may conflict with State laws, such as those 

regarding tuition recovery funds. As noted by another 

commenter, a teach out might involve travel or other 

constraints that make it impractical for some students. 

The commenter recommended that the Department take into 

consideration that students choose programs for reasons 

other than academics, such as compatibility with work or 

family obligations. 

Another commenter expressed the view that the proposed 

regulations would eliminate the path to loan discharge when 

there is a teach out available, regardless of whether the 

opportunity was accessible, in the same mode of 

instruction, or of comparable quality, and would encourage 
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406 

predatory institutions to submit sub-par teach-out 

opportunities. 

Another commenter took issue with the statement in the 

NPRM that “borrowers may be better served by completing 

their programs . . . than by having their loans forgiven.” 

The commenter stated that the Department provided no 

evidence to support that assertion. In the commenter’s 

view, this type of decision-making does not qualify as a 

“good reason” under the APA for changing the closed school 

discharge eligibility requirements. 

Another commenter opposed the proposed changes to the 

closed school discharge regulations to deny loan discharges 

to those who were offered a teach-out--even if they did not 

complete it. The commenter stated that the statutory 

language creating closed school discharges indicates that 

Congress intended to make the discharges available to all 

students in a program. Specifically, 20 USC 1087(c) reads 

that “if a borrower . . . is unable to complete the program 

in which such student is enrolled due to the closure of the 

institution . . . then the Secretary shall discharge the 

borrower’s liability on the loan.” The statutory language 

does not refer to completing another, substantially 

similar, program; nor does it refer to a program offered by 
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407 

another institution, in another modality, or in another 

location. In the commenter’s view, the Department’s 

proposal to deny discharges to anyone who had the 

opportunity to complete a program is a subversion of 

congressional intent and the plain reading of the 

legislative text. 

The commenter also noted that the Department’s 

proposed changes run counter to its own longstanding 

interpretation that the statute permitting closed school 

loan discharges applies to all borrowers from the 

institution. While teach-out plans are required from 

closing institutions, the Department has previously 

recognized that a teach-out may not be what a student 

signed up for, and may differ in key ways from the original 

program. To respect students’ choices and ensure they are 

able to make the choice that’s right for them, the 

regulations have allowed students to either transfer their 

credits (or accept a teach-out) or to receive a loan 

discharge. 

The commenter expressed the view that the Department 

is proposing to eliminate that choice in an attempt to 

reduce liabilities for closing institutions. The commenter 

noted that the Department expects this provision, along 
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408 

with the elimination of automatic discharges, to reduce 

closed school discharges by 65 percent. 

 The commenter noted several problems with teach-out 

plans in the current system: in teach-out arrangements, 

students are not always able to transfer all of their 

credits or pick up their programs exactly where they left 

off at the closing institution; some teach-out plans offer 

only impractical or sub-par options for students; 

accrediting agency policies relating to teach-out 

agreements differ across agencies, particularly where 

teach-out agreements are concerned; none of the accrediting 

agencies expressly require in their standards that 

institutions arrange teach outs in the same modality as the 

original program; it can be difficult to find teach-out 

arrangements for some niche programs, so some students may 

fall through the cracks in establishing teach-out 

agreements; and few accreditors list standards beyond 

geography, costs, and program type that they consider in 

approving or rejecting proposed teach-out arrangements, 

although some regional accreditors require that teach-outs 

be offered by institutions with regional accreditation 

only. 
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409 

The commenter expressed the view that the result of 

the proposed regulations would be to create a strong 

incentive for institutions to establish teach-out 

agreements, without much consideration for the quality of 

the teach out or how well it will serve the students 

affected by the institution’s closure. 

The commenter also noted that State policies vary 

widely on school closures. The Department provided no 

discussion on the question of when State authorizers 

require institutions to get their sign-off on teach-out 

plans. 

 The commenter stated that one State’s efforts to 

require teach-out plans from institutions and ensure other 

protections are in place before colleges close received 

push-back from institutions of higher education, and that 

organizations representing States have said they are not 

aware of other States requiring these provisions. 

 Commenters requested the reason behind why the 

Department stated that accreditors will only approve 

adequate teach-out plans. In addition, the commenter 

requested clarification as to whether the Department would 

foreclose closed-school discharges to students who were 

offered an online-only teach out. The commenter asked what 
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410 

percentage of schools that closed in the past five years 

offered a teach-out plan and whether the Department has 

considered the impact of the proposed regulations in 

relation to this information. The commenter also requested 

whether the Department would allow a borrower to establish 

eligibility for a closed school discharge when the 

borrower’s individual circumstances precluded them from 

completing their program of study through the teach-out. 

The commenter stated that some accreditors require 

teach-out plans prior to a school closing if the school is 

in financial straits. However, such teach-out plans may 

only offer an initial suggestion of which institutions the 

closing college might reach an agreement with--not a signed 

contract with those institutions. Such a plan does not 

constitute a formal agreement with another institution to 

take over in the event that the institution cannot or will 

not teach out its own students. Furthermore, it does not 

mean the teach-out will be executed according to the plan 

in the event of actual closure. 

The commenter suggested that, if the Department 

retains this proposal, teach-out agreements would be a more 

appropriate measure than teach-out plans for institutions 

not remaining open long enough to teach out their own 
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411 

students, since the plans may be outdated or uncertain. 

The commenter also recommended that the Department should 

require that the teach-out be the same in its 

implementation as it was in the accreditor’s approval of 

the plan, ensuring that the letter of the plan is followed 

through, since the documents on file with the accreditor 

may not always comport with on-the-ground realities. 

Finally, the commenter proposed that, if the 

Department does not revise these proposed regulations, the 

Department clarify that they only apply to schools closing 

after the effective date of the regulations, July 1, 2020. 

Another commenter recommended that the proposed “teach 

out” changes only apply for those closing schools whose 

graduates consistently find careers in their fields of 

study. In this commenter’s view, letting a school continue 

to provide education that is not going to be applicable to 

the borrower’s career goals is a waste of the borrower’s 

time and money, and he or she should be permitted to file 

for full discharge of the loans. 

Another commenter noted that there are times where the 

approved teach-out schools are out-of-State, the “teachout” school is at risk of closing, the other school has a 
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412 

poor reputation, or the school with the approved teach-out 

is too far away from the closing school. 

Discussion: The Department agrees with commenters 

that teach-out plan requirements are not uniform among 

accreditors and we, through the recent negotiated 

rulemaking effort, are taking steps to improve and 

modernize the requirements relating to teach-out plans and 

to better coordinate information between the Department and 

accreditors. 

We acknowledge that even a well-planned and wellexecuted teach out may not be ideal for every student. 

Issues such as modality, location, and compatibility with 

work and family situations may make it difficult for a 

student in an education program to participate in a teachout offered by a closing or closed school. Therefore, the 

Department has revised its proposal to allow a student to 

choose either the teach-out or the closed school discharge. 

These final regulations do not disqualify a borrower who 

has declined to participate in a teach out from receiving a 

closed school discharge. However, to avoid circumstances 

where students complete their program and apply for 

discharge, the borrower is required to certify that they 

did not complete the program of study, or a comparable 
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413 

program, through a teach-out at another school or by 

transferring academic credits or hours earned at the closed 

school to another school. 

The Department does not have the authority to regulate 

the quality of academic instruction, nor does it have the 

authority to regulate each detail of teach-out plans or 

agreements. We do, however, work together as a member of 

the regulatory triad and believe that the accreditor will 

approve plans that will serve students appropriately in the 

event of a closure. The Department can hold accreditors 

accountable for ensuring that teach-out plans provide 

acceptable options and opportunities for students. 

The Department does not believe that an online only 

teach-out is an equivalent option, if the original program 

was not taught exclusively via distance education. While 

we believe this could be an available option that may be 

suitable for some students, it is insufficient for this to 

be the only teach-out option to be offered to students 

currently enrolled in ground-based programs. Similarly, it 

is not sufficient for a teach-out plan to include only 

ground-based courses in the event that it is an online 

institution that is engaged in a teach-out. 
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414 

The Department does not generally require schools to 

submit teach-out plans to us since accreditors and State 

authorizing bodies are charged with reviewing and approving 

teach-out plans. However, the Department reserves the 

right to review any teach-out plan that has been approved 

by the institution’s accreditor and State authorizing body. 

Under these final regulations, the Department allows 

the borrower to choose between the teach-out (or transfer) 

and the closed school discharge. As stated elsewhere, we 

believe that in many instances, and in particular among 

students close to the end of their program, the student may 

be best served by completing their academic program at the 

closing institution or a teach-out partner institution. 

For students with less than 25 percent of the program 

remaining to complete, a teach-out that takes place at the 

closing institution may offer the most rapid and costeffective route to degree completion. Moreover, while 

accreditors generally require a student to complete at 

least 25 percent of their program at an institution that 

awards a credential, many accreditors waive the 25 percent 

rule for students who are enrolled in a formal teach-out 

agreement with another institution. 
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415 

One commenter challenged the Department’s assertion 

that borrowers may be better served by completing their 

programs than by having their loans forgiven. We stand by 

this assertion. In our view, obtaining the education 

credential that the borrower wanted to pursue is generally 

preferable to foregoing credential completion or being 

required to start a program over at another institution. 

Disruptions in a student’s time in school can have 

devastating consequences and, too often, lead to the 

student abandoning their educational pursuit.139 It is 

better to create a path for students to finish their 

degree, certificate, or program, rather than create 

perverse incentives to stop their schooling, with only a 

plan for an indeterminate, future starting date. 

Our goal is not to reduce the number of closed school 

discharges awarded through these regulations or reduce the 

liability for closing institutions, as one commenter 

suggested. Rather, it is to provide students enrolled at a 

139 See: Park, Toby J., “Working Hard for the Degree: An Event History 

Analysis of the Impact of Working While Simultaneously Enrolled,” April 

2012, Presented at the American Educational Research Association’s 

Annual Conference, Vancouver, BC, available at: 

https://www.insidehighered.com/sites/default/server_files/files/PARK_WO

RKING.pdf. 
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closing or closed school as many options as possible for 

completing their program. The Department seeks to 

encourage institutions to provide approved teach-out 

offerings rather than closing precipitously. 

Regarding the commenters’ other concerns about teachout plans, we believe that the revised language in these 

final regulations, consistent with the Department’s longstanding interpretation of 20 USC 1087(c), addresses those 

concerns. Since borrowers will have a choice of 

participating in the teach out or receiving a closed school 

discharge, a borrower who believes, due to the closure of 

the institution, that the teach out offered by the school 

will not meet his or her needs, may decline the teach out 

and still qualify for a closed school discharge. 
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Changes: We have revised our proposed changes (now 

reflected in § 685.214(c)(2)(ii)) to specify that a 

borrower is eligible for a closed school discharge if the 

borrower opts not to accept the opportunity to complete the 

borrower’s program of study pursuant to a teach-out plan or 

agreement, as approved by the school’s accrediting agency 

and, if applicable, the school’s State authorizing agency. 

As discussed above, we are no longer making changes to the 

regulations regarding FFEL or Perkins loans, so parallel 

changes are no longer necessary to sections 674.33 or 

682.402. 

Departmental Review of Guaranty Agency Denial of a 

Closed School Discharge Request

Comments: Commenters supported allowing a borrower 

the opportunity for the Department to review a closed 

school discharge claim, which was denied by the guaranty 

agency, to provide a more complete review of the claim for 

the closed school discharge. One commenter suggested that 

this secondary review process would result in greater 

uniformity of the processing of closed school discharge 

applications. Another commenter provided detailed proposed 

regulatory language in support of this change. 
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418 

Discussion: We thank the commenters for their support 

for the proposed changes in the NPRM and their suggestions. 

However, since no new loans are being made under the FFEL 

program, plus the facts that the outstanding FFEL loans 

will not be affected by these changes and that the changes 

proposed regarding Departmental review of guaranty 

agencies’ denials were also included in the 2016 

regulations, we will not be making changes to the FFEL 

program regulations in this area. 

Changes: None. 

Additional Recommendations 

Comments: One commenter recommended that, before 

granting a closed school discharge, the Department notify 

the school about the proposed discharge, the basis for the 

proposed discharge, and provide the school with a copy of 

the application and supporting documentation submitted to 

the Department. Under this proposal, the school would have 

60 days to submit a response and information to the 

Secretary addressing the closed school discharge claim. 

The commenter also suggested that the Department should 

provide the borrower with a copy of any response and 

information submitted by the school. Another commenter 

also suggested that the school have an opportunity to 
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419 

provide information to the Department that might affect the 

decision of whether to grant a closed school discharge. A 

third commenter stated that the Department would not be 

able to make an accurate closed school discharge 

determination without information from by the school. 

Discussion: The Department disagrees with the 

commenters’ proposal. The determining factors that 

establish a borrower’s eligibility for a closed school 

discharge are limited to whether the borrower was in 

attendance at the school at the time it closed or withdrew 

within the applicable number of days of the date the school 

closed, and the borrower did not complete his or her 

program or a comparable program at another institution. 

For most borrowers in these situations, the Department 

already has information about the school’s closure date and 

has access to information about whether the borrower was in 

attendance or had recently withdrawn. The Department has 

made decisions on these claims for more than 20 years 

without having a formal submission process for additional 

information from the school, and we do not have any 

evidence that those decisions were incorrect. Accordingly, 
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420 

we do not believe that we need to establish a process for 

schools to review the borrower’s information and respond. 

Changes: None. 

Comments: One commenter noted that the 2016 final 

regulations established requirements that closing 

institutions provide information about closed school 

discharge opportunities to their students. The commenter 

recommended that the Department include these requirements 

in these regulations, citing the concerns the Department 

raised in the 2016 final regulations that potentially 

eligible borrowers may be unaware of their possible 

eligibility for closed school discharges because of a lack 

of outreach and information about available relief. 

Discussion: The Department appreciates the 

commenter’s concerns regarding the removal of the 

requirements included in § 668.14(b)(32). As stated above 

in the Automatic Closed School Discharges section, the 

Department provides information on our website to students 

regarding the closed school loan discharge process, 

frequently asked questions, fact sheets, webinars, and 

transfer fairs. 
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421 

The Department is rescinding §668.14(b)(32) because we 

concluded that it is the Department’s, not the school’s, 

responsibility to provide this information to students. 

The Department believes that the borrower will have the 

best access to accurate, up-to-date and complete 

information by obtaining it from the Department’s website, 

or the websites of accreditors and state authorizing 

bodies. Unlike institutional websites that may cease to 

operate when a school closes, the Department’s website will 

continue to provide students with updated information. 

Even so, we encourage schools to post the Department’s 

closed school loan discharge application on their 

institutional website and to direct their students to the 

FSA website for further information. 

Changes: None. 

Comments: One commenter had specific concerns about 

the timeframe for appeal of closed school loan discharge 

determinations, whether appeal is an option for nondefaulted borrowers, and capitalization of interest. The 

commenter also raised concerns about PLUS loans and closed 

school discharges as they pertain to PLUS loans. The 
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422 

commenter recommended we specify that the reference to a 

borrower making a monetary claim with a third party refers 

to both the student and the parent in the case of a parent 

PLUS loan. 

 One commenter expressed a concern that the proposed 

closed school regulations would allow even the most 

financially unstable institutions on the brink of closure 

to continue benefitting from Federal student aid. 

One commenter expressed the view that the final 

regulations should clarify that students are not eligible 

for closed school discharge when their college merges with 

another college, changes locations, or undergoes a change 

in ownership or a change in control. The commenter cited 

one example of a case in which a college was engaged in 

internal restructuring that required a change in OPEID 

numbers. According to the commenter, the school was 

required to offer students a closed school discharge 

despite offering the same program to students under the new 

OPEID number. In this commenter’s view, the Department 

should clarify that internal restructurings do not result 

in a closed school discharge. 

One commenter recommended that the Department look 

closely at borrower defense claims regarding institutions 
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423 

that have recently closed. The commenter asserts that many 

of these claims are closed school discharge claims 

disguised as borrower defense claims. 

One commenter recommended that the Department 

designate the closed school discharge regulations for early 

implementation to incentivize institutions that are 

currently considering institutional or location closures to 

provide a teach-out for their students. 

One commenter stated that if a school goes “out of 

business” or goes bankrupt, the former students should have 

reduced loan repayment obligations, especially for loans 

made by the school. 

One commenter noted that under both the current and 

proposed regulations, the Department is required to 

identify any Direct Loan or Perkins Loan borrower “who 

appears to have been enrolled at the school on the school 

closure date or to have withdrawn not more than 120 days 

prior to the closure date” and to “mail the borrower a 

closed school discharge application and an explanation of 

the qualifications and procedures for obtaining a 

discharge.” FFEL regulations similarly require guaranty 

agencies, upon the Department’s determination that a school 

has closed, to identify potentially eligible borrowers and 
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424 

mail them a discharge application with instructions and 

eligibility criteria. This commenter asserts that the 

Department has not fulfilled its duty to provide notices 

and application forms to all potentially eligible 

borrowers, and that many borrowers whose schools have 

closed remain unaware of their eligibility. The commenter 

contends that applying the proposed changes to the closed 

school discharge regulations to such borrowers would 

unfairly harm them by making many of them newly ineligible 

to discharge their loans without ever having received 

notice of their eligibility. 

Discussion: The Department does not believe that it 

is necessary to create an appeal process for borrowers 

making claims for closed school discharges. In most cases, 

closed school discharge decisions are based solely on 

whether the borrower was attending the school when it 

closed or shortly before and did the borrower choose to 

complete their program through a teach-out or transfer of 

credits. If the borrower’s claim is denied but they have 

additional supporting information they can always submit a 

new claim and still receive full relief. Thus, there is no 

reason for a new formal appeal process. 
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425 

We do not share the commenter’s concern that the rules 

relating to Parent PLUS loan borrowers are unclear. We 

believe that our current language makes it clear that 

Parent PLUS loan borrowers must satisfy the same 

requirements for a discharge as student borrowers except 

that the Department considers the date the student stopped 

attending the school and whether the student completed 

their program of study. 

We disagree that the final regulations would have any 

impact on a school’s eligibility to participate in the 

student financial aid programs. If a school stops offering 

educational programs, it loses its eligibility to 

participate in the title IV student financial aid programs 

for other reasons. However, if a school closes one 

location and otherwise keeps offering educational programs, 

the continuing locations would remain eligible to 

participate. Depending upon how far the closing or closed 

campus is from the remaining campuses of the institution, 

or in the case of a campus relocation, the distance between 

the old and new location, the State or the accreditor may 

make a determination of whether this would be classified as 

a school closure. For example, in some states a new or 

continuing campus must be within a certain travel distance 
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426 

of the closing or moving campus, or must be on the same 

mass transit line, in order for the move to a new campus or 

merger with an existing campus to not be classified as a 

school closure. 

 The Department has not proposed modifying the 

definition of “closed school.” Generally speaking, the 

merger of campuses, changes in campus location changes of 

ownership would be not be considered closed schools and 

students enrolled at those institutions would not generally 

be eligible for closed school loan discharge. 

 We do not believe that a school’s closure or 

bankruptcy should automatically reduce its’ former 

students’ loan repayment obligations. If those students 

qualify for a closed school discharge, or have a borrower 

defense to repayment, they can apply for that relief 

individually. The Department has no authority to determine 

whether or not a student remains obligated to repay private 

loans, including those issued by the institution, in the 

event that an institution closes. 

 If a borrower at a school that has closed may qualify 

for either a closed school discharge or a borrower defense 

discharge, we encourage the borrower to apply for a closed 

school discharge. The closed school discharge application 
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427 

process is generally less burdensome than the borrower 

defense application process since in the case of the closed 

school, the evidence of the closure is clear and apparent. 

We do not believe there is a strong incentive for a 

borrower who may qualify for a closed school discharge to 

apply for a borrower defense discharge instead. 

 The Department thanks the commenter for the suggestion 

regarding early implementation of the closed school 

discharge regulatory provisions. We reviewed the 

provisions and our procedures to determine if early 

implementation was possible. As a result, we are limiting 

our early implementation of these final regulations to 

those expressly listed in the “Implementation Date of These 

Regulations” section at the beginning of this document. 

Changes: None. 

Comments: None. 

Discussion: In the discharge procedures for loans 

first disbursed on or after July 1, 2020, the Department 

makes a technical amendment in 685.214(g)(6) to state that 

if the borrower does not qualify for a closed school 

discharge, the Department resumes collection. This 

technical amendment reflects the Department’s longstanding 
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428 

practice to resume collection if a borrower’s closed school 

discharge application is denied. 

Changes: The Department makes a technical amendment to 

685.214(g)(6) to state that if the borrower does not 

qualify for a closed school discharge, the Department 

resumes collection. 

FALSE CERTIFICATION DISCHARGES 
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429 

Application Process 

Comments: One commenter recommended that the 

Department remove the new requirement that a borrower 

submit a “completed” application in order to obtain a false 

certification loan discharge, and that we instead retain 

the language in the 2016 final regulations that required a 

borrower to submit an application in order to qualify for a 

false certification discharge. Another commenter agreed 

with the recommendation to remove “completed,” at least 

until the false certification discharge application is 

tested and revised to reduce inadvertent borrower errors. 

The commenter believed that by requiring a completed 

application within 60 days of suspending collections, the 

Department, guaranty agencies, and servicers would lack the 

discretion to notify the borrower regarding inadvertent 

errors and allow the borrower additional time to submit a 

corrected application while collection remains suspended. 

One commenter recommended that the Department provide 

a school with written notice that a student has filed a 

discharge application and give the school the opportunity 

to respond. Another commenter also supported this proposal 

and urged the Department to provide the institution with a 

copy of the application and supporting information and 
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430 

afford the school a reasonable period of time to respond, 

such as 60 days. Under this proposal, the student would be 

provided a copy of the school’s response and supporting 

documentation. 

One commenter expressed the view that the proposed 

regulatory changes related to false certification 

discharges will result in borrower confusion about their 

false certification discharge applications. The commenter 

objected to the Department’s proposal to remove language 

included in the 2016 final regulations that would require 

the Secretary to issue a decision that explains the reasons 

for any adverse determination on the application, describe 

the evidence on which the decision was made, and provide 

the borrower, upon request, copies of the evidence. The 

2016 final regulations also provide that the Secretary 

considers any response and additional information from the 

borrower and notifies the borrower whether the 

determination has changed. In the commenter’s view, this 

language would offer borrowers an opportunity to respond 

and submit additional evidence that could prove critical 

both to the approval of a borrower’s application and to the 

Department’s oversight of institutional misconduct. 
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431 

Discussion: These final regulations require the 

borrower to submit a “completed” application because an 

incomplete application——such as an application without a 

signature or an application with missing information——does 

not provide all the information necessary for the 

Department, guaranty agency, or servicer to make a decision 

on the claim, which will result in the application being 

returned to the borrower as incomplete. Therefore, we will 

retain the term “completed” in the final regulations. 

Requiring the borrower to submit a “completed” 

application in the regulations does not preclude the 

Department from contacting the borrower and asking the 

borrower to provide the missing information. Additionally, 

we believe sixty days from the day that the Secretary 

suspended collection efforts is a reasonable period of time 

for a borrower to complete the application, and for any 

necessary follow-up communication between the borrower and 

the Department. 

 We disagree with the commenters’ proposal that the 

Department give a school an opportunity to respond to the 

borrower’s false certification discharge application. The 

information and documentation that the Department routinely 

collects through the false certification discharge 
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432 

application process is typically sufficient for the 

Department to make a determination of eligibility. 

Further, while information is generally not required from 

the school, the Department has the discretion to contact 

the school to request additional information. In addition 

to any relevant information that a school may provide in 

response to a request from the Department, the final 

regulations provide that the Secretary may determine 

whether to grant a request for discharge by reviewing the 

application in light of information available from the 

Secretary’s records and from other sources, including, but 

not limited to, the school, guaranty agencies, State 

authorities, and relevant accrediting associations. In 

other words, the Secretary has the discretion to review all 

necessary and relevant information to make a determination 

about a discharge based on false certification under these 

final regulations. We believe this approach strikes the 

right balance between thoughtful use of government 

resources and facilitating a full and fair process, by 

providing secretarial discretion and not requiring the 

Department to conduct unnecessary mandatory steps. 

 We do not believe that these final regulations will 

result in confusion to borrowers about their false 
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certification discharge applications. Both the proposed 

and final regulations expressly state that the false 

certification discharge application will explain the 

qualifications and procedure for obtaining a discharge. 

 Information on eligibility for a false certification 

discharge will be provided to borrowers on the false 

certification discharge form and other forms, and we will 

provide updated information on our websites. Additionally, 

these final regulations provide in 685.215(f)(5) that if 

the Secretary determines that the borrower does not qualify 

for a discharge, the Secretary notifies the borrower in 

writing of that determination and the reasons for the 

determination, and resumes collection. 

We do not believe that it is necessary to provide a 

formal appeal process for a borrower to dispute a denial of 

a false certification discharge application. Due process 

does not require an appeal in this context. We provide 

additional avenues for a borrower to dispute a denial of a 

loan discharge through such means as contacting the FSA 

Ombudsman Group.140 Currently, the Ombudsman Group works 

140 See: https://studentaid.ed.gov/sa/repay-loans/disputes/prepare. 
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434 

with borrowers and their loan holders to attempt to resolve 

disputes over matters such as discharge decisions. This 

process continues to be effective and the Ombudsman Group 

is engaged in a continuing process to improve their 

responsiveness to borrowers.141 Given the considerable time 

and resources involved in formal appeal processes and the 

efficiency of the Ombudsman Group, we have decided not to 

include a formal process in the final regulations. With 

regard to (1) providing information to borrowers with 

regard to “false certification” discharge and (2) a formal 

appeal, we believe our regulatory approach strikes the 

right balance between thoughtful use of government 

resources and facilitating a full and fair process, by not 

adding additional, unnecessary mandatory steps. 

Changes: None. 

141 In the Report of the Federal Student Aid Ombudsman, the Ombudsman 

Group reported that customer satisfaction survey results were “not as 

high as desired,” but had improved from FY 2016. (See: FSA Fiscal Year 

2018 Annual Report, 

https://www2.ed.gov/about/reports/annual/2018report/fsa-report.pdf, at 

pg. 100-101.) The Ombudsman noted, however, that they attributed the 

customer rating to individuals expressing dissatisfaction because they 

expected the Ombudsman to act as their advocate, desired an outcome 

that falls outside law and regulations, or based their satisfaction on 

the outcome achieved rather than the service provided.
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False Certification of a Borrower Without a High 

School Diploma or Equivalent 

Comments: Several commenters supported the proposal 

to amend the eligibility criteria for false certification 

loan discharges to specify that, in cases when a borrower 

could not provide the school an official high school 

transcript or diploma but provided an attestation that the 

borrower was a high school graduate, the borrower would not 

qualify for a false certification discharge based on not 

having a high school diploma. These commenters agreed that 

a student attestation of high school graduation should be a 

bar to a false certification discharge. Many commenters 

expressed the view that if a student lies about earning a 

high school diploma for the purpose of applying for Federal 

student loans, the school should not be held responsible. 

One commenter noted that this proposal would provide a 

useful protection for schools serving populations for which 

providing a diploma can be difficult, such as nontraditional students who are unable to access their 

transcripts due to the length of time since high school 

graduation. Another commenter made the point that 
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institutions and taxpayers should not be accountable for 

the fraudulent behavior of borrowers. 

One commenter supportive of the proposal suggested 

additional language that, in the commenter’s’ view, would 

better reflect the intent of the regulatory change. The 

commenter recommended language specifying that a borrower 

does not qualify for a false certification discharge if the 

borrower falsely attested to the school in writing and 

under penalty of perjury that the borrower had a high 

school diploma or completed high school through home 

schooling. 

One commenter, supportive of the proposal to deny a 

false certification loan discharge to students who deceived 

the school about the students’ high school completion 

status, expressed concern that the parameters described in 

685.215(c)(1)(ii) are convoluted and may be difficult to 

manage at an open access institution such as most community 

colleges and vocational schools. Institutions often rely 

on the students’ self-certification of high school 

completion, such as through the information submitted by 

the student in the FAFSA, which would fail the requirement 

described in proposed 685.215(c)(1)(ii)(A). This commenter 

proposed revising 685.215(c)(1)(ii) to provide that a 
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437 

borrower would not qualify for a false certification 

discharge under 685.215(c)(1) if the borrower submitted a 

written attestation, including certification through the 

FAFSA, that the borrower had a high school diploma or its 

recognized equivalent. 

One commenter agreed with the proposal, but noted that 

if the borrower reported not having a high school diploma 

or its equivalent upon admission to the school and the 

school certified the student’s eligibility for Federal 

student aid, the school should be held liable for the funds 

that were provided to the student. As another commenter 

noted, although schools may rely on information in the 

FAFSA when certifying borrower eligibility, it is also the 

school’s responsibility to resolve conflicting information. 

The commenter suggested including language that establishes 

an exception to this rule in cases where the school had 

information that indicates that the student’s information 

is inaccurate. 

Other commenters stated that, in some cases, a false 

attestation by a student is the result of a deliberate 

effort by a school. These commenters believed that 

students who have been induced to misrepresent their 

eligibility as a result of institutional efforts or 
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438 

practices should be entitled to relief under the 

regulations. Other commenters expressed the view that the 

proposal may lead to schools rushing students through the 

attestation forms and, thus, may incentivize fraud on the 

part of schools. One commenter asserted that students will 

be counseled by schools to sign the attestation and stated 

that at least one accrediting agency forbids such 

attestations. The commenter recommended that a separate 

process be put in place for students who are unable to 

obtain their high school diplomas or transcripts due to 

natural disasters.

A group of commenters expressed the view that the 

attestation provision will enable predatory schools to 

defraud both students and taxpayers, while denying relief 

to borrowers. This group believed that the proposal 

conflicts with the broad statutory mandate to grant false 

certification discharges and raises serious due process 

concerns by creating a blanket restriction that denies 

false certification discharges whenever a school produces 

an attestation of high school status presumably signed by 

the borrower without consideration of facts or evidence. 

These commenters also noted that the FSA Handbook allows 

schools to accept alternative documentation of high school 
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graduation status if a student cannot provide official 

documentation to verify high school completion status and, 

thus, an avenue already exists for the limited number of 

borrowers who cannot obtain their official high school 

transcripts to qualify for Federal student financial aid. 

These commenters asserted that the attestation exception is 

unnecessary and does not provide any benefit to borrowers. 

Additionally, these commenters contended that the 

attestation exception would deprive borrowers of due 

process rights. According to these commenters, the 

proposed rule assumes the validity of a borrower’s 

attestation and forecloses a borrower’s ability to present 

evidence that he or she did not knowingly sign a false 

attestation. These commenters provided examples of 

signatures obtained through duress, misrepresentation, or 

deceitful and illegal business practices. In the view of 

these commenters, the regulations would provide a road map 

for abuse by predatory schools, that would only need to 

produce an attestation form—no matter how dubiously 

obtained—to insulate themselves from Departmental oversight 

and to bar any remedy for borrowers. 

A group of commenters stated that it would be 

improperly retroactive for the Department to apply the 
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attestation exception to all Perkins and Direct Loan 

borrowers, rather than to loans disbursed after the 

effective date of the regulations. 

This group also opposed the Department’s use of the 

disbursement date of the loan rather than the origination 

date to indicate when a borrower was falsely certified. 

These commenters argued that the use of disbursement date 

conflicts with the plain language of the HEA, which 

requires an institution to certify an individual’s 

eligibility to borrow before it “receives” financial aid 

through a disbursement. These commenters stated that, while 

a school may admit a high school senior who is not yet 

eligible for student financial aid, it may not certify 

eligibility of that student until the student has obtained 

his or her high school diploma or GED. In the view of 

these commenters, allowing schools to certify for aid upon 

disbursement will incentivize schools to falsely certify 

high school seniors who subsequently do not graduate to 

continue receiving revenue. According to these commenters, 

the proposal would essentially allow a school to 

“provisionally” certify a borrower’s eligibility and 

encourage fraud. 
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Discussion: We thank the commenters who supported our 

proposal. We also thank the commenter who pointed out 

that, while schools may rely on information provided on the 

FAFSA to certify eligibility for student financial aid, 

schools also have an obligation to resolve discrepant 

information. If the school has evidence that a borrower 

has falsely certified his or her high school graduation 

status, the school may not certify the borrower’s 

eligibility for title IV funds, regardless of the 

information provided by the student in the FAFSA. While 

these regulations would prevent a borrower who falsely 

certified high school graduation status from receiving a 

false certification discharge, nothing in these final 

regulations relieves a school of its obligation to ensure 

that it certifies only eligible borrowers for Federal 

student aid under title IV. 

The Department may always conduct a program review and 

make findings against a school that unlawfully certifies 

eligible borrowers for Federal student aid under title IV, 

and the Department may recover liabilities against such 

schools under 34 CFR part 668, subpart G. These final 

regulations, unlike the 2016 final regulations, place the 

burden on the borrowers and not the schools to certify 
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eligibility for Federal student aid for purposes of a false 

certification discharge. Schools must rely upon the 

information that a borrower provides about a high school 

diploma or alternative eligibility requirements and cannot 

issue subpoenas to compel the production of records that 

will demonstrate the student has a high school diploma or 

its equivalent. Even if discrepant information exists, 

borrowers who submitted to the school a written 

attestation, under penalty of perjury, that they had a high 

school diploma, should not receive a false certification 

discharge if the borrower was untruthful in attesting that 

he or she had earned a high school diploma. Federal 

taxpayers should not pay for a borrower’s misrepresentation 

of eligibility requirements for Federal student aid with 

respect to a high school diploma or its equivalent. In the 

event that a borrower was encouraged or coerced to sign an 

untrue attestation regarding his or her high school 

graduation status, the borrower would be entitled to relief 

under the borrower defense to repayment regulations, not 

the false certification loan discharge regulations. 

The Department appreciates the suggestion to revise 

the regulatory language with respect to borrowers who 

completed high school through home schooling. We believe 
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that proposed § 685.215(c)(1)(ii)(A) (§ 

685.215(e)(1)(ii)(A) of these final regulations), which 

expressly includes borrowers who were home schooled 

adequately addresses students who received an education 

through homeschooling. 

 Although commenters provided some examples of schools 

that may have deliberately encouraged borrowers to falsely 

certify their high school graduation status, or rushed 

borrowers through the process of signing attestation forms, 

we are not aware of data that shows this is widespread. 

Additionally, the commenter misinterprets what the 

Accrediting Commission of Career Schools and Colleges 

(ACCSC) states in its “Standards of Accreditation.” 

Whereas the commenter stated that ACCSC “forbids” the use 

of attestations, in fact, the Standards state that ACCSC 

does not consider a self-certification to be documentation, 

not that the usage of such attestations is forbidden.142 It 

would be detrimental to the school, and to the school’s 

reputation, to systematically and intentionally enroll and 

142 ACCSC, “Standards of Accreditation,” July 1, 2018,

http://www.accsc.org/UploadedDocuments/1967/ACCSC-Standards-ofAccreditation-and-Bylaws-07118.pdf.
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award aid to ineligible students, who did not graduate from 

a high school or who do not meet the alternative 

eligibility criteria. 

 If a school knows that the borrower did not have a 

high school diploma or has not met the alternative 

eligibility requirements and represents to the borrower 

that the borrower should submit a written attestation, 

under penalty of perjury that the borrower had a high 

school diploma, then the school has committed a 

misrepresentation that constitutes grounds for a borrower 

defense to repayment claim. The Department will continue 

to hold schools accountable for misrepresentations made to 

a borrower under § 685.206, and the Department may initiate 

a proceeding against a school for a substantial 

misrepresentation by an institution under § 668.71. These 

enforcement mechanisms provide safeguards against 

fraudulent practices by schools. 

The Department agrees with the commenter that 34 CFR 

§685.215(c)(1)(ii), as proposed in the 2018 NPRM, does not 

permit a student’s certification of high school graduation 

status on the FAFSA to qualify as the written attestation, 

under penalty of perjury, that the borrower had a high 

school diploma. A form separate from the FAFSA will better 
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445 

signify the consequences and importance of such a written 

attestation, under penalty of perjury, to the borrower. 

The Department will provide a model language for such a 

written attestation that schools may choose to use. 

The Department acknowledges that the FSA Handbook 

provides a list of documentation other than a high school 

diploma that may be used by a borrower to demonstrate 

eligibility for receiving Federal student aid under title 

IV. For example, a student who has a General Educational 

Development (GED) certificate is eligible to receive 

financial assistance under title IV.143 A borrower who 

meets alternative eligibility requirements does not need to 

submit to the school a written attestation, under penalty 

of perjury, that the borrower had a high school diploma. 

The Department’s final regulations recognize that there are 

alternative eligibility requirements and expressly 

reference these alternative eligibility requirements in 34 

CFR § 685.215(e)(1)(i). 

We agree that the alternative eligibility requirements 

may benefit some borrowers, but some borrowers cannot 

143 Federal Student Aid Handbook, AVG-90 (2017-18).
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446 

satisfy these alternative eligibility requirements. If a 

borrower went to high school 40 years ago and lost his or 

her diploma, he or she may not be able to readily satisfy 

the alternative eligibility requirements. These final 

regulations afford such a borrower an avenue to nonetheless 

qualify to receive Federal student aid. 

Similarly, these final regulations provide an avenue 

for students who lost their high school diplomas as the 

result of a natural disaster to qualify to receive Federal 

financial aid. The Department acknowledges that such 

students also may qualify for Federal financial aid through 

the alternative eligibility requirements.144 Accordingly, 

the Department does not need to create a separate process 

for survivors of natural disasters. 

These final regulations provide borrowers with due 

process. Procedural due process requires notice and an 

opportunity to be heard. These regulations give borrowers 

notice that if they falsely or fraudulently submit to the 

school a written attestation, under penalty of perjury, 

144 Federal Student Aid Handbook, “School-Determined Requirements,” May 

2018, Pg. 1-10, 

https://ifap.ed.gov/fsahandbook/attachments/1819FSAHbkVol1Ch1.pdf. 
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447 

that they had a high school diploma, then they will not 

qualify for a false certification discharge. The Federal 

false certification discharge application provides the 

borrower with an opportunity to be heard. Accordingly, 

these final regulations satisfy due process. However, in 

the event that the borrower was coerced into signing such 

an attestation as a result of a school’s misrepresentation, 

the borrower would likely qualify for relief under the 

borrower defense to repayment regulations. 

These final regulations provide that a borrower does 

not qualify for a false certification discharge under § 

685.215(e)(1) if the borrower was unable to provide the 

school with an official transcript or an official copy of 

the borrower’s high school diploma and submitted to the 

school a written attestation, under penalty of perjury, 

that the borrower had a high school diploma. If the school 

forges the borrower’s signature on such an attestation, 

then the borrower did not submit this written attestation 

to the school and would qualify for a false certification 

discharge. 

Additionally, if the school signs the borrower’s name 

on the loan application or promissory note without the 

borrower’s authorization, then the borrower may still 
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448 

qualify for a false certification discharge under 

685.215(a)(1)(iii). These final regulations continue to 

include forged signatures on a loan application or 

promissory note as an adequate basis for a false 

certification student loan discharge. 

The Department in its 2018 NPRM proposed rescinding 

the provision in the 2016 final regulations that if the 

Secretary determines that the borrower does not qualify for 

a false certification discharge, the Secretary will notify 

the borrower in writing of its determination on the request 

for a false certification discharge and the reasons for the 

determination.145 In response to comments that raised due 

process concerns, the Department will no longer rescind 

this provision for the discharge procedures that apply to 

loans first disbursed on or after July 1, 2020, and 

includes this provision in the final regulations as 

685.215(f)(5). If the Secretary determines that a borrower 

does not qualify for a discharge, then under 685.215(f)(5), 

the Secretary notifies the borrower in writing of that 

determination and the reasons for that determination, and 

145 83 FR 37251.
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449 

resumes collection. The Department has always resumed 

collection of the loan after the Department denied a false 

certification discharge and is adding the phrase “and 

resumes collection” in 685.215(f)(5) as a technical 

amendment to provide clarity. 

We understand the commenter’s concern about 

retroactive application of the regulatory changes. The 

regulations regarding false certification will apply to 

loans first disbursed on or after July 1, 2020 and will not 

apply retroactively. We have revised these final false 

certification regulations only to apply to new borrowers in 

the Direct Loan program. False certification discharges 

are not available in the Perkins Loan program; therefore, 

these regulations will not affect those borrowers. We also 

are not making changes to the false certification discharge 

requirements for the FFEL program. 

The Department disagrees that using the disbursement 

date of the loan rather than the origination date for 

purposes of false certification discharge contradicts the 

HEA. As noted in the 2018 NPRM, the Department 

acknowledged the concerns of the negotiator who noted that 

a borrower may be a senior in high school with the 

intention of graduating when that borrower applies for 
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450 

assistance under title IV. The Department recognizes that 

under section 484(a)(1) of the HEA and 34 CFR 668.32(b), a 

student is not eligible to receive assistance under title 

IV if the student is enrolled in an elementary or secondary 

school. Section 437(c) of the HEA provides the authority 

for a false certification discharge, and such a discharge 

applies only to a “borrower who received . . . a loan made, 

insured, or guaranteed under this part.” A borrower will 

not be eligible for the discharge unless the borrower 

received the loan. Moreover, a school may realize that a 

borrower provided the school with false or discrepant 

information for eligibility of title IV assistance after 

the origination date of the loan but before the loan is 

disbursed, and the school may revoke its certification of 

eligibility for that borrower prior to disbursement of the 

loan. Accordingly, the date of disbursement of the loan 

aligns with the HEA and serves as a better gauge to 

determine eligibility for a false certification discharge. 

As noted above, the Department has various enforcement 

mechanisms to address fraud by a school, and a school is 

not permitted to falsely certify a borrower’s eligibility 

to receive assistance under title IV. 
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451 

Changes: We have revised our proposed changes to § 

685.215 to clarify that they apply only to loans disbursed 

on or after July 1, 2020. Additionally, in the discharge 

procedures for loans first disbursed on or after July 1, 

2020, the Department is not rescinding the provisions in 

the 2016 final regulations that provide that the Secretary 

will notify the borrower in writing of its determination on 

the request for a false certification discharge and the 

reasons for the determination, if the Secretary determines 

that the borrower does not qualify for a false 

certification discharge.146 The Department includes this 

provision in these final regulations as 685.215(f)(5). If 

the Secretary determines that a borrower does not qualify 

for a discharge, then under 685.215(f)(5), the Secretary 

notifies the borrower in writing of that determination and 

the reasons for that determination, and resumes collection. 

The Department has always resumed collection of the loan 

after the Department denied a false certification discharge 

and is adding the phrase “and resumes collection” in 

685.215(f)(5) as a technical amendment.

146 83 FR 37251.
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452 

Additional False Certification Discharge 

Recommendations 

Comments: Two commenters recommended that the 

Department retain language on automatic false certification 

discharges for Satisfactory Academic Progress (SAP) 

violations in the 2016 final regulations. One of these 

commenters noted that program reviews would not address the 

purpose of the SAP language in the 2016 final regulations, 

which was to permit loan discharges for the affected 

borrowers when the Department finds evidence of 

falsification of SAP. The commenter stated that while 

investigations, audits, and reviews of institutional 

policies and practices are necessary to uncover evidence of 

such falsification, and to ensure that the institution is 

held accountable, the borrower should not be held 

responsible for repaying the loan. 

Discussion: We do not believe that it is appropriate 

to have a specific provision in the regulations providing 

for a false certification discharge based on falsification 

of SAP. Existing § 685.215(c)(8) (2016) already provides 

that the Department may discharge a borrower’s Direct Loan 

by reason of false certification without an application 

from the borrower if the Secretary determines, based on 
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453 

information in the Secretary’s possession, that the 

borrower qualifies for a discharge, and § 685.215(e)(7), 

will also include such a provision. This regulation gives 

the Secretary broad discretion in discharging a loan 

without an application from the borrower based on 

information in the Secretary’s possession. Accordingly, 

this regulation does not preclude the Secretary from 

considering evidence in her possession that the school 

falsified the SAP progress of its students as part of the 

Secretary’s decision to discharge a loan. 

However, we do not think it is appropriate for the 

regulation to specifically include Satisfactory Academic 

Process as information the Secretary would consider, and we 

do not include that language for loans first disbursed on 

or after July 1, 2020. Evaluation of an institution’s 

implementation of their SAP policy is part of an FSA 

program review, and thus, the Department has a mechanism in 

place to identify inappropriate activities in implementing 

an institution’s SAP policy. SAP determinations are 

subject to the internal policies of the school, and it 

would be difficult to determine if a school violated its 

own SAP policies in the context of, and in conjunction 

with, reviewing a false certification discharge 
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454 

application. The Department does not wish to single out 

and elevate evidence that the school has falsified the SAP 

of its students above other information in the Secretary’s 

possession that she may use to discharge all or part of a 

loan without a Federal false certification application from 

the borrower. 

Additionally, we do not have evidence that 

falsification of SAP is widespread. As we stated in the 

2016 final regulations, schools have a great deal of 

flexibility both in determining and in implementing SAP 

standards. There are a number of exceptions under which a 

borrower who fails to meet SAP can continue to receive 

title IV aid. Borrowers who are in danger of losing title 

IV eligibility due to a failure to meet SAP standards often 

request reconsideration of the SAP determination. Schools 

typically work with borrowers in good faith to attempt to 

resolve the situation without cutting off the borrower’s 

access to title IV assistance. 

We do not believe that a school should be penalized 

for legitimate attempts to help a student who is not 

meeting SAP standards, nor do we believe a student who has 

successfully appealed a SAP determination should be able to 

use that initial SAP determination to obtain a false 
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455 

certification discharge on his or her student loans. 

However, a student may use a misrepresentation about SAP to 

successfully allege a borrower defense to repayment under 

34 CFR 685.206(e), assuming the student satisfies the other 

elements of a borrower defense to repayment claim. For 

these reasons, it is not necessary to expressly state that 

the information the Secretary may consider includes 

evidence that the school has falsified the SAP of its 

students. 

Changes: None. 

Comments: None. 

Discussion: A disqualifying condition or condition 

that precludes a borrower from meeting State requirements 

for employment was a basis for a false certification 

discharge prior to the 2016 final regulations and remains a 

basis for a false certification discharge. In the 2016 

final regulations, the Department added language in 34 CFR 

§ 685.215(c)(2) to require a borrower to state in the 

application for a false certification discharge that the 

borrower did not meet State requirements for employment (in 

the student’s State of residence) in the occupation that 

the training program for which the borrower received the 

loan was intended because of a physical or mental 
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456 

condition, age, criminal record, or other reason accepted 

by the Secretary. The Department in its 2018 NPRM noted 

that “the changes in the 2016 final regulations did not 

alter the operation of the existing regulation as to 

disqualifying conditions in any meaningful way, and as a 

result does not propose such added language in these 

regulations.”147 The Department would like to further note 

that its past guidance previously discouraged schools from 

requesting or relying upon a borrower’s criminal record.148 

Some State and Federal laws also may discourage or prevent 

schools from requesting information about a student’s 

physical or mental health condition, age, or criminal 

record.149 If schools do not have knowledge of the 

disqualifying condition that precludes the student from 

meeting State requirements for employment in the occupation 

for which the training program supported by the loan was 

intended, then schools cannot falsely certify a student’s 

eligibility for Federal student aid under title IV. 

147 83 FR 37270. 148 U.S. Dep’t of Educ., Beyond the Box: Increasing Access to Education 

for Justice-Involved Individuals (May 9, 2016), available at

https://www2.ed.gov/documents/beyond-the-box/guidance.pdf. 149 See e.g. Wash. Rev. Code § 28B.160.020 (2018).
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457 

Accordingly, a borrower’s statement that the borrower has a 

disqualifying condition, standing alone, will not qualify a 

borrower for a false certification discharge under 34 CFR § 

685.215(a)(1)(iv). 

Changes: None. 

Financial Responsibility, Subpart L of the General 

Provisions Regulations 

Section 668.171, Triggering Events 

Comments: Numerous commenters wrote that the 

Department should strengthen the mandatory triggers. They 

urged the Department to strengthen the financial 

responsibility portion of the proposed rules by reinstating 

the full list of triggers provided in the 2016 final rules 

or by adding additional triggers. Commenters reasoned 

that, in order to protect taxpayer dollars, the Department 

should strengthen school accountability by increasing the 

number of early warnings of an institution’s coming 

financial difficulties. A commenter stated that the 

Department needs “to develop more effective ways to 

identify events or conditions that signal impending 
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458 

financial problems.”150 Without that, the commenters 

concluded the Department would not truly be able to 

anticipate potential taxpayer liabilities and obtain 

financial protection prior to incurring those liabilities. 

The commenters believed that the mandatory and 

discretionary triggering events in § 668.171(c) and (d) 

were inadequate, too narrow and less predictive, or late in 

detecting misconduct by institutions compared to the 

triggering events in the 2016 final regulations. The 

commenters argued that by eliminating or weakening several 

of the 2016 triggering events, or making those triggering 

events discretionary, the Department has made it easier for 

an institution to continue to operate, or operate without 

consequences or accountability, in cases when the 

institution would likely close or incur significant 

liabilities. 

As a result, the commenters reasoned that the 

Department would be less likely to obtain financial 

150 81 FR 39361. (emphasis in comment)
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459 

protection, or obtain it on a timely basis, leaving 

taxpayers to bear the costs. In addition, some of these 

commenters noted that the Department’s Office of the 

Inspector General issued a report151 stating, in part, that 

(1) the Department would receive important, timely 

information from institutions experiencing the triggering 

events in the 2016 final regulations that would improve the 

Department’s processes for identifying institutions at risk 

of unexpected or abrupt closure, and (2) enforcement of the 

regulations would also improve the Department’s processes 

for mitigating potential harm to students and taxpayers by 

obtaining financial protection based on broader and more 

current information than institutions provide in their 

financial statements. 

Many commenters supported the mandatory and 

discretionary triggering events proposed in the 2018 NPRM, 

noting that they focus on known, quantifiable, or material 

actions. As such, some of these commenters believed the 

triggering events are an improvement over those in the 2016 

151 ED- OIG/I13K0002, available at 

https://www2.ed.gov/about/offices/list/oig/auditreports/fy2017/a09q0001

.pdf. 
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460 

final regulations that could have exacerbated the financial 

condition of an institution with minor and temporary 

financial issues or required an evaluation of the impact 

that undefined regulatory standards (i.e., high drop-out 

rates, significant fluctuations in title IV funding) would 

have on an institution’s financial condition. 

Other commenters were concerned that the proposed 

triggering events exceed the Department’s authority, 

arguing that the triggers include factors that are not 

grounded in accounting principles and do not account for an 

institution’s total financial circumstances as required 

under § 498(c) of the HEA. Along the same lines, a few 

commenters were concerned that some of the triggering 

events were overly broad and poorly calibrated to identify 

situations when an institution is unable to meet its 

obligations and asked the Department to consider whether 

the triggers are necessary. 

Some commenters believed that the Department should 

apply the mandatory and discretionary triggers equally 

across all institutions. In addition, the commenters noted 

that proprietary institutions must already comply with the 

provisions that a school must receive at least 10 percent 

of its revenue from sources other than title IV, HEA 
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461 

program funds (also known as the “90/10” requirement). In 

addition, all institutions must meet the requirements for a 

passing composite score and cohort default rates and argued 

that the Department should not create new requirements for 

these provisions exclusively for proprietary institutions. 

 

Discussion: The Department disagrees with the 

comments that the proposed triggering events will diminish 

our oversight responsibilities. These regulations do not 

change the approach the Department currently uses to 

identify and react contemporaneously to actions or events 

that have a material adverse effect on the financial 

condition or viability of an institution. 

The 2016 final regulations include as triggers (1) 

events whose consequences are uncertain (e.g., estimating 

the likely outcome and dollar value of a pending lawsuit or 

pending defense to repayment claims, or evaluating the 

effects of fluctuations in title IV funding levels), (2) 

events more suited to accreditor action or increased 

oversight by the Department (e.g., unspecified State 

violations that may have no bearing on an institution’s 

financial condition or ability to operate in the State), 

and (3) results of a yet-undefined test (e.g., a financial 
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462 

stress test) that would be akin to the current financial 

responsibility standards and potentially inconsistent with 

the current composite score methodology. The Department 

acknowledges that the composite score methodology should be 

updated through future rulemaking. In these final 

regulations, we adopt mandatory triggering events whose 

consequences are known, material, and quantifiable (e.g., 

the actual liabilities incurred from lawsuits) and 

objectively assessed through the composite score 

methodology or whose consequences pose a severe and 

imminent risk (e.g., SEC or stock exchange actions) to the 

Federal interest that warrants financial protection. 

Additionally, based upon our review of the comments, 

the Department has decided to revise the proposed triggers 

in these final regulations. First, the Department has 

decided not to rescind the high annual drop-out rates 

trigger in the 2016 final regulations. Despite our 

previous concerns about whether a threshold has ever been 

established for this trigger and whether it is an event 

more suited to action by an accreditor, we have 

reconsidered this position, in part based on a comment 

pointing out that Congress has identified drop-out rates as 

an area of such significant concern that a high rate should 
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463 

be factored into the Department’s selection of institutions 

for program reviews. 

However, we do not adopt this commenter’s logic 

regarding significant fluctuations in Pell Grants or loan 

volume. While statutorily appropriate for a program 

review, we believe that additional financial oversight, in 

the form of a discretionary trigger, would be ill-suited to 

fluctuations in loan volume and Pell grant amounts. First, 

significant fluctuations in loan volume year-over-year more 

readily stem from events that do not indicate financial 

instability, such as through institutional mergers, which 

the Department has reason to believe will continue if not 

increase in the future.152 Next, the Department is 

concerned that linking Pell Grant fluctuations to a 

discretionary trigger would harm low-income students and 

discourage institutions from serving students who rely on 

152 Kellie Woodhouse, “Closures to Triple,” Inside Higher Ed, September 

28, 2015, https://www.insidehighered.com/news/2015/09/28/moodyspredicts-college-closures-triple-2017; Clayton M. Christensen and 

Michael B. Horn, “Innovation Imperative: Change Everything,” The New 

York Times, November 1, 2013, 

https://www.nytimes.com/2013/11/03/education/edlife/online-educationas-an-agent-of-transformation.html; Abigail Hess, “Harvard Business 

School Professor: Half of American Colleges Will Be Bankrupt in 10 to 

15 Years,” CNBC, August 30, 2018, https://www.cnbc.com/2018/08/30/hbsprof-says-half-of-us-colleges-will-be-bankrupt-in-10-to-15-years.html. 
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464 

Pell Grants. Finally, fluctuations in Pell Grants and loan 

volume may be inversely related to national economic 

conditions – such as a recession leading to newly 

unemployed workers seeking additional training or education 

– rather than the financial health of an institution. 

Second, the Department closely considered comments 

regarding whether our proposed triggers were strong enough 

to identify early warning signs of financial difficulty and 

whether the Department could properly and quickly identify 

events or conditions that signaled impending financial 

problems. As more fully explained below, the Department 

continues to believe that our proposed triggers provide 

necessary protections and are sensitive to early warning 

signs. However, the Department takes its responsibility as 

stewards of taxpayer funds seriously and, as a result, is 

responsive to community concerns regarding whether our 

oversight of those funds is insufficient. 

Based upon numerous comments that we should strengthen 

the financial responsibility regime, as well as our general 

duty to taxpayers, the Department has decided that when two 

or more unresolved discretionary triggers occur at an 

institution within the same fiscal year, those unresolved 

discretionary triggers will convert into a mandatory 
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465 

triggering event, meaning that they will result in a 

determination that the institution is not able to meet its 

financial or administrative obligations. 

Institutions will already have notice of, and be 

subject to, the discretionary triggering events in 

§668.171(d). The Department has determined that two or 

more unresolved discretionary triggers may be indicators of 

near-term financial danger that leads to the conclusion 

that an institution is unable to meet its financial or 

administrative obligations. This regulatory change 

strengthens authority the Secretary already possesses, at 

§668.171(d), by empowering the Department to act when an 

institution exhibits a pattern of problematic behavior. 

We believe the elevation of multiple discretionary 

triggers, that are unresolved and occur in the same fiscal 

year, to mandatory triggers strengthens the Department’s 

ability to enforce its financial responsibility 

requirements. Institutions that exhibit behavior that is 

likely to have a material adverse effect on the financial 

condition of the institution require the Department to 

respond to protect taxpayer and student interests. 

Despite these changes, our review of the comments does 

not lead us to the conclusion that the Department should 
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466 

adopt the 2016 triggers in their entirety. Through these 

triggers, the Department balances its interest in taxpayer 

protection with institutional stability. In particular, 

the Department seeks to avoid a repeat of prior instances 

in which the Department sought a letter of credit from an 

institution that it triggered a precipitous closure, harmed 

a large number of students who were unable to complete 

their program of study, and required taxpayers to pay an 

even greater cost in the form of closed school discharges. 

We also seek to avoid the use of triggers, such as pending, 

unsubstantiated claims for borrower relief discharge and 

non-final judgements, that do not provide an opportunity 

for due process, invite abuse, and have already resulted in 

high numbers of unsubstantiated claims. The triggers have 

also proven unduly burdensome for institutions that were 

required to report all litigation, even allegations 

unrelated to claims for borrower defense relief. We view 

the triggers in these final regulations as providing a 

sound and more objective basis than the 2016 triggers for 

determining whether an institution is financially 

responsible. 

Contrary to the presumption by the commenters that the 

2016 triggers would have identified more financially 
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467 

troubled institutions, we note that (1) the potential 

liabilities arising from pending lawsuits or borrower 

defense claims is far from certain both in timing and in 

amount, and estimating those liabilities for the purpose of 

recalculating the composite score is problematic and could 

inappropriately affect institutions for several years (see 

the discussion under heading “Mandatory and Discretionary 

Triggering Events.”), and (2) reclassifying some the 

triggers as discretionary will still provide review to 

identify actions or events that may have a material adverse 

impact on institutions. In addition, while we agree with 

the OIG report that information provided by the triggering 

events will better enable the Department to exercise its 

oversight responsibilities, we disagree with the notion 

raised by the commenters that the triggering events 

outlined in the 2018 NPRM will dilute the Department’s 

ability to do so. To the contrary, we believe the approach 

adopted in these final regulations, together with the 

revisions explained above, will identify those institutions 

whose post-trigger financial condition actually warrants 

financial protection, rather than applying triggers that 

presumptively result in institutions having to provide 

financial protection and unduly precipitate coordinated 
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468 

legal action against an institution that trigger financial 

protections that could have devastating – and in many cases 

unwarranted – financial and reputational impacts on the 

institution. 

With regard to the comments that the triggers exceed 

the Department’s authority, we note that § 498(c) of the 

HEA directs the Secretary to determine whether the 

institution “is able . . . to meet all of its financial 

obligations, including (but not limited to) refunds of 

institutional charges and repayments to the Secretary for 

liabilities and debts incurred in programs administered by 

the Secretary.”153 The statute uses the present tense to 

direct the Secretary to assess the ability of the 

institution to meet current obligations. These regulations 

satisfy that directive by requiring that the assessment is 

performed contemporaneously with the occurrence of a 

triggering event. The use of these triggers for interim 

evaluations, in addition to the composite score calculated 

from the annual audited financial statements, using the 

financial responsibility ratios, takes into consideration 

153 20 USC 1099c(c)(1). 
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469 

the total financial circumstances of the institution on an 

ongoing basis. 

We disagree with the comment that some of the 

triggering events are overly broad and poorly calibrated. 

As discussed in this section and under the heading 

“Mandatory and Discretionary Triggering Events,” the 

Department recalibrated the triggers from the 2016 final 

regulation to more narrowly focus on actions or events that 

have or may have a direct adverse impact and eliminated the 

triggers from that final regulation that were speculative 

or not associated directly with making a financial 

responsibility determination. 

In response to the comments that the triggering events 

should apply equally to all institutions, the commenters 

appear to suggest that the Department somehow change or 

extend existing statutory requirements (e.g., impose the 

90/10 trigger on all institutions) or not consider other 

agency provisions that apply only to certain institutions 

(e.g., SEC and exchange requirements for publicly traded 

institutions). 

The Department lacks the authority to apply certain 

statutory requirements to other institutions and cannot 

ignore for the sake of uniformity the risks associated 
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470 

with, or the consequences of, an institution that fails to 

comply with such requirements. With regard to the 

objections for establishing triggers for provisions that 

already have associated sanctions (90/10 and CDR), it is 

the consequence of those sanctions that we are attempting 

to mitigate by obtaining financial protection. An 

institution that fails 90/10 for one year, or has a cohort 

default rate of 30 percent or more for two consecutive 

years, is one year away from possibly losing all or most of 

its title IV eligibility as well as its ability to continue 

to operate is a going concern. In that event, the 

financial protection obtained as a result of these 

triggering events would cover some of the debts and 

liabilities that would otherwise be shouldered by 

taxpayers. However, the Department agrees that in 

instances in which the HEA does not designate a specific 

trigger for a specific type or class of institution, the 

Department will not use its regulatory power to create new 

requirements or sanctions that apply to some but not all 

institutions. 

Changes: The Department revises §668.171 to include a 

new paragraph at §668.171(d)(5) to read: “As calculated by 
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471 

the Secretary, the institution has high annual dropout 

rates; or”. Proposed paragraph §668.171(d)(5) is now 

redesignated §668.171(d)(6). Additionally, the Department 

adds paragraph §668.171(c)(3) as follows: “For the period 

described in (c)(1) of this section, when the institution 

is subject to two or more discretionary triggering events, 

as defined in paragraph (d) of this section, those events 

become mandatory triggering events, unless a triggering 

event is resolved before any subsequent event(s) occurs.” 
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472 

Comments: Some commenters were concerned that the 

proposed framework of mandatory and discretionary 

triggering events does not clearly specify how the 

Department will manage multiple triggering events or 

specify whether a recalculated composite score is used only 

for determining that an event has a material adverse effect 

on an institution or whether the recalculated score 

represents a new, official composite score. Similarly, 

other commenters requested that the Department explain how 

it will apply, handle, determine, or view specific 

instances surrounding a triggering event and, for 

discretionary triggering events, how the Department will 

determine whether an event has a material adverse effect on 

an institution. 

Other commenters noted that the NPRM appears to 

obligate the Department to recalculate the composite score 

every time a triggering event is reported. The commenters 

suggested that the Department reserve the right to forgo a 

recalculation if the reported liability is deemed 

immaterial. 

The commenters argued that an institution should not 

be required to report every liability arising from a 

judicial or administrative action, without regard to the 
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473 

amount or resulting implications, and the Department would 

not need to perform a recalculation for every reported 

liability. To address these issues, the commenters 

suggested that the Secretary establish a minimum percentage 

or dollar value above which an institution would be 

required to notify the Department and the Department would 

recalculate the composite score. For example, a judicial 

or administrative action resulting in a liability under 

$10,000 would not require reporting or recalculating the 

composite score and would reduce burden on institutions and 

the Department. 

Discussion: Based on the actual liability or loss 

incurred by an institution from a triggering event, the 

Department recalculates the institution’s composite score 

to determine whether any additional action is needed. As 

was the case in the 2016 final regulations, if the 

institution’s recalculated score is 1.0 or higher, no 

additional action is needed, and there is no change in the 

institution’s official composite score. 

For example, assume that an institution’s official 

composite is 1.8, but as a result of a triggering event, 

its recalculated score is 1.4. The institution’s official 
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474 

composite score remains at 1.8, even though a score of 1.4 

would in the normal course require the institution to 

participate in the title IV, HEA programs under the zone 

alternative in 34 CFR 668.175(c). Under the trigger 

provisions, an institution with a recalculated score in the 

zone would not be required to provide a letter of credit, 

nor would it be subject to any of the zone provisions. 

On the other hand, if the institution’s recalculated 

composite score was a failing score of less than 1.0 (e.g., 

a score of 0.7), that score becomes the institution’s 

official composite score and remains the composite score 

unless modified by a subsequent triggering event or until 

the Department calculates a new official composite score 

based on the institution’s annual audited financial 

statements for that fiscal year. In this case, with a 

failing score of 0.7, the institution would be required to 

participate in, and be subject to the provisions of, the 

letter of credit or provisional certification alternatives 

under 34 CFR 668.175(c) or (f). 

The Department has determined that there is a greater 

risk to taxpayers when an institution has a failing 

composite score. As was the case with the 2016 final 

regulations, the Department will only take action based on 
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475 

interim adjustments that result in a failing composite 

score. The official composite score is based on an 

institution’s annual audited financial statements. The 

interim adjustments are made based on triggering events 

that occurred after the end of the institution’s fiscal 

year. These adjustments will show up in a subsequent year 

and be reflected in the audited financial statements for 

that year. The official composite score needs to be based 

only on the institution’s audited information. The 

adjustments that are made to a composite score subsequent 

to the most recently accepted audited financial statements 

are designed to protect the Department, students, and 

taxpayers. 

Given that a recalculated score does not affect an 

institution’s official composite score, unless it is a 

failing score less than 1.0, we believe it is unnecessary 

to establish a materiality threshold below which a 

triggering event is not reported, as suggested by the 

commenters. A settlement, final judgment, or federal or 

state final determination resulting in a liability of 

$10,000 may be material for an institution whose financial 

condition is already precarious, but a $10 million 
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476 

liability may not have a material impact on a financially 

healthy institution. 

To objectively assess whether a liability is material 

to a specific institution, we rely on the composite score 

methodology. Regardless of whether an institution is on 

the cusp of failing the composite score or has a high 

composite score, the relevant issue is whether the 

liability that must be reported results in a failing 

recalculated score. 

We believe that liabilities arising from minor 

settlements, final judgments, and final determinations by a 

Federal or State agency are not likely to create 

variability in composite scores that could have negative 

implications, particularly with oversight entities that use 

or rely on the composite score, because composite scores 

will only be changed if the recalculated scores are 

failing. In the cases where the recalculated scores are 

failing, we believe that the cognizant oversight entities 

should be interested in those outcomes. 

On its own, it is important for the Department to know 

that an institution has incurred liabilities arising from 

settlements, final judgments, and final determinations by 

Federal or State agencies. Although the amount of each 
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477 

liability arising from such instances may be a minor 

amount, the cumulative effect of numerous settlements, 

final judgments, and final Federal or State agency 

determinations could damage the institution’s financial 

stability. The threshold that the Department has 

established is any amount that causes the institution to 

have a failing composite score, and the only way the 

Department can determine if an institution has reached this 

threshold, is by requiring the institution to report the 

liabilities referenced in paragraph (c)(1)(i)(A). 

Regarding the comments about the burden associated 

with reporting all incurred liabilities, we considered this 

burden in establishing the reporting process in these final 

regulations and believe it adequately balances the burden 

on schools with the Department’s ability to obtain 

necessary information. In addition, we discuss more 

details of the reporting requirements under the heading 

“Reporting Requirements, § 668.161(f)” below. 

With respect to how the Department will manage and 

evaluate a triggering event or handle multiple events, we 

believe it is not appropriate or feasible to detail the 

Department’s internal review process in these final 

regulations. The outcome for any failing composite score 
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478 

recalculation will be available to the reporting 

institution. To the extent that the Department establishes 

procedures for institutions to report and respond to the 

triggering events or develops guidelines regarding how we 

intend to evaluate certain triggering events, the 

Department will make that information available to 

institutions. 

Generally, the mandatory triggers reflect actions or 

events whose consequences are realized immediately, such as 

a liability incurred through a final judgment after a 

judicial action or through a final administrative action by 

a Federal or State agency, a withdrawal of owner’s equity 

that reduces resources available to the institution to meet 

current needs, or an SEC or exchange violation that 

diminishes the institution’s ability to raise capital or 

signals financial distress. For a mandatory trigger whose 

consequences can be quantified (a monetary liability 

incurred by the institution or withdrawal of owner’s 

equity), a failing recalculated score (less than 1.0) 

evidences an adverse material effect. For the other 

mandatory triggers (SEC and exchange violations), given the 

nature and gravity of those events, we presume they will 

have an adverse material effect on the institution’s 
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479 

financial condition. In either case, the burden falls on 

the institution to demonstrate otherwise at the time it 

notifies the Department that the event has occurred. 

On the other hand, discretionary triggers generally 

reflect actions or events whose consequences are less 

immediate and less certain. For a discretionary trigger, 

the Department will need to show that the event is likely 

to have a material adverse effect on the institution’s 

financial condition or jeopardize the institution’s ability 

to continue to operate as a going concern.154 The 

Department will consider in its review any additional 

information provided by the institution at the time it 

reports that event. 

 

154 Note: In the 2016 final regulations, we established that for the 

discretionary triggers, an institution does not meet its financial or 

administrative obligations if the Secretary demonstrates that the 

trigger was “reasonably likely to have a material adverse effect on the 

financial condition, business, or results of operations of the 

institution,” and included a non-exhaustive list of discretionary 

triggers. 34 CFR 668.171(g)(2017). In contrast, in the 2018 proposed 

regulations, we characterized the Secretary’s burden as determining if 

any of the listed events “is likely to have a material adverse effect 

on the financial condition of the institution. . .” This phrasing is a 

technical change for clarity and as a result, we are retaining this 

phrasing in the final regulations. However, we include a finite list 

of discretionary trigger events, to provide more certainty to 

institutions and to facilitate the Department’s ability to administer

the regulations.
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480 

Changes: None. 

Comments: One commenter criticized the Department’s 

rulemaking with respect to financial responsibility, 

claiming that the Department has not analyzed data on the 

existing financial protection held by the Department to 

assess the degree to which it may fall short of 

institutional liabilities, or provided the public with 

information necessary to establish the extent to which the 

Department’s current policies and practices meet the 

statutory requirement that the Department ensure 

institutions of higher education are financially 

responsible. The commenter submitted a FOIA request 

related to this topic and stated that the request is now 

the subject of ongoing litigation. 

In addition, the commenter contended that the 

Department failed to provide information during the 

rulemaking process regarding how it sets the amount of a 

required LOC. While acknowledging the Department’s 

longstanding regulations that establish a floor for the 

amount of the LOC at 10 percent of the amount of an 

institution’s prior year title IV funding, the commenter 

admonished the Department for failing to (1) consider 
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481 

whether to increase the amount of LOC floor in the proposed 

regulations in light of revoking the automatic triggers and 

(2) provide any information on the methodology the 

Department uses to set the amount of an LOC. 

As a result, the commenter said the Department had not 

provided the necessary information to say whether it is 

adequately protecting taxpayers from significant 

liabilities. The commenter also asserted that the 

Department cannot engage in a reasoned negotiated 

rulemaking and cannot provide a fulsome opportunity to 

comment as required by both the HEA and the APA, without 

first analyzing the information the commenter had 

requested. 

Other commenters contended that the Department is not 

adequately identifying risks from institutions noting that 

the majority of the letters of credit (LOC) obtained by the 

Department came from institutions with failing composite 

scores, but only a few LOCs stemmed from significant 

concerns or events like those envisioned by the 2016 

triggers. 

Discussion: First, we note that the sufficiency of 

the Department’s response to any individual FOIA request is 

beyond the scope of this rulemaking and decline to comment 
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482 

on conclusions drawn about the response or the ongoing 

litigation. 

 With respect to the other aspects of the comment, the 

commenter appears to be confusing LOCs obtained for 

different purposes. The financial protection triggers in 

these and the 2016 final regulations were designed to help 

identify conditions or events that were likely to have a 

forward-looking impact on an institution’s financial 

stability. The 2016 final regulations were not in effect 

at the time of the 2018 NPRM and the negotiated rulemaking 

that preceded it, so no triggers were in place at the time. 

Prior to the 2016 final regulations becoming effective, the 

Department’s regulations primarily authorized requiring a 

LOC from an institution for failing to satisfy the 

standards of financial responsibility based on its annual 

audited financial statements, or during a change of 

institutional control, or more recently in the event that 

an institution files for receivership 

We do not believe that an analysis of LOCs obtained 

under the preexisting regulations based solely on 

information contained in audited financial statements would 

have facilitated fulsome comment and participation about 

how best to calibrate forward-looking financial 
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483 

responsibility triggers because the actions or events 

relating to the triggers may not be evident, or otherwise 

disclosed, in those statements. The Department must walk a 

fine line between protecting taxpayers against sizeable 

unreimbursed losses through borrower defense loan and 

closed school loan discharges, and forcing the closure by 

establishing LOC requirements that themselves push the 

institution in unreasonable financial duress. 

In addition, we did not propose in the 2018 NPRM to 

remove the concept of automatic triggers altogether. We 

proposed modifying or removing some of the triggers, 

referred to in the 2018 NPRM and in these final regulations 

as “mandatory” instead of “automatic,” but the concept that 

certain events trigger a requirement for financial 

protection, absent a compelling response from an 

institution that the triggering event does not and will not 

have a material adverse effect on its financial condition, 

was not removed from the proposed or these final 

regulations. In the 2018 NPRM and these final regulations, 

we set forth a reasoned basis for the way we propose to 

structure the automatic/mandatory and discretionary 

triggers, including why and how that structure differs from 

the 2016 final regulations. This basis includes our 
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484 

analysis of the rationales specified in the 2016 final 

regulations and the reasons for why our weighing of facts 

and circumstances results in a different approach.155 

The analysis of the triggers we incorporate into these 

final regulations is detailed elsewhere in this section. 

In summary, both at negotiated rulemaking and through the 

2018 NPRM comment process, the public had sufficient 

information for a fulsome opportunity to comment and 

participate in the discussion about financial protection 

triggers. 

With regard to how the Department establishes the 

amount of a LOC, as the commenter noted, the amount is, and 

has historically been, set initially at 10 percent of the 

total amount of the prior year’s title IV funds received by 

an institution. We have always had the discretion to 

require a LOC greater than 10 percent, but established in 

the 2016 final regulations under § 668.175(f)(4), that the 

amount of a LOC may be any amount over 10 percent that the 

Department demonstrates is sufficient to cover estimated 

losses. However, in the 2018 NPRM we did not propose, and 

155 See e.g. 83 FR 37272.
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485 

do not adopt in these final regulations, the approach in 

the 2016 final regulations that specifically tied any 

increase in the LOC over 10 percent to the amount needed to 

cover estimated losses. While that approach may be 

appropriate in some cases, we believe the Secretary should 

have, and historically has had, the flexibility to 

establish the amount of the LOC on a case by case basis, as 

may be warranted by the specific facts of each case. 

With respect to the comment about increasing the LOC 

floor, if the commenter is suggesting that by providing 

larger LOCs, institutions that are not subject to the 

removed triggers would mitigate the risk to taxpayers from 

institutions that were previously subject to those 

triggers, that arrangement implies the existence of a 

shared risk pool from which the Department could tap to 

cover liabilities from any institution. A LOC is specific 

to an institution and cannot be used to cover the 

liabilities of any other institution. Consequently, 

increasing the LOC floor would not have the effect the 

commenter intended, but perversely result in 

inappropriately increasing the LOCs of unaffected 

institutions. 

Changes: None. 
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486 

Mandatory and Discretionary Triggering Events 

Section 668.171(c)(1), Actual liabilities from defense 

to repayment discharges and final judgments or 

determinations 

Comments: Some commenters believed that the 2016 

final regulations unfairly penalized an institution based 

upon unfounded or frivolous accusations in pending lawsuits 

that, once settled or adjudicated, could result in no 

material financial impact on the institution. These and 

other commenters agreed with the proposal in the 2018 NPRM 

to hold an institution accountable for the actual amount of 

liabilities from settlements, final judgments, or final 

Federal or State agency determinations. 

Similarly, other commenters believed that the proposal 

to use the actual liabilities incurred by an institution in 

recalculating its composite score corrected a significant 

flaw in the 2016 final regulations that could have 

triggered a reassessment of an institution’s financial 

responsibility based on alleged or contingent claims that 

may never come to pass. 

Other commenters believed that the current triggers 

for pending lawsuits and defense to repayment claims under 
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487 

668.171(c)(1)(i) and (ii) and 668.171(g)(7) and (8) should 

be retained to better protect students and taxpayers. 

Discussion: We have determined that the 2016 final 

regulations enumerated certain triggering events that may 

not serve as accurate indicators of an institution’s 

financial condition. To reduce the burden on institutions 

in reporting the triggering events and mitigate the 

possibility that institutions would improperly be required 

to provide financial protection as a consequence of those 

events, while balancing the need to protect the Federal 

interests, it is our objective in these regulations to 

establish triggers that are more targeted and more 

consistently identify financially troubled institutions. 

For example, under existing 668.171(c)(1)(B) (2017) 

and 668.171(c)(1)(ii) (2017), an institution is not 

financially responsible if the liabilities from pending 

lawsuits brought by State or Federal authorities, or 

generally by other parties, result in a recalculated 

composite score of less than 1.0, as provided under 

668.171(c)(2) (2017). To perform this calculation, we 

value the potential liability from a pending suit as the 

amount demanded by the suing party or the amount of all of 

the institution’s tuition and fee revenue for the period at 
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488 

issue in the litigation. However, we recognize as a 

commonsense matter that some lawsuits may demand 

unrealistic amounts of money at the outset of the 

proceedings, yet may ultimately be resolved for 

significantly lower amounts or no liability. Because the 

amount of the potential liability from pending suits or 

borrower defense-related claims, however it is determined, 

is treated as if it were paid in recalculating an 

institution’s composite score, the institution could be 

required unnecessarily to provide a letter of credit or 

other financial protection not only in the year the suit is 

brought, or that claims are made, but also for any 

subsequent years in which the suit or claims remain 

pending. This result places a significant burden on the 

institution for lawsuits that ultimately may not have a 

material adverse effect on its financial condition and 

viability. 

Further, in the brief time since implementing the 2016 

final regulations, the Department has encountered a 

significant administrative burden and difficulty in 

monitoring institutions’ reports of pending litigation, 

determining whether such litigation meets the requirements 

of the 2016 final regulations, and valuing such suits, many 
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489 

of which have not led to a failure of financial 

responsibility due to a recalculated composite score of 

less than 1.0. 

We reaffirm our position in the preamble to the 2016 

final regulations that the Department has the authority to 

review lawsuits pending against an institution. However, 

in view of the burden on institutions and the difficulty of 

accurately valuing the potential liability of pending 

suits, in these regulations, we have instead determined 

that the mere existence of a lawsuit against an institution 

should not qualify as a triggering event and decline to 

include pending suits, whether brought by a Federal or 

State entity, or by another party, as automatic or 

mandatory triggers, as was the case in the 2016 final 

regulations.

Likewise, valuing the amount of pending borrower 

defense claims under existing 668.171(g)(7) and (8) 

(2017), depends in part on factors such as whether the 

claims stem from similarly situated borrowers (e.g., claims 

arising for the same reasons), the timing of the valuation 

(e.g., the valuation may occur after a few claims are filed 

or the Department may look at a pool of claims filed during 

a specified time period), and whether the Department re-
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490 

values the remaining pending claims in a pool after it has 

adjudicated some of the claims. 

As estimates, these valuations could create falsepositive outcomes (i.e., inaccurately valuing borrower 

defense claims could result in an otherwise financially 

responsible institution inappropriately providing financial 

protection) and would impose a significant burden on the 

Department to monitor and analyze the potential impact of 

unanalyzed borrower defense claims. Similarly, outside 

groups could be encouraged to manipulate borrowers to file 

unjustified borrower defense claims, or could do so on 

behalf of borrowers, simply to create a financial trigger 

that will negatively impact the institution, even if the 

borrower defense claims are ultimately found to have no 

merit. As a result, we did not propose adopting either of 

the discretionary triggers related to pending or potential 

borrower defense claims in the 2018 NPRM and do not 

incorporate them into these final regulations. 

In sum, valuing the liability accurately and 

objectively is critical in assessing, through the composite 

score calculation, whether lawsuits or claims have an 

adverse impact on the financial condition of an institution 

that justifies requiring the institution to secure a letter 
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491 

of credit or other financial protection. We believe that 

valuation is best done by using the actual amount of the 

liability incurred by the institution and would 

appropriately balance the Department’s administrative 

burden in monitoring an institution’s financial condition 

and safeguard the taxpayers’ interest in the Federal 

student aid programs. 

We also accordingly rescind the reporting requirements 

in the 2016 final regulations related to pending lawsuits. 

Instead, we require an institution to notify the Department 

no later than 10 days after it incurs a liability arising 

from a settlement, a final judgement arising from a 

judicial action, or a final determination arising from an 

administrative proceeding initiated by a Federal or State 

entity. We note that in the preamble to 2018 NPRM156 , the 

Department proposed as triggering events a liability 

arising from (1) borrower defense to repayment discharges 

granted by the Secretary or (2) a final judgment or 

determination from an administrative or judicial action or 

proceeding initiated by a Federal or State entity. We 

156 83 FR 37271. 
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492 

clarify in these regulations that a judgment or 

determination becomes final when the institution does not 

appeal, or has exhausted its appeals, of that judgement or 

determination. In addition, we note that the Department 

initiates an administrative action whenever it seeks 

reimbursement for a liability arising from borrower defense 

to repayment discharges and that action results in a final 

determination. Consequently, we have incorporated the 

proposed borrower defense trigger as part of the general 

trigger for liabilities from final determinations under 

668.171(c)(1)(i)(A). Finally, in the 2016 Final 

Regulations, the trigger, in 668.171(c)(1)(i), specifically 

identified liabilities incurred by an institution from 

settlements. Although settlements were not likewise 

identified in the 2018 NPRM, we intended to account for 

that outcome in proposed 668.171(c)(1)(i)(B). To avoid 

confusion, we clarify in these regulations that settlements 

are part of that trigger. 

In the 2018 NPRM, the Department proposed that a 

liability from a final judgment or determination arising 

from an administrative or judicial action or proceeding 

should constitute a mandatory trigger. The Department is 

revising 668.171(c)(1)(i)(A) to more specifically describe 
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493 

the type of administrative or judicial action or proceeding 

that gives rise to the trigger. As previously noted, an 

administrative or judicial proceeding must be initiated by 

a Federal or State entity. With respect to an 

administrative action or proceeding initiated by a Federal 

or State entity, the Department further specifies that the 

determination must be made only after an institution had 

notice and an opportunity to submit its position before a 

hearing official because the institution should receive due 

process protections in any such administrative action or 

proceeding initiated by a Federal or State entity. 

 

Changes: We are revising 668.171(c)(1) to provide 

that liabilities incurred by an institution include those 

arising from a settlement, final judgment, or final 

determination from an administrative or judicial action or 

proceeding initiated by a Federal or State entity. In 

addition, we establish that a judgment or determination 

becomes final when the institution does not appeal or has 

exhausted its appeals of that judgment or determination. 

Section 668.171(d)(1), Accrediting Agency Actions 
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Comments: Many commenters supported the proposed 

accrediting agency trigger in 668.171(d)(1) of the 2018 

NPRM and the Department’s willingness to work with an 

institution and its accreditor to determine whether an 

event has or will have a material adverse effect on the 

institution. The commenters agreed that a show cause order 

that would lead to the withdrawal, revocation, or 

suspension of an institution’s accreditation was an 

appropriate discretionary triggering event. Some 

commenters suggested that in addition to a show cause 

order, the trigger should apply to instances where an 

accrediting agency places an institution on probation or 

similar status. Other commenters believed that the 

accrediting agency trigger should be mandatory instead of 

discretionary. 

Some commenters urged the Department to retain the 

accrediting agency trigger in current 668.171(c)(1)(iii) 

where an institution is not financially responsible if it 

is required by its accrediting agency to submit a teach-out 

plan. 

Discussion: We agree with commenters that the trigger 

should be revised to include the phrase “probation or 
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495 

similar status” as that action by an accrediting agency may 

have the same effect as a show cause order. Instead of 

presuming the action will have a materially adverse effect, 

as a discretionary trigger, we would first obtain 

information about why the accrediting agency issued the 

show cause order or placed the institution on a 

probationary status, and the time within which the agency 

requires or allows the institution to come into compliance 

with its standards. The Department would then determine 

whether the accrediting agency action will likely have an 

adverse effect on the institution’s financial condition 

depending on the nature or severity of the violations that 

precipitated that action and the compliance timeframe.

Under the trigger in current 668.171(c)(1)(iii), where 

an institution notifies the Department whenever its 

accrediting agency requires a teach-out plan for a reason 

described in 602.24(c)(1) that could result in the 

institution closing or closing one or more of its 

locations, the Department recalculates the institution’s 

composite score based on the loss of title IV funds 

received by students attending the closed location during 

its most recently completed fiscal year, and by reducing 
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496 

the expenses associated with providing programs to those 

students. 

While the Department can determine the amount of the 

title IV funds received by students in those programs, and 

that amount could serve as a reasonable proxy for lost 

revenue, determining the reduction in expenses associated 

with not providing the programs is less certain. 

Under current Appendix C, the associated expense 

allowance is calculated by dividing the Cost of Goods Sold 

by the Operating Income and multiplying that result by the 

amount of title IV funds received by students at the 

affected location. However, the level of detail needed to 

accurately derive the expenses associated with providing a 

program, particularly at a location of the institution, is 

typically not contained or disclosed in an institution’s 

audited financial statements. While the Cost of Goods Sold 

approximates those expenses at the parent level, it does 

not reflect all of them, and attempting to more accurately 

associate expenses at the location level would require 

additional, unaudited information from the institution. 

As noted in the discussion for pending lawsuits and 

borrower defense claims, incorrectly valuing the amount 

used in recalculating the composite score may result in 
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497 

imposing unnecessary financial burdens on an institution 

that, in this case, could cause the institution to forgo 

providing or executing a teach-out. 

Changes: We are revising 668.171(d)(1)(iv) to include 

the phrase “probation order or similar action.” 

Section 668.171(c)(1)(i)(B), Withdrawal of Owner’s 

Equity Comments: Commenters generally supported the 

mandatory trigger relating to the withdrawal of owner’s 

equity. 

One commenter believed that in recalculating the 

composite score for a withdrawal of owner’s equity, the 

Department should, in addition to decreasing modified 

equity by the amount of the withdrawal, also adjust the 

equity ratio by decreasing total assets. 

Discussion: The purpose of this trigger, is to 

identify instances where the withdrawal or use of resources 

would likely cause an institution whose financial condition 

is already precarious (i.e., an institution with a 

composite of less than 1.5) to fail the composite score 

standard. For this purpose, total assets in the equity 

ratio would not be reduced by any transaction associated 

with capital distributions or related party receivables. 

For capital distributions, the initial accounting 
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498 

transaction recorded in the institution’s financial records 

would increase liabilities and reduce equity. 

Consequently, there would be no reduction in assets for 

these transactions. 

The 2016 final regulations were not clear on what the 

Department meant by withdrawal of owner’s equity. 

Withdrawal of owner’s equity includes distributions of 

capital and related party transactions for the purposes of 

this trigger. In these regulations, we distinguish between 

two types of capital distributions - the equivalent of 

wages in a sole proprietorship or partnership, and 

dividends or return of capital. 

Under the 2018 NPRM, a sole proprietorship or 

partnership would be required to report every distribution 

of the equivalent of wages. However, in view of the 

comments relating to the need for, and burden associated 

with, reporting the occurrence of the triggering events, we 

establish in these regulations that, in accordance with 

procedures established by the Secretary, an affected 

institution must report no later than 10 days after it is 

informed that its composite score is below a 1.5, the total 

amount of wage equivalent distributions it made during 

the fiscal year associated with that composite score.. As 
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499 

long as the institution does not make wage-equivalent 

distributions in excess of 150 percent of that amount 

during its current fiscal year and for six months into its 

subsequent fiscal year, we will not require the institution 

to report any of those distributions for that 18-month 

period. 

However, if the institution makes wage-equivalent 

distributions in excess of 150 percent of the reported 

amount at any time during the 18-month period, the 

institution must report the amount of each of those 

distributions within 10 days, and the Department will 

recalculate the institution’s composite score based on the 

cumulative amount of the actual distributions. Because a 

proprietary institution may submit its financial statement 

audits to the Department up to six months after the end of 

its fiscal year, the Department will not know the actual 

amount of wage-equivalent distributions the institution 

made during its most recently completed fiscal year until 

we receive those audits. 

In addition, like other triggers, we account for the 

occurrence of events that are not yet reflected in an 

institution’s financial statement audits. Therefore, the 

18-month period consists of the 12 months in the 
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500 

institution’s current fiscal year plus the six months of 

its subsequent fiscal year that transpire before the 

institution submits its financial statement audits. The 

Department believes this approach will reduce, or eliminate 

entirely, the burden that most institutions would have 

incurred under the 2018 NPRM, while at the same time 

providing the Department the means to assess the actions of 

those institutions that are most likely to fail the 

composite score standard because of this trigger. 

With regard to distributions of dividends or return of 

capital, an institution must report the amount of any 

dividend once declared, and the amount of any return of 

capital once approved, no later than 10 days after the 

respective event occurs. The Department will use that 

amount to recalculate the institution’s composite score. 

While we recognize that related party receivables do 

not impact equity, per se, any increase in those 

receivables reduces the liquid assets available to an 

institution to meet its financial obligations. 

Therefore, in keeping with the purpose of this 

trigger, except for transfers between entities in an 

affiliated group as provided under § 668.171(c), an 

institution must report any increases in the amount of 
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501 

related party receivables that occur during its fiscal 

year, regardless of whether those receivables are secured 

or unsecured. The Department will use the reported amount 

to recalculate the composite score. 

Changes: We have revised § 668.171(c)(1)(i)(B) to 

include capital distributions that are the equivalent of 

wages in a sole proprietorship or partnership as an example 

of an event under the trigger. We also revised § 

668.171(f)(1)(ii)(A) to provide that for distributions akin 

to wages, an affected institution must report the total 

amount of wage-equivalent distributions that it made during 

its prior fiscal year and is not required to report any 

wage-equivalent distributions that it makes during its 

current fiscal year or the first six months of its 

subsequent fiscal year, if the total amount of those 

distributions does not exceed 150 percent of the amount 

reported by the institution. We have also changed the 

regulation to require that the institution report such 

wage-equivalent distributions, if applicable, no later than 

10 days after the date the Secretary notifies the 

institution that its composite score is less than 1.5. 
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502 

We have clarified in § 668.171(c)(1)(i)(B) that a 

dividend or a return of capital may be an event under the 

trigger. We similarly clarify in § 668.171(f)(1)(B), that 

a distribution of dividends, or a return of capital, must 

be reported no later than 10 days after the dividends are 

declared, or the return of capital is approved. In 

addition, we establish that an institution must report a 

related party receivable no later than 10 days after it 

occurs. 

Section 668.171(c)(2), SEC and Exchange Violations 

Comments: One commenter contended that the mandatory 

trigger with respect to the SEC does not provide a valid 

correlation with respect to an institution’s ability to 

satisfy its financial obligations. The commenter noted 

that the correlation that ED identified in the 2018 NPRM is 

misplaced. This commenter asserted that the SEC may delist 

the stock of an institution as a result of concerns about 

governance that are not indicative of a publicly-traded 

institution’s financial health. Similarly, the failure of 

an institution to file a report does not necessarily 

reflect that the institution is unable to meet its 

financial or administrative obligations as the report may 

have been filed late for reasons unrelated to the 
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503 

institution’s financial condition or administrative 

obligations. For these reasons, the commenter encouraged 

the Secretary to avoid classifying the SEC and exchange 

actions as mandatory triggering events and proposed a 

different mandatory trigger. 

Discussion: After careful consideration of the 

comments, we have decided to keep the mandatory triggers 

for publicly traded institutions. 

The commenter raises a valid concern that the failure 

of an institution to file a report does not necessarily 

reflect that the institution is unable to meet its 

financial or administrative obligations, as the filing may 

have been filed late for reasons unrelated to the 

institution’s financial condition. This is particularly 

true where a company files the late report within a 

relatively short time after the original or extended due 

date and is late only with respect to a single report. 

Filing late could also be due to unforeseen circumstances 

such as the individual required to sign the report is 

unavailable, an unpredictable circumstance with an 

institution’s auditors, or the need to address a financial 

restatement done for technical reasons. 
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504 

We do not adopt the commenter’s suggestions regarding 

668.171(c)(B)(2)(i) and (c)(B)(2)(ii). The commenters are 

correct that a delisting does not necessarily mean that an 

institution has financial problems, but it could mean that 

it does. Even more concerning, delisting could be a 

prelude to bankruptcy. These actions are likely to impair 

an institution’s ability to raise capital and that 

potential consequence calls into question the viability of 

the institution. 

We also note that the SEC and stock exchange 

violations triggers existed in the 2016 final regulations, 

at 668.171(e) (2017). Under those regulations, a warning by 

the SEC that it may suspend trading on the institution’s 

stock would render the institution not financially 

responsible. By limiting, in these regulations, the 

trigger to SEC orders as opposed to warnings, the trigger 

is more specifically tailored to identify institutions with 

a high likelihood of financial difficulties. The exchange 

action component of the trigger in these regulations is 

similarly more tailored than the 2016 final regulations. 

Under the 2016 final regulations, an institution would not 

be financially responsible if the exchange on which the 

institution’s stock is traded notifies the institution that 
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505 

it is not in compliance with exchange requirements or the 

institution’s stock is delisted. Under these regulations, 

the Department will limit its determination that an 

institution is not financially responsible to those 

situations where the institution’s stock has actually been 

delisted. 

We note that the occurrence of a mandatory triggering 

event does not automatically precipitate financial 

protection, as alluded to by the commenter in requesting 

the trigger to be reclassified. 

As a mandatory trigger, the burden is on the 

institution to demonstrate, at the time it reports an SEC 

or exchange action, that the action does not or will not 

have an adverse material effect on its financial condition 

or ability to continue operations as a going concern, and a 

favorable demonstration would obviate the need for 

financial protection. We see no utility in reclassifying 

this trigger as discretionary because it is reasonable for 

the Department to rely on the expertise of the SEC or 

exchange about actions stemming from violations of their 

requirements that may have an immediate and severe impact 
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506 

on the institution – the responsibility is rightly on the 

institution to demonstrate the contrary to the Department. 

Changes: None. 

Section 668.171(d)(4) and (6), 90/10 Revenue and 

Cohort Default Rate (CDR) Triggering Events 

Comments: Some commenters believe that the cohort 

default rate (CDR) and 90/10 triggers are unrelated to an 

institution’s financial stability and should be removed. 

Other commenters urged the Department to classify both of 

these events as mandatory instead of discretionary 

triggers. Along the same lines, another commenter believed 

that the statutory requirements governing the loss of title 

IV eligibility stemming from a 90/10 or cohort default rate 

failure do not require or allow the Department to consider 

alternative remedies or mitigating circumstances. The 

commenter asserted that there was no reasonable basis on 

which the Department could determine that no risk exists 

when institutions fail the 90/10 or CDR triggers, and, 

therefore, it would be arbitrary for the Department to 

determine on a case-by-case basis which of the failing 

institutions that would be required to provide financial 

protection. To ensure that the Department upholds the 
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507 

statutory requirements for 90/10 and CDR, and financial 

responsibility in the event of closure, the commenter urged 

the Department to classify the failure of both events as 

mandatory triggers. 

Discussion: We disagree that the triggers are 

unrelated to an institution’s financial stability. As 

discussed previously under the heading “Triggering Events, 

General,” if either of these triggering events occur, an 

institution may be one year away from losing all or most of 

its eligibility to participate in the title IV programs. 

That loss would likely have a significant adverse impact on 

the institution’s financial condition or its ability to 

continue as a going concern, and either outcome may warrant 

financial protection. 

The current regulations require an institution that 

fails 90/10 or whose cohort default rates are more than 30 

percent for two consecutive years to provide a letter of 

credit or other financial protection to the Department. 

However, rather than presuming that financial protection is 

required, we believe it is more appropriate to reclassify 

these triggers as discretionary triggers to allow the 

Department to review the institution’s efforts to remedy or 

mitigate the causes for its 90/10 or CDR failure or to 
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508 

assess the extent to which there were anomalous or 

mitigating circumstances precipitating these triggering 

events, before determining whether financial protection for 

the Department in the form of a LOC is warranted. Part of 

that review is evaluating the institution’s response to the 

triggering event to determine whether a subsequent failure 

is likely to occur, based on actions the institution is 

taking to mitigate its dependence on title IV funds, the 

extent to which a loss of title IV funds (from either 90/10 

or CDR failure) will affect its financial condition or 

ability to continue as a going concern, or whether the 

institution has challenged or appealed one or more of its 

default rates. 

Contrary to the assertion made by the commenter, this 

case-by-case review forms the basis needed for the 

Department to proceed under these regulations with issuing 

a determination regarding whether the institution is 

financially responsible. We wish to clarify that the 

Department’s review or consideration of circumstances 

relating to whether a 90/10 or CDR failure affects an 

institution’s financial responsibility has no bearing on 

how the statutory requirements are applied or the 

consequences of those requirements. 
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509 

 

Changes: None. 

Section 668.171(d)(2), Violations of Loan Agreements 

Comments: Some commenters were concerned with the 

amount of discretion the Department has in situations where 

a creditor has affirmatively determined that a loan or 

credit is not at risk and suggested that the Department 

qualify the trigger so it does not apply in cases where the 

violation is waived by the creditor. Other commenters 

argued that an institution should have ample time to remedy 

a situation with a creditor before reporting it to the 

Department. On the other hand, some commenters questioned 

why this was a discretionary trigger or a trigger at all, 

noting the requirement that an institution be current in 

its debt payments currently serves as a baseline standard 

for determining whether an institution is financially 

responsible and the Department did not provide any 

evidence, analysis, or examples of existing loan violations 

that would not constitute a threat to the overall financial 

health of an institution. 

Discussion: A violation of a loan agreement is a 

discretionary trigger under the existing regulations, and 
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510 

we continue to believe that this trigger will assist the 

Department in fulfilling its objective of identifying and 

acting on signs of financial distress. With regard to the 

comments on whether the Department should exempt the 

reporting of a loan violation in cases where the creditor 

waives the violation or provide some time for an 

institution to remedy a loan violation before it reports 

the violation, we believe that all violations are 

potentially significant and must be reported, regardless of 

whether they are waived or remedied. In cases where the 

creditor waives a violation without imposing new 

requirements or restrictions, the institution simply 

reports that outcome. Although we decline to define the 

waiver as a cure for the violation, we typically would 

accept the waiver if it was obtained promptly by the 

institution during the then-current fiscal year. 

Institutions that violate a debt provision without 

obtaining a waiver are also at risk that the total debt may 

be called by the creditor. We are concerned about allowing 

time for an institution to remedy a loan violation because 

that defeats or lessens the utility of allowing the 

Department to act contemporaneously in response to 

potentially significant issues. 
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511 

With respect to the comment that instead of 

establishing a discretionary trigger, the Department should 

retain as a “baseline standard” the requirement that an 

institution is current in its debt payments, we note that 

the trigger for loan violations is currently discretionary 

and the proposed provisions for this trigger are the same 

as they are in the current regulations under 668.171(g)(6). 

The baseline standard the commenters refer to was part of 

regulations that were in effect before the 2016 final 

regulations. 

Nevertheless, the commenters incorrectly presumed that 

the “baseline standard” is somehow more robust or better 

than the trigger on loan violations. To the contrary, 

under the “baseline” the Department would not be aware that 

an institution violated a loan agreement unless: (1) it was 

identified in a footnote to the institution’s audited 

financial statements, which are submitted to the Department 

six to nine months after the institution’s fiscal year; or 

(2) the institution failed to make a payment under a loan 

obligation for 120 days and the creditor filed suit to 

recover its funds. As a discretionary trigger, the 

Department will be aware of a loan violation within 10 days 

of when the creditor notifies the institution, regardless 
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512 

of whether the creditor filed suit, and can assess 

contemporaneously the consequences of that violation. 

Changes: None. 

Section 668.171(d)(3), State Licensing or 

Authorization 

Comments: Some commenters argued that the current 

State licensing or authorization trigger under § 

668.171(g)(2) (2017) is too broad because it requires an 

institution to report any violation of State requirements 

and concluded that it could have the unintended consequence 

of requiring an institution to close precipitously. The 

commenters believed that the proposed trigger takes a more 

precise approach by requiring an institution to report only 

those violations that could lead to the institution losing 

its licensing or authorization. 

On the other hand, a few commenters believed it was 

critical for the Department to get information on all State 

actions and review those actions on a case-by-case basis to 

determine whether financial protection should be required. 

Other commenters suggested revising the trigger to 

state that “the institution is notified by a State 

licensing or authorization agency that its license or 
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513 

authorization to operate has been or is likely to be 

withdrawn or terminated for failing to meet one of the 

agency’s requirements.” The commenters note that State 

authorizing entities often include boilerplate language in 

notices of noncompliance that indicates that if the 

noncompliance is not remedied, authorization can be lost. 

The commenters believed that under proposed language, a 

notice that included a single instance of immaterial 

noncompliance would still have to be reported if the State 

included that boilerplate language. 

Other commenters asserted that the Department should 

define “state licensing or authorizing agency” to only 

refer to the primary State agency responsible for State 

authorization, not specialized State agencies, such as 

boards of nursing. 

Discussion: Under the 2016 final regulations, at 

668.171(g)(2), the Department requires institutions to 

report any citation by a State licensing or authorizing 

agency for failing State or agency requirements. As we 

stated in the 2018 NPRM, we believe that a more targeted 

approach is appropriate for these regulations to better 

identify State or agency actions that are likely to have an 

adverse financial impact on institutions and to reduce 
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514 

reporting burden on institutions and burden on the 

Department in reviewing citations. We see little benefit 

in requiring an institution to report, and for the 

Department to review, violations of State or agency 

requirements that have no bearing on the institution’s 

ability to operate and offer programs in the State. Doing 

so may provide some insight for program review risk 

assessments, but would not have a material adverse effect 

on an institution’s ability to operate. A notice from the 

State contemplating the termination of an institution’s 

authorization or licensure, which could result in the 

institution closing or discontinuing programs, satisfies 

that purpose without imposing unnecessary burdens on the 

institution or the Department. 

While we appreciate the commenters’ language 

suggestions, the Department must be able to react to any 

State licensing or authorizing agency actions that are 

required to be reported, regardless of whether those 

actions are qualified or prefaced by boilerplate language. 

If the Department allows an institution to determine that a 

termination notice from the State licensing or authorizing 

agency stems from immaterial noncompliance, as suggested by 

the commenter, there is a potential that significant 
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515 

actions might not be reported if they were misunderstood or 

mischaracterized by the institution as being immaterial. 

In cases where an institution believes that the State or 

agency action is not material, it may provide an 

explanation to that effect when it reports that action to 

the Department. 

With regard to the suggestion that the Department 

define the term “State licensing or authorizing agency” to 

be the only cognizant entity, we believe that narrowing the 

meaning of the term to exclude other State agencies, such 

as boards of nursing, would inappropriately weaken the 

effectiveness of trigger, particularly in cases where 

programs are licensed by those other agencies or boards. 

Changes: None. 
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516 

Reporting Requirements, 668.161(f) 

Comments: Many commenters appreciated that the 

Department proposed to allow institutions to provide an 

explanation or information pertaining to a triggering event 

at the time that event is reported and then again in 

response to a determination made by the Department. 

Some commenters suggested that an institution should 

be allowed 30 days, instead of 10 days, to report a 

triggering event. These commenters argued that various 

offices within an institution might be involved and have 

contemporaneous knowledge of a triggering event, but 

individuals dealing with an unrelated agency action, such 

as renegotiated debt, are unlikely to be cognizant of the 

Department’s reporting deadline. 
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517 

Discussion: The Department will not adopt the 

commenters’ proposal. First, we note that under the 

existing regulations, institutions also have a 10-day 

reporting window from the date of each of the triggering 

events, except for the 90/10 trigger (which is also the 

case in these regulations). As a result, we believe that 

institutions will have appropriate processes and procedures 

in place by the time these regulations are effective to 

allow for timely reporting. 

Second, there are a limited number of triggering 

events, not all of which apply to every institution, and 

institutions should delegate authority to one or more 

individuals to identify triggering events and ensure that 

reporting deadlines are met. The 10-day reporting deadline 

is needed to alert the Department timely of triggering 

events that may have serious consequences for institutions, 

students, and taxpayers, and for the Department to take 

timely action to mitigate the impact of those consequences. 

Third, if, as the commenter asserts, the individuals 

in various campus offices that are responsible for actions 

related to a triggering event would not be aware of the 

reporting deadline, the institution has an obligation to 
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518 

make sure that its staff understand triggering events and 

the reporting deadlines associated with those triggers. 

Changes: None. 

Section 668.172, Financial Ratios 

Procedural Concerns Regarding the Financial 

Responsibility Subcommittee. 

Comments: A commenter noted that the formation of the 

Financial Responsibility Subcommittee, which consisted of 

negotiators and individuals selected by the Department who 

were not negotiators, departed from typical practice where 

the negotiators initiate the formation of a subcommittee 

comprised of negotiators during the negotiations. The 

commenter contended that because subcommittee members were 

not seated on the full committee and the subcommittee 

meetings were not open to the public, there was not a 

fulsome discussion of the issues by the full committee. 

The commenter asserted that the Department seemed to 

have acknowledged that the closed-door sessions were 

inappropriate by announcing that the sessions for two 

future subcommittees would be livestreamed. In addition, 

the commenter was concerned that the Department seated an 

individual with pecuniary interests in financial 

responsibility as both a negotiator and a subcommittee 
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519 

member but did not acknowledge that the individual was from 

an institution that had an active issue with the Department 

on subcommittee matters. The commenter asserted that 

because the individual’s institution would receive 

favorable treatment under the proposed regulations, this 

apparent conflict of interest should have been avoided, or 

clearly identified prior to start of the rulemaking. In 

short, the commenter argued that the Department did not 

follow the appropriate procedures under the APA, and other 

requirements, in promulgating the proposed changes to the 

composite score, and that the Department should withdraw 

those changes. 

Discussion: Neither the APA nor the HEA stipulates 

the precise procedures the Department must use when 

conducting negotiated rulemaking, and the Department has 

the discretion to use different procedures to fit the 

contours of different negotiated rulemakings. Thus, the 

fact that the Department’s approach to establishing the 

subcommittee differed from past practice is not indicative 

of impropriety or insufficiency. 

In this case, the Department knew prior to 

commencement of negotiations that, in order to facilitate 

full public participation on applicable financial 
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520 

accounting and reporting standards promulgated by the 

Financial Accounting Standards Board, subcommittee members 

with specific expertise in these matters would be needed. 

For this reason, in the Federal Register notice of intent 

to establish negotiated rulemaking committees, we 

specifically sought the participation of individuals with 

certain knowledge. As in the past, following its meetings, 

the subcommittee presented its recommendations to the main 

negotiated rulemaking committee for a final vote. The 

evolution of the Department’s practices in subsequent 

negotiated rulemakings reflects its efforts to best provide 

for negotiation of the complex issues at hand, but does not 

reduce, or call into question, the legal sufficiency of 

past practices. 

Generally, every institution with a representative has 

an interest in the outcomes of regulations that govern 

their participation in the Federal student aid programs. 

For the representative that participated on the 

subcommittee, the institution met the financial 

responsibility requirements for prior years by providing a 

letter of credit while raising, along with other 

institutions, an objection as to the Department’s 

calculation of its composite score. There was no unresolved 
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521 

issue concerning this institution’s compliance with 

existing Department requirements related to the calculation 

of its composite score, and no conflict of interest with 

respect to the participation by that institution’s 

representative both on the committee and in the 

subcommittee. 

Changes: None. 

Section 668.91, Initial and Final Decisions

Comments: None. 

Discussion: As discussed in the 2018 NPRM, the 

Department’s proposed regulations would update the 

regulations to reflect the language in proposed 668.175 and 

generally represent technical changes to the 2016 final 

regulations to track the actions and events in proposed 

668.171. In addition, after further review, we have 

determined that an insurer would likely be unable or 

unwilling to provide a statement that an institution is 

covered for the full or partial amount of a liability 

arising from a triggering event in 668.171, as required 

under the 2016 Final Regulations and the 2018 NPRM. 

Therefore, we are revising 668.91(a)(3)(iii)(A) to provide 

that an institution may demonstrate that it has insurance 
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522 

that will cover the risk posed by the triggering event by 

presenting the Department with a copy of the insurance 

policy that makes clear the institution’s coverage. 

Finally, we clarify that an institution may demonstrate for 

a mandatory or discretionary triggering event that the 

amount of the letter of credit or other financial 

protection demanded by the Department is not warranted for 

a reason described in 668.91(a)(3)(iii)(A). 

Changes: We are revising 668.91(a)(3)(iii)(A) to 

clarify that it applies to mandatory and discretionary 

triggering events and provide than an institution may 

provide a copy of its insurance policy demonstrating that 

it has insurance to cover or partially cover the triggerassociated risk. 

Section 668.172(c) Excluded Items, Termination of the 

Perkins Loan Program 

Comments: Commenters noted that, as result of 

terminating the Perkins Loan Program, some institutions may 

elect to liquidate their portfolios and assign all loans to 

the Department for servicing. The commenters believed that 

a liquidation decision can result in a one-time loss that a 

non-profit institution will likely display separately or as 
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523 

a non-operating loss on its financial statements 

(“Statement of Activities”). 

Although the commenters asked the Department to 

clarify how it will treat Perkins Loan Program liquidation 

losses, they argued than an institution should not be 

penalized for the dissolution of the Perkins Loan Program 

and, thus, recommended that the Department consider nonoperating losses related to a Perkins liquidation to be 

infrequent and unusual in nature and, therefore, excluded 

from the calculation of the composite score. 

Discussion: The liquidation of the Perkins Loan 

portfolio would normally not result in a loss to an 

institution. Generally, a loss would only occur if the 

institution had to purchase loans that were not acceptable 

for assignment. The Department does not believe that the 

administration of title IV, HEA programs should be excluded 

from the composite score computation. The liquidation of 

the Perkins Loan portfolio would result in removal of the 

receivables by assignment to the Department. The cash 

would be returned to the Department or be released from 

restriction, which would not result in a loss, and only 

loans that are not acceptable for assignment would result 
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524 

in any loss to the institution, because it would be 

required to purchase the loans and those losses should be 

reflected in the composite score. 

Changes: None. 

Section 668.172(d), Leases 

Comments: Many commenters supported the proposal that 

the Department could calculate a composite score for an 

institution under the new requirements issued by the 

Financial Accounting Standards Board (FASB ASU 2016–02, ASC 

842 (Leases)), and at the institution’s request, a second 

composite score that excludes the lease liabilities and 

right to use assets that the institution is otherwise 

required to report under these new requirements. 

Although many commenters appreciated the Department’s 

recognition of the complexity and impact of the FASB 

changes, they encouraged the Department to guarantee that 

it would calculate the two composite scores for a minimum 

of six years, without regard to whether the methodology is 

updated through rulemaking, to provide stability and ensure 

that institutions have time to adjust operations. 

Other commenters urged the Department to simply 

calculate the two composite scores until the methodology is 

updated. 
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525 

Some commenters argued that since the Department did 

not propose any consequences for an institution that fails 

one of the two composite scores and offered no 

justification for permitting all operating leases to be 

excluded, even those entered into after the rule takes 

effect, the Department should eliminate, or at least 

shorten, the transition period and align the FASB 

implementation timeline to the effective date of the 

regulations. However, during any transition period the 

Department may offer, the commenters urged the Department 

to hold accountable any institution that fails either of 

the two composite scores. Specifically, any institution 

with a failing composite score under the new FASB 

requirements should be placed on heightened cash 

monitoring, be required to provide timely financial 

reporting, and/or be required to provide financial 

protection. 

Commenters also wrote that the Department should 

eliminate, or at least shorten, the transition period and 

align the FASB implementation timeline to the effective 

date of the regulations. However, during any transition 

period offered, the commenters urged the Department to hold 

any institution accountable that fails either of the two 
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526 

composite scores by placing the institution on heightened 

cash monitoring, requiring timely financial reporting, 

and/or compelling financial protection. 

Other commenters noted that the proposed transition 

for leases differed from the Subcommittee recommendation 

that the six-year transition applied only to operating 

leases in effect during the initial reporting period 

following the effective date of these regulations. The 

commenters stated that since 2010, all institutions should 

have known FASB was preparing to change the lease 

standards. 

Another commenter objected to the transition period 

for leases arguing that the Department had provided no data 

to support this approach or rationale for why a six-year 

period was appropriate. 

Discussion: In view of the comments regarding the 

length, or application, of the transition period, the use 

of two composite scores, and the need to align the FASB 

implementation timeline to these regulations, we conclude 

that it is reasonable for the Department to calculate one 

composite score for an institution by grandfathering in 

leases entered into prior to December 15, 2018 (pre-
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527 

implementation leases) and applying Accounting Standards 

Update (ASU) 2016-02, Accounting Standards Codification 

(ASC) 842 (Leases) to any leases entered into on or after 

that date (post implementation leases). 

The Department will grandfather in leases if the 

institution provides adequate information to the Department 

in the Supplemental Schedule and a note in, or on the face 

of, the audited financial statements on the leases it 

entered into prior to December 15, 2018 and will treat 

those leases as they have been treated prior to the 

requirements of ASU 2016-02. That is, the amount of any 

right of use asset and associated liability will be removed 

from the balance sheet or statement of financial position. 

Because the value of leases entered into prior to December 

15, 2018, can only decrease, any increase in the value of 

leases will be considered a new lease and ASU 2016-02 

requirements will apply to those leases. Any leases entered 

into on or after December 15, 2018, will be treated as 

required under ASU 2016-02. 

In establishing this approach, the Department 

considered three factors: that FASB changes an accounting 

standard when it recognizes that the standard is obsolete 

or no longer addresses the economic reality that it seeks 
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528 

to address; that an institution made business decisions 

prior to the requirements of ASU 2016-02; and that changes 

to the standards for leases could have a detrimental impact 

on an institution’s composite score even in cases where the 

underlying financial condition of the institution may not 

have changed. 

The Department believes that calculating the composite 

score by grandfathering in existing leases and applying the 

FASB standards to new leases strikes an appropriate balance 

between these factors. 

While the subcommittee specified a transition period 

during which the Department would allow leases in existence 

as of the effective date of the regulations to be treated 

the way leases were treated prior to the requirements of 

ASU 2016-02, doing so would mitigate but not eliminate the 

impact on all institutions for business decisions they made 

prior to the requirements of ASU 2016-02. In addition, the 

Department could not identify an empirical basis to support 

a six-year timeframe, as opposed to a different timeframe, 

and therefore could not include the six-year period in this 

final rule. 

Rather than a time-limited transition period, the 

Department believes it is reasonable to grandfather in 
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529 

existing leases by establishing in these regulations that 

leases entered into prior to December 15, 2018 are treated 

as they would have been treated prior to ASU 2016-02 until 

the balance of those leases is zero. Because an 

institution is required to value the right-of-use assets 

and associated liabilities based on whether it will 

exercise options and other lease clauses in existence as of 

the effective date of ASU 2016-02, any leases entered into 

prior to December 15, 2018, and treated as they would have 

been prior to ASU 2016-02 for the composite score, cannot 

increase and would only decrease over time to zero. 

The Department establishes December 15, 2018, as the 

effective date for new leases because that is the first 

effective date of ASU 2016-02 for public entities for 

fiscal years beginning after December 15, 2018. The 

Department recognizes that not all institutions will be 

required to implement ASU 2016-02 for fiscal years 

beginning after December 15, 2018, but in an effort to 

treat all institutions fairly, the Department will apply 

the first required implementation date to all institutions. 
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530 

Changes: We are revising 668.172(d) to provide that 

the Secretary accounts for operating leases by applying the 

new FASB standards to all leases the institution has 

entered into on or after December 15, 2018 (postimplementation leases), as specified in the Supplemental 

Schedule, and treating leases the institution entered into 

prior to December 15, 2018 (pre-implementation leases), as 

they would have been treated prior to the new FASB 

requirements. An institution must provide information 

about all leases on the Supplemental Schedule, and in a 

note, or on the face of its audited financial statements. 

In addition, any adjustments, such as any options exercised 

by the institution to extend the life of a preimplementation lease, are accounted for as postimplementation leases. 

Section 668.172, Appendix A and B 

Format 

Comments: Some commenters found the Appendices 

confusing and difficult to read, suggesting that a 

consistently formatted layout with proper labeling is 

needed to improve usability. In addition, the commenters 

noted that in Section 3 of Appendix B, the Department 
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531 

mistakenly labeled some of the components of the ratios and 

their corresponding line numbers and in Appendix B, Section 

1, and that the value of property, plant, and equipment 

(PP&E) is net of depreciation, not appreciation. 

A few commenters suggested that the formula for 

expendable net assets begin with “total net assets” instead 

of the proposed construction of “net assets without donor 

restrictions + net assets with donor restrictions” to 

alleviate the potential misinterpretation about the subgroupings of “net assets with donor restrictions.” 

Discussion: We appreciate the comments that 

identified errors in the Appendices, and we will correct 

those errors. With regard to using “Total net assets” as 

opposed to “Net assets with donor restrictions plus Net 

assets without donor restrictions” to arrive at Expendable 

net assets, the commenters did not explain how any 

misinterpretations could occur. Because Net assets with 

donor restrictions and Net assets without donor 

restrictions are taken directly from the face of the 

Statement of Financial Position, it is unclear to us how 

these numbers can be misinterpreted. 
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532 

Changes: Appendix A and B are revised to correct the 

labels and line numbers noted by the commenters, and to 

otherwise improve usability and clarity. 

Long-term Debt 

Comments: Some commenters disagreed with the proposal 

that if an institution wishes to include debt obtained for 

long-term purposes in total debt, the institution must 

disclose in its financial statements that the debt, 

including long-term lines of credit, exceeds twelve months 

and was used to fund capitalized assets. Under that 

proposal, the debt disclosure must include the issue date, 

term, nature of capitalized amounts, and amounts 

capitalized. Otherwise, the Department would exclude from 

debt obtained for long-term purposes the amount of any 

other debt, including long-term lines of credit used to 

fund operations, in calculating the numerator of the 

Primary Reserve Ratio. 

One commenter believed that a corresponding change 

needs to be made to Total Assets that would allow any cash 

balances, or assets related to the excluded borrowing, to 

also be excluded. The commenter argued that without this 

change, the composite score would be unbalanced and would 

unfairly penalize an institution that utilizes debt to 
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533 

finance capital improvements, ongoing operations, and 

growth opportunities. 

Discussion: The Department believes that a long-term 

debt disclosure is needed because it provides the 

information necessary to ensure that the primary reserve 

ratio is calculated accurately for all institutions and 

helps to identify and guard against those institutions that 

attempt to manipulate their composite scores. Long-term 

debt up to the value of Property, Plant and Equipment 

(PP&E) is treated favorably in the composite score 

calculation because that debt is intended to reflect 

investments by an institution in those items. 

The Department disagrees that any adjustment to total 

assets needs to be made, as total assets are not an element 

of the primary reserve ratio. The issue of debt obtained 

for long-term purposes is central only to the primary 

reserve ratio and for determining the appropriate amount of 

debt obtained for long-term purposes that is related and 

limited to PP&E under that ratio. The Department is 

establishing how to determine the correct amount of debt 

obtained for long-term purposes for calculating the primary 

reserve ratio. 

Changes: None. 
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534 

Comments: Some commenters stated that the proposed 

treatment of long-term debt in the 2018 NPRM was not 

discussed, or discussed thoroughly enough, by the 

Subcommittee or the main negotiating Committee and should 

be withdrawn. 

Other commenters noted that the discussions with the 

Subcommittee centered on closing a loophole on the use of 

long-term lines of credit that some institutions 

manipulated to increase their composite scores. To this 

end, the Subcommittee recommended that long-term lines of 

credit may be used to calculate adjusted equity or 

expendable net assets if the lines of credit are identified 

separately in the Supplemental Schedule with accompanying 

information specifying the issue date, term, nature of 

capitalized amounts, and amounts capitalized. 

The commenters argued that instead of adopting the 

Subcommittee’s recommendation, the Department’s proposal 

fundamentally changes the definition of all debt obtained 

for long-term purposes, effectively repealing the guidance 

provided in Dear Colleague Letter (DCL) GEN-03-08. 

 Some commenters suggested that the Department phase-in 

or create a transition period before requiring institutions 

to link long-term debt to the acquisition of PP&E. The 
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535 

commenters noted that some institutions have large 

investments in old and newly constructed buildings and hold 

long-term debt that directly or indirectly relates to brick 

and mortar. These commenters asserted that it can be 

challenging for institutions to show a direct relationship 

between issues of debt within all debt obtained for longterm purposes and capitalized asset acquisitions. The 

commenters identified a variety of factors that make this 

difficult, including institutional longevity, contributions 

that support PP&E payment and payout timing, variability in 

build, renovation, and maintenance schedules as well as 

debt consolidations, restructurings, and refinancing over 

decades. 

Discussion: The discussions in the subcommittee 

centered around the abuse of long-term lines of credit and 

manipulation of the composite score in general. Based on 

those discussions and in developing these regulations, the 

Department determined that long-term notes payable should 

not be treated differently from long-term lines of credit. 

Both can be used for the purpose of purchasing PP&E, 

including construction-in-progress (CIP), both can be used 

to fund investments or operations, and both can be used to 

manipulate the composite score if the purpose and use of 
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536 

the debt is not known. The Department’s goal, as discussed 

in the Subcommittee meetings, is to limit or eliminate 

instances where institutions report long-term debt to 

manipulate their composite scores, and to include long-term 

debt related to PP&E and construction in progress (CIP) to 

compute an accurate composite score. The Department sees 

no reason to have different requirements for different 

types of debt. We believe the best approach is for all 

debt to be treated the same, except for short-term debt 

obtained for CIP which can be considered debt obtained for 

long-term purposes up to the amount of the CIP. 

These regulations effectively repeal DCL GEN-03-08. 

Typically, no amount of PP&E would be included in a primary 

reserve ratio. However, at the time the financial 

responsibility regulations were originally developed, the 

community expressed concerns that institutions would be 

discouraged from investing in PP&E. To mitigate that 

concern, the Department provided in the regulations that 

long-term debt up to the amount of PP&E an institution 

reported would be added to the numerator of the primary 

reserve ratio, effectively crediting the institution for 

the long-term debt associated with a portion of the PP&E 
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537 

that had properly been subtracted from the numerator of the 

primary reserve ratio. 

Over time, there has been significant manipulation of 

the composite score in reliance on DCL GEN-03-08, where the 

reported long-term debt was not associated with investments 

into an institution’s PP&E and CIP. We believe that 

reverting back to the original intent of adding debt 

obtained for long-term purposes to the numerator of the 

primary reserve ratio is the proper approach because it 

results in a more accurate portrayal of an institution’s 

financial health. 

The Department agrees with the commenters that some 

type of phase-in or transition is appropriate to account 

for institutions that do not have the records to, or 

otherwise cannot, associate debt to PP&E acquired in the 

past under the guidance provided in DCL GEN-03-08. 

In these regulations, we revise the calculation of the 

primary reserve ratio with regard to the amount of longterm debt that is included in debt obtained for long-term 

purposes and used as an offset to PP&E, including CIP and 

right-of-use assets. Specifically, we will consider the 

PP&E that an institution had prior to the effective date of 

these regulations (pre-implementation) and the additional 
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538 

PP&E it has acquired after that date (post-implementation). 

For this discussion, qualified debt refers to any postimplementation debt obtained for long-term purposes that is 

directly associated with PP&E acquired with that debt. Any 

debt obtained for long-term purposes post-implementation 

must be qualified debt. 

Since institutions were not required under DCL GEN-03-

08 to associate debt obtained for long-term purposes with 

capitalized assets and may not have the accounting records 

pre-implementation to associate debt with specific PP&E, in 

determining the amount of pre-implementation PP&E that is 

included in the primary reserve ratio, the Department will 

use the lesser of (1) the PP&E minus 

depreciation/amortization or other reductions, or (2) the 

qualified debt obtained for long-term purposes minus any 

payments or other reductions, as the amount of debt 

obtained for long-term purposes. 

The basis for the pre-implementation PP&E and 

qualified debt will be the amounts reported in the 

institution’s most recently accepted financial statement 

submitted to the Department prior to the effective date of 

these regulations. An institution must adjust the amount 

of pre-implementation debt by any payments or other 
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539 

reductions and must also adjust the pre-implementation PP&E 

by any depreciation/amortization or other reductions in 

subsequent years. 

Post-implementation debt is the amount of debt that an 

institution used to obtain PP&E since the end of the fiscal 

year of its most recently accepted financial statement 

submission to the Department prior to the effective date of 

these regulations less any payments or other reductions. 

An institution must adjust post-implementation debt by any 

debt obtained and associated with PP&E in subsequent years 

by any payments or other reductions. Similarly, the 

institution must also adjust post-implementation PP&E by 

any PP&E obtained in subsequent years and any 

depreciation/amortization or other reductions in subsequent 

years. Any refinancing or renegotiated debt cannot 

increase the amount of debt associated with previously 

purchased PP&E. No pre- implementation debt required to be 

disclosed can increase. For each debt to be considered for 

the composite score, the individual debts must be disclosed 

as described below. 

The Department is revising the reporting on long-term 

debt to require that an institution must, in a note to its 

financial statements, clearly identify for each debt to be 
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540 

considered in the composite score for pre- and postimplementation long-term debt and PP&E net of depreciation 

or amortization and the amount of CIP and the related debt. 

An institution must also disclose in a note to its 

financial statements, for each pre- and post-implementation 

debt, the terms of its notes and lines of credit that 

include the beginning balance, actual payments and 

repayment schedules, ending balance, and any other changes 

in its debt including lines of credit. 

Changes: We are revising the definition of debt 

obtained for long-term purposes in Section 1 of Appendices 

A and B to reflect the amount of pre- and postimplementation long-term debt that can be included in the 

primary reserve ratio. The definition also provides that 

any amount of pre-and post-implementation debt obtained for 

long-term purposes that an institution wishes to be 

considered for the primary reserve ratio must be clearly 

presented or disclosed in the financial statements. We 

have also modified Section 3 of Appendices A and B to show 

how the definition of qualified debt obtained for long-term 

purposes will be presented or disclosed by institutions. 

Comments: Some commenters believed that access to a 

long-term line of credit reflects an institution’s ability 
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541 

to access credit in the open market and argued that the 

institution should not be penalized for having access to 

credit unless it needs to post collateral to gain access to 

this credit. In addition, the commenters believed that 

long-term debt should be specifically tied to PP&E 

acquisitions in order to be added back in the computation 

of adjusted equity. 

While long-term debt can be used specifically for PP&E 

acquisitions, the commenters noted that some institutions 

use cash to pay for PP&E acquisitions and decide later to 

obtain long-term debt in a future year using the assets 

purchased as collateral. The commenters asked whether this 

practice creates a disconnect if the assets are not 

acquired in the same year as the occurrence of the debt. 

In addition, if the long-term debt is secured by PP&E, the 

commenters questioned why it matters if the debt was 

specifically for the purchase of those assets. These 

commenters, and others, believed that the proposed changes 

relating to long-term debt should be removed and discussed 

as part of a broader negotiated rulemaking for the 

composite score. 

Another commenter stated that the primary reserve 

ratio is intended to measure liquidity and argued that the 
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542 

acquisition of long-term debt that is immediately 

accessible (like a line of credit) is conclusive evidence 

of liquidity up to the amount of line. Therefore, the 

commenter reasoned that it does not matter whether the 

institution uses the funds from that line of credit for 

property, plant and equipment or anything else. The 

commenter posited that an institution should not have to 

draw down on the line of credit to get the benefit afforded 

long-term debt in the primary reserve ratio. As support 

for this position, the commenter cited a study.157 

Discussion: The Department disagrees that an 

institution would be penalized for having access to credit. 

The question before the Department was the appropriate 

amount to use in the composite score calculation for debt 

obtained for long-term purposes. To the extent that the 

proceeds from a long-term line of credit were used to 

purchase PP&E and the amount used is still outstanding at 

the end of the institution’s fiscal year, that amount is 

157 Filippo Ippolito and Ander Perez, Credit Lines: The Other Side of 

Corporate Liquidity, Barcelona Graduate School of Economics, March 

2012, available at: 

https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/618.

pdf.
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543 

included in determining the amount of debt obtained for 

long-term purposes. Where PP&E is used as collateral for 

obtaining debt, that debt would not count as debt obtained 

for long-term purposes unless it is used to purchase other 

PP&E. 

With regard to using cash to purchase PP&E, for the 

purposes of debt obtained for long-term purposes used in 

the primary reserve ratio, there is no long-term debt 

associated with those assets. When an institution later 

uses the PP&E as collateral, there is still no long-term 

debt associated with the purchase of those assets. 

Additionally, none of the debt obtained would count toward 

the primary reserve ratio unless the proceeds from the 

borrowing were used to purchase PP&E. 

There is a difference in long-term debt being used to 

purchase PP&E and PP&E being used to secure long-term debt. 

For example, a long-term line of credit may be used to 

purchase furniture. There is no security interest by the 

creditor in the furniture, but the long-term line of credit 

was used to purchase PP&E and the amounts from the line of 

credit used to purchase the furniture that are still 

outstanding at the end of the institution’s fiscal year 

would be considered debt obtained for long-term purposes. 
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544 

Conversely, an institution secures a loan using a building 

as collateral for the loan and then uses the proceeds to 

pay salaries and taxes. In this case, there is no debt 

obtained for long-term purposes because the proceeds of the 

loan were not used for the purchase of PP&E, a long-term 

purpose. 

The Department does not agree that the issues 

surrounding long-term debt need to be part of a broader 

negotiated rulemaking for the composite score because the 

approach established in these regulations does not penalize 

institutions for decisions made prior to this regulation. 

We are grandfathering in existing long-term debt as 

reported under DCL GEN-03-08 and requiring only that new 

long-term debt must be associated with and used for PP&E. 

The study cited by the commenter specifically states, 

“Credit lines have a predetermined maturity. This implies 

that any drawn amount has to be repaid before the credit 

line matures, thus limiting the use of lines of credit for 

example for long term investments.” The authors also state 

that lines of credit “are normally issued with a stated 

purpose which restricts their possible uses.” The primary 

reserve ratio, as a measure of liquidity, would normally 

not include any PP&E and no amount of debt obtained for 
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545 

long-term purposes would normally be added back to the 

numerator in determining Adjusted Equity or Expendable Net 

Assets. The original recommendation from the KPMG study 

which formed the basis for the Department’s current 

financial responsibility regulations excluded net PP&E from 

the Primary Reserve Ratio and had no provision for adding 

back debt obtained for long-term purposes. Regarding net 

PP&E and the Primary Reserve Ratio the KPMG study provided 

the following: “The logic for excluding net investment in 

plant (net of accumulated depreciation) is twofold. First, 

plant assets are sunk costs to be used in future years by 

an institution to fulfill its mission. Plant assets will 

not normally be sold to produce cash since they will 

presumably be needed to support ongoing programs. In some 

instances, there is a lack of ready market to turn the 

assets into cash, even if they are not needed for 

operations. Second, excluding net plant assets is necessary 

to obtain a reasonable measure of liquid equity available 

to the institution on relatively short notice.” 

(Methodology for Regulatory Test of Financial 

Responsibility Using Financial Ratios - December 1997)

In response to comments from the community that 

this treatment would influence institutions not to 
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546 

invest in PP&E, the Department provided that to the 

extent debt obtained for long-term purposes was used 

for PP&E, the Department would add such amounts back 

to Adjusted Equity or Expendable Net Assets up to the 

total amount of PP&E to encourage institutions to 

reinvest in themselves. To the extent that a longterm line of credit is allowed to be used for, and is 

used, for the purchase of PP&E, although there are 

limits to the use of lines of credit for long-term 

investments, that amount will be added back to 

Adjusted Equity or Expendable Net Assets as provided 

for in the regulations. 

While a line of credit does provide resources for 

an institution to use to meet its needs prior to being 

drawn on, it is not reflected in the institution’s 

financial statements. When a line of credit is drawn 

on, it is reflected as a liability in the financial 

statements. At the point that a line of credit is 

drawn on, that amount becomes a drain on other liquid 

resources of the institution. The mere existence of a 

line of credit is not proof of liquidity. If the line 

of credit is exhausted, there is no liquidity 

associated with that line of credit. An option for 
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547 

the Department given the manipulation of the Composite 

Score through the use of debt obtained for long-term 

purposes would have been to return to the original 

KPMG methodology and the way Primary Reserve Ratios 

are normally calculated in the financial community by 

excluding Net PP&E from Adjusted Equity or Expendable 

Net Assets and not adding back any debt obtained for 

long-term purposes associated with the Net PP&E. The 

Department wants to encourage institutions to reinvest 

in themselves, but also wants to curb manipulation of 

the composite score. The Department believes that its 

approach to debt obtained for long-term purposes 

accomplishes both goals. 

Changes: None. 

Comments: A few commenters believed the Department 

should consider any long-term debt obtained by an 

institution for the primary reserve ratio. 

Discussion: The Department does not agree with the 

commenter’s proposal. As discussed more thoroughly in the 

preamble to the NPRM, the Department’s Office of Inspector 
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548 

General and the Government Accountability Office have both 

identified the use of long-term debt as one of the primary 

means of manipulating the composite score and these 

regulations are intended to reduce or eliminate that 

manipulation. 

Changes: None 

Appendix A and B, Related Parties 

Comments: For non-profit institutions, some 

commenters suggested that related party contributions 

receivables from board members should be included in 

secured related party receivables if there is no “business 

relationship” with board members. 

Discussion: The commenters are asking the Department 

to change the regulatory requirements for related party 

transactions under 34 CFR 668.23(d). The requirements 

under those regulations were not included in the notice 

announcing the formation of the Subcommittee and, thus, are 

beyond the scope of these regulations. 

Changes: None. 

Appendix A and B, Construction in Progress 
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549 

Comments: One commenter disagreed that CIP should be 

included as PP&E in the computation of adjusted equity 

unless the corresponding debt associated with the CIP is 

also included. The commenter argued that if the 

corresponding debt is not included, this could create a 

significant issue if the construction loan is deemed to be 

a short-term line of credit. While the construction loan 

is specifically for the building project, the commenter 

believed that a short-term line of credit would be excluded 

as debt in the primary reserve ratio since it is not 

considered to be long-term, and only when the construction 

loan is termed-out as permanent long-term financing upon 

the project’s completion would the debt be included in the 

primary reserve ratio. The commenter argued that this 

disconnect could cause a composite score issue for an 

institution that has a significant multi-year building 

project. In addition, the commenter stated the CIP is not 

placed in-service until the project is completed and, 

therefore, not usable by the institution. 

For these reasons, the commenter recommended that the 

composite score continue to exclude construction-inprogress assets until they are completed and placed in 

service as PP&E. 
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Discussion: To the extent that an institution is 

using short-term financing for CIP and clearly shows in the 

notes to the financial statements the amount of short-term 

financing that is directly related to CIP, it would be 

appropriate to include that amount as debt obtained for 

long-term purposes because the Department considers 

construction projects to serve a long-term purpose for the 

institution. The Department agrees that CIP has not been 

placed in service. However, CIP is not an expendable asset 

and most closely resembles PP&E; therefore, the Department 

is including it and its associated debt in the primary 

reserve ratio. 

Changes: We are revising the Appendices to reflect 

that short-term financing for CIP will be considered debt 

obtained for long-term purposes up to the value of CIP and 

only to the extent that the short-term financing is 

directly related to the CIP. 

Appendix A and B, Net Pension Liability 

Comments: One commenter noted that the primary 

reserve ratio treats the net pension liability as shortterm, which reduces the net assets available for short-term 

obligations. As a result, the commenter argues that her 
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551 

specific institution cannot achieve a composite score 

higher than a 1.4, which over time triggers the requirement 

that the institution provide a letter of credit to the 

Department. The commenter urged the Department to 

eliminate the net pension liability from the calculation of 

the primary reserve ratio and treat it instead as a longterm liability. 

Discussion: The commenter is mistaken - the 

Department has never made a distinction between short-term 

and long-term pension liabilities. 

Changes: None. 

Appendix A and B, Supplemental Schedule and Financial 

Statement Disclosures 

Comments: Some commenters believed that to satisfy 

the reporting requirements in these regulations and avoid 

conflicts with GAAP, any additional information the 

Department seeks about leases, long-term lines of credit, 

related-party receivables, split-interest gifts, or other 

items should be provided in the Supplemental Schedule 

rather than in the notes to the financial statements. The 

commenters argued that because the Supplemental Schedule 

identifies all the financial elements needed to calculate 

the composite score, and those elements are cross-
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552 

referenced to the financial statements and reviewed by the 

institution’s auditor in relation to the financial 

statements as a whole, there is no need to alter GAAP. 

Consequently, the commenters recommend that the Department 

remove the proposed additional disclosure requirements in 

the financial statements. 

Other commenters believed that including the 

Supplemental Schedule as part of an institution submission 

to the Department should eliminate any differences between 

the composite score calculated by the institution and the 

score calculated by the Department. To further minimize 

any differences, the commenters recommended that the 

Supplemental Schedule include the elements used to 

calculate the pre-ASU 2016-02 composite score so that the 

Department has both calculations at the time of the 

institution’s submission. 

Discussion: Under § 498(c)(5) of the HEA, the 

Department must use the audited financial statements of an 

institution to determine whether it is financially 

responsible. As the commenters note, the Supplemental 

Schedule is not part of the audited financial statements 

but any notes to the financial statements are part of the 
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553 

audited financial statements. Consequently, the Department 

cannot rely on the information contained in the 

Supplemental Schedule as the commenters suggest. 

In addition, we do not believe that the notes to the 

financial statements required under these regulations alter 

GAAP because the Department is not requiring that the 

information needed to calculate the composite score must be 

provided in the notes to the financial statements. Rather, 

it is up to an institution to determine the level of 

aggregation or disaggregation it uses in preparing its 

financial statements. Therefore, a note will need to be 

included only when the required information is not readily 

identifiable in any other part of the audited financial 

statements. 

We agree with the suggestion that the Department 

revise the Supplemental Schedule to include the elements 

needed to calculate the composite score for leases, but 

note that an institution is not required to include or 

report to the Department any composite score that it 

chooses to calculate based on the Supplemental Schedule. 

 
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554 

Changes: We are revising the Supplemental Schedules 

to identify the elements relating to leases that are needed 

to calculate the composite scores. 

Financial Protection — 668.175(h) 

Comments: Many commenters supported the Department’s 

efforts to expand the types of financial protection that an 

institution may provide. 

 One commenter argued that the Department did not 

comply with applicable law to support the provision in 

668.175(h)(1) that it would publish in the Federal Register

other acceptable forms of surety or financial protection. 

The commenter stated that this provision is nothing more 

than a proposal to make a future proposal on unspecified 

future action and, thus, should be withdrawn. 

Another commenter objected to this provision arguing 

that it allows the Department to concoct any new kind of 

financial protection with no standards or requirements in 

place to ensure that it serves its purpose of paying for 

liabilities and debts that would otherwise be incurred by 

taxpayers. The commenter concluded that because the 

Department failed to demonstrate that there is a specific 

need for this flexibility and provided no restrictions to 
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555 

ensure that alternatives would be on par with a letter of 

credit, this provision should be removed. 

Discussion: The Department disagrees with the 

contention that its proposal to publish in the Federal 

Register other acceptable forms of surety or financial 

protection does not comply with the law. Announcing our 

intent to accept such form of surety would not change the 

substance of these final regulations, as it would merely 

provide an additional method by which institutions could 

comply with the rule. In addition, the Department would 

not concoct a form of financial protection that offers no 

financial protection. As discussed in the NPRM (83 FR 

37263) and the 2016 final regulations (81 FR 76008), we 

understand that obtaining irrevocable letters of credit can 

be costly, but are not aware of other surety instruments 

that that would provide the Department with same the level 

of financial protection or ready access to funds. However, 

if surety instruments become available that are more 

affordable to institutions but offer the same benefits to 

the Department, we wish to retain the flexibility to 

consider accepting those instruments in the future. 
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Changes: None. 

Comments: None. 

Discussion: In the 2016 final regulations, we revised 

668.175 to provide that an institution that fails to meet 

the financial responsibility standards as a result of the 

new triggering events in 668.171(c)-(g), as opposed to just 

as a result of 668.171(b), may begin or continue to 

participate in the title IV, HEA programs through the 

alternate standards set forth in 668.175. The 2016 final 

regulations also established under 668.175(h)(2017) that if 

the institution did not provide a letter of credit within 

45 days of the Secretary’s request, the Department would 

offset the amount of the title IV, HEA program funds the 

institution is eligible to receive in a manner that ensured 

that, over a nine-month period, the total amount of offset 

would equal the amount of financial protection the 

institution was requested to provide. For the regulations 

proposed in the 2018 NPRM, and in these final regulations, 

we adopt the same concept, but with technical changes to 

track the new triggers in 668.171(c) and (d). We also 

amend 668.175(h) to incorporate the possibility of 
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557 

additional types of financial protection in the future, to 

be identified in a Federal Register notice, allow for cash 

as an alternative form of financial protection, and modify 

the nine-month set-off period to be six to twelve months. 

As we explained in the preamble of the 2018 NPRM, these 

changes were made to provide the Department with 

flexibility to assess what time period might be appropriate 

as an off-set period and to accommodate the possibility of 

future financial instruments or surety products that may 

satisfy the Department’s requests for financial protection. 

In addition, we codify current practice in these 

regulations that the Department may use a letter of credit 

or other financial protection provided by an institution to 

cover costs other than title IV, HEA program liabilities. 

Under current practice, we notify an institution that the 

Department may use the letter of credit or other protection 

to pay, or cover costs, for refunds of institutional or 

non-institutional charges, teach-outs, or fines, penalties, 

or liabilities arising from the institution’s participation 

in the title IV, HEA programs. 

Changes: We are revising 668.175(h) to provide that 

under procedures established by the Secretary or as part of 
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558 

an agreement with an institution, the Secretary may use the 

funds from a letter of credit or other financial protection 

to satisfy the debts, liabilities, or reimbursable costs 

owed to the Secretary that are not otherwise paid directly 

by the institution including costs associated with teachouts as allowed by the Department. 

Section 668.41(h) and (i), Loan Repayment Rate and 

Financial Protection Disclosures 

Comments: Some commenters believed that establishing 

early warning triggering events that require an institution 

to provide disclosures to students and financial protection 

to the Department, as promulgated in the 2016 final 

regulations, would offer critical information to students 

and help protect taxpayers from financial risk. 

Some of these commenters argued that removing 

disclosures to students runs counter to the Department’s 

stated goal of enabling students to make informed decisions 

on the front-end of college enrollment. For these reasons, 

the commenters urged the Department to maintain the 

disclosure requirements in the 2016 final regulations. 

Similarly, other commenters believed that providing 

disclosures to students about institutions that are 
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559 

required to submit letters of credit to the Department, or 

after consumer testing, disclosures relating to triggering 

events, is important for alerting current and prospective 

students as well as the general public about potential 

financial problems at those institutions. 

Some of these commenters stated that rather than 

presuming that prospective students would not understand 

letters of credit or the triggering events, as discussed in 

the preamble to the 2018 NPRM, the Department should leave 

those presumptions aside and require the disclosures. 

Other commenters likened the situation where a student does 

not understand the calculation of the debt to earnings rate 

but benefits nonetheless from the information that it 

provides about a program’s quality to the letter of credit 

disclosure providing greater knowledge about the financial 

condition of the institution. 

With regard to the disclosure associated with the loan 

repayment rate for proprietary institutions, some 

commenters agreed with the Department’s proposal to rescind 

that disclosure, but other commenters cited research or 

analysis that they alleged supported maintaining the 

disclosure. Some of these commenters contend that a recent 

research paper found that almost 50 percent of the 
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560 

borrowers who attend proprietary institutions default on 

their loans within five years of entering repayment and 

that another paper shows that the relatively poor outcomes 

of students at for-profit institutions remain even after 

controlling for differences in family income, age, race, 

academic preparation, and other factors. Other commenters 

cited research showing that, among for-profit institutions, 

there were almost no schools with repayment rates above 20 

percent. In addition, some commenters noted that in the 

preamble to the NPRM, the Department argued that repayment 

rates reflect financial circumstances and not educational 

quality, but did not cite any research, analysis, or data 

to support that claim. These commenters believed that 

repayment rates are a critical measure for safeguarding 

$130 billion in Federal aid and supported that belief by 

citing various reports raising concerns over rising default 

and delinquency rates and linking repayment outcomes to 

other metrics of educational outcomes. Other commenters 

argued that the focus on proprietary institutions is 

justified and cited research from the Brookings 

Institution, showing that among non-degree certificate 

students, those in for-profit programs earned less per year 

than their counterparts at public institutions despite 
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561 

taking out more in loans. Another commenter voiced similar 

concerns for proprietary institutions in New York, noting 

particularly that only seven percent of students enroll at 

those institutions but account for one in four New Yorkers 

who default on their loans within three years of entering 

repayment. 

Discussion: We note that the loan repayment rate 

warning and financial protection disclosures were discussed 

during the Gainful Employment (GE) negotiated rulemaking 

and associated NPRM along with GE-related disclosures. 

However, we are including these disclosures in these final 

regulations because they were part of the 2016 final 

regulations we are proposing to revise. 

In the 2016 final regulations, we explained that we 

were requiring repayment rate disclosures that relied upon 

a repayment rate calculation based on the data provided to 

the Department by institutions through the GE regulations 

and on the repayment calculation in those regulations. 

However, on July 1, 2019, the Department published a final 

rule that rescinds those requirements.158 As a result, 

158 81 FR 31392.
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562 

providing the same repayment rate disclosure as required in 

the 2016 final regulations is no longer feasible and we do 

not maintain this disclosure in these final regulations. 

As a general matter, we consider repayment rates to be 

an important factor students and their families may 

consider when choosing an institution and the Department 

intends to continue to make comparable information about 

repayment rates, as well as other information, for all 

institutions publicly available on the Department’s College 

Scorecard website.159 This information is a useful resource 

because it includes repayment rate information, not only 

for proprietary institutions, but also for nonprofit and 

public institutions of higher education. 

We believe that any benefit that a student may derive 

from knowing the loan repayment rate for a proprietary 

institution is negated by not knowing the comparable loan 

repayment rate at a non-profit or public institution, 

because the student may rely on the limited repayment rate 

information available and end up enrolling at an 

159 See: https://collegescorecard.ed.gov/.
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563 

institution whose repayment rate is the same or even worse 

than the proprietary institution. 

With respect to the financial protection disclosures, 

we acknowledge that some prospective students may find this 

information helpful, but on balance, we believe that the 

disclosures, if viewed without proper context, could 

tarnish the reputation of an institution that otherwise 

satisfies title IV provisions, and thus jeopardize or 

diminish the credential, or employment or career 

opportunities, of enrolled students and prior graduates. 

Changes: None. 

GUARANTY AGENCY (GA) COLLECTION FEES (Sections 

682.202(b)(1), 682.405 (b)(4)(ii), 682.410(b)(2) and (4) 

Comments: Some commenters supported the proposed 

changes in §§ 682.202(b)(1), 682.405(b)(4)(ii), and 

682.410(b)(4), providing that a guaranty agency may not 

capitalize unpaid interest after a defaulted FFEL Loan has 

been rehabilitated, and that a lender may not capitalize 

unpaid interest when purchasing a rehabilitated FFEL Loan. 
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One commenter proposed that the Department retain in § 

682.402(e)(6)(iii) a provision of the 2016 final 

regulations that deleted a reference to a guaranty agency 

capitalizing interest. 

One commenter strongly opposed the changes to 

§ 682.410(b)(2), asserting that section 484F of the HEA 

explicitly permits a guarantor to charge a borrower who 

enters into a rehabilitation agreement reasonable 

collection costs up to 16 percent. The commenter further 

asserted that section 484A(b) of the HEA provides that a 

defaulted borrower must pay reasonable collection costs and 

that there are no exceptions under which the borrower is 

not required to pay such costs. The commenter argued that 

the regulatory change raises equal protection concerns 

because it ties the Rehabilitation Fee to a 60-day interval 

that does not have any discernable or rational relationship 

to borrowers, guarantors, default, or anything else related 

to loan rehabilitation. 

The commenter further asserted that the regulation 

creates due process concerns because it calls for the 

elimination of a statutorily-conferred right to payment 

that is often guarantors’ only real compensation for 

fulfilling their fiduciary obligation to the Department and 
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565 

helping borrowers rehabilitate defaulted loans. The 

commenter expressed concern that the regulatory change 

could create perverse incentives and harm borrowers, the 

federal government, and taxpayers by inhibiting creative 

outreach tactics that have proven successful bringing 

defaulted borrowers back into repayment. This commenter 

also drew a distinction between a defaulted borrower 

entering into an “acceptable repayment plan” and a 

defaulted borrower entering into a Rehabilitation 

Agreement. This commenter noted that it is a common 

practice for guarantors to dispense with per-payment 

collection fees when borrowers enter an acceptable 

repayment plan within 60 days of receiving a default 

notice, even though they are required to do so. They 

reiterate that loan rehabilitation is a unique process that 

is defined and mandated by the HEA and controlled by 

detailed regulations. 

Discussion: We thank the commenters who are supportive 

of the proposed revisions of the guaranty agency collection 

fee regulatory provisions. We will retain the 2016 final 

regulations, which are currently effective, with respect to 

§§ 682.202(b)(1), 682.405, and 682.410(b)(4) because the 
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2016 final regulations effectively accomplish the same 

policy objective as the proposed amendatory language in the 

2018 NPRM. 

We agree with the comment about 34 CFR 

682.402(e)(6)(iii) and retain the change made in the 2016 

final regulations to remove the sentence regarding 

capitalization of interest. 

We disagree with the commenter who raised legal 

objections to the Department’s proposed regulation. The 

changes in § 682.410(b)(2) are consistent with the 

regulatory interpretation and position that the Department 

outlined in Dear Colleague Letter (DCL) GEN-15-14 (July 10, 

2015). We withdrew that DCL to allow for public comment on 

a regulatory change rather than rely solely on our 

interpretation of existing regulations. 

The Department has considered the commenter’s 

objections but believes that the proposed change is 

consistent with the HEA and the existing regulations. We 

note that the United States Court of Appeals for the 

Seventh Circuit accepted the Department’s statutory and 
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567 

regulatory interpretation in Bible v. United Student Aid 

Funds, Inc.160 

Section 484A(a) of the HEA provides that defaulted 

borrowers “shall be required to pay, in addition to other 

charges specified in this subchapter . . . reasonable 

collection costs.” Section 428F(a) of the HEA requires the 

guarantor to offer the borrower an opportunity to have a 

defaulted loan “rehabilitated,” and the default status 

cured, by making nine timely payments over 10 consecutive 

months, after which the loan may be sold to a FFEL Program 

lender or assigned to the Department, and the record of 

default as reported by the guarantor is removed from the 

borrower’s credit history. Under the HEA and the 

Department’s regulations, the installment amounts payable 

under a rehabilitation agreement must be “reasonable and 

affordable based on the borrower’s total financial 

circumstances.” 

The regulations direct the guarantor to charge the 

borrower “reasonable” collection costs incurred to collect 

the loan.161 Generally, the charges cannot exceed the 

160 799 F.3d. 633(7th Cir. 2015). 161 34 CFR 682.410(b)(2).
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568 

lesser of the amount the borrower would be charged as 

calculated under 30.60 or the amount the Department would 

charge if the Department held the loan. Before the 

guarantor reports the default to a credit bureau or 

assesses collection costs against a borrower, the guarantor 

must provide the borrower written notice that explains the 

nature of the debt, and the borrower’s right to request an 

independent administrative review of the enforceability or 

past-due status of the loan and to enter into a repayment 

agreement for the debt on terms satisfactory to the 

guarantor.162 

Thus, the regulations direct the guaranty agency to 

charge the borrower collection costs, but only after the 

guaranty agency provides the borrower the opportunity to 

dispute the debt, to review the objection, and to agree to 

repay the debt on terms satisfactory to the guarantor. If 

the borrower agrees within that initial period to repay the 

debt under terms satisfactory to the guarantor and 

consistent with the requirements, the borrower cannot be 

162 34 CFR 682.410(b)(5)(ii).
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charged collection costs at any time thereafter unless the 

borrower later fails to honor that agreement. 

We also disagree with the commenter’s suggestion that 

the imposition of collection costs is intended to 

compensate the guaranty agencies and provide them an 

incentive to offer loan rehabilitation. A guaranty agency 

is permitted to charge the borrower for the reasonable 

collection costs it incurs in collecting on loans. It is 

not reasonable for the guaranty agency to charge collection 

costs for collection activities it does not need to take 

because the borrower entered into and met the requirements 

of a loan rehabilitation agreement. Collection costs are 

not intended to be a funding source for guaranty agencies 

or an incentive for them to offer a statutorily required 

opportunity to borrowers. 

Changes: The Department retains the 2016 regulations, 

which are currently effective, with respect to 

682.202(b)(1), 682.405, and 682.410(b)(4) because the 2016 

final regulations effectively accomplish the same policy 

objective as the proposed amendatory language in the 2018 

NPRM. The Department will proceed to revise 682.410(b)(2) 

as proposed in the 2018 NPRM. 
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570 

The Department also retains the change made in 

682.402(e)(6)(iii) as a result of the 2016 final 

regulations. 

Comments: A group of commenters stated that the 

preamble to the 2018 NPRM specified that collection costs 

are not assessed if the borrower enters into a repayment 

agreement with the guaranty agency within 60 days from 

“receipt” of the initial notice, while the regulatory 

language was less specific about when the 60-day time 

period would commence. These commenters requested a change 

to the regulatory language to make clear that the 60-day 

period begins when the guaranty agency “sends” the initial 

notice described in paragraph (b)(6)(ii), since this is the 

only date that can be determined by the guaranty agency. 

Discussion: We agree with the commenters who noted 

that that it is appropriate that the 60-day period be 

determined from the date the guaranty agency sends the 

notice to the borrower, because the guaranty agency cannot 

reasonably establish when a borrower receives the notice. 
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Changes: We have modified 682.410(b)(2)(i) by 

replacing the word “following” with “after the guaranty 

agency sends”. 

SUBSIDIZED USAGE PERIOD AND INTEREST ACCRUAL (Section 

685.200) 

Comments: A group of commenters wrote in support of 

the regulations that provide a recalculation of the 

subsidized usage period and restoration of subsidies when 

any discharge occurs. They noted that this action assures 

that harmed borrowers are made more completely whole. 

Discussion: We thank the commenters for their support 

of the proposed revisions to the regulations governing 

subsidized usage periods and interest accrual. The 

Department is not rescinding the revisions that the 2016 

final regulations made to § 685.200, which concerns the 

subsidized usage period and interest accrual. 

Additionally, the borrower defense to repayment provisions 

in these final regulations expressly state that further 

relief may include eliminating or recalculating the 

subsidized usage period that is associated with the loan or 

loans discharged, pursuant to 685.200(f)(4)(iii). 
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Changes: The changes proposed to 685.200 in the 2018 

NPRM were effectuated by the 2016 final regulations, so no 

additional changes are necessary at this point. The 

Department revised 685.206(e)(12)(ii)(B) , which describes 

the relief that a borrower may receive, to expressly 

reference 685.200(f)(4)(iii), which addresses the 

subsidized usage period. 

Regulatory Impact Analysis (RIA) 

Under Executive Order 12866, the Office of Management 

and Budget (OMB) determines whether this regulatory action 

is “significant” and, therefore, subject to the 

requirements of the Executive Order and subject to review 

by the Office of Management and Budget (OMB). Section 3(f) 

of Executive Order 12866 defines a “significant regulatory 

action” as an action likely to result in a rule that may-- 

(1) Have an annual effect on the economy of $100 

million or more, or adversely affect a sector of the 

economy, productivity, competition, jobs, the environment, 

public health or safety, or State, local, or tribal 
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573 

governments or communities in a material way (also referred 

to as an “economically significant” rule); 

(2) Create serious inconsistency or otherwise 

interfere with an action taken or planned by another 

agency; 

(3) Materially alter the budgetary impacts of 

entitlement grants, user fees, or loan programs or the 

rights and obligations of recipients thereof; or 

(4) Raise novel legal or policy issues arising out of 

legal mandates, the President's priorities, or the 

principles stated in the Executive order. 

This final regulatory action will have an annual 

effect on the economy of more than $100 million because 

changes to borrower defense to repayment and closed school 

discharge provisions impact transfers among borrowers, 

institutions, and the Federal Government and changes to 

paperwork requirements increase costs. Therefore, this 

final action is “economically significant” and subject to 

review by OMB under section 3(f)(1) of Executive Order 

12866. Notwithstanding this determination, we have 

assessed the potential costs and benefits of this final 

regulatory action and have determined that the benefits 

justify the costs. 
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574 

Under Executive Order 13771, for each new regulation 

that the Department proposes for notice and comment or 

otherwise promulgates that is a significant regulatory 

action under Executive Order 12866 and that imposes total 

costs greater than zero, it must identify two deregulatory 

actions. For FY 2019, no regulations exceeding the 

agency's total incremental cost allowance will be 

permitted, unless required by law or approved in writing by 

the Director of OMB. Much of the effect of these final 

regulations involves reducing transfers between the Federal 

Government and affected borrowers, but, as described in the 

Paperwork Reduction Act section, we expect annualized 

burden reductions of approximately $4.7 million when 

discounted to 2016 dollars as required by Executive Order 

13771. . These final regulations are a deregulatory 

action under Executive Order 13771 and therefore the twofor-one requirements of Executive Order 13771 do not apply. 

We have also reviewed these regulations under 

Executive Order 13563, which supplements and explicitly 

reaffirms the principles, structures, and definitions 

governing regulatory review established in Executive Order 

12866. To the extent permitted by law, Executive Order 

13563 requires that an agency-- 
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575 

(1) Propose or adopt regulations only on a reasoned 

determination that their benefits justify their costs 

(recognizing that some benefits and costs are difficult to 

quantify); 

(2) Tailor its regulations to impose the least burden 

on society, consistent with obtaining regulatory objectives 

and taking into account--among other things and to the 

extent practicable--the costs of cumulative regulations; 

(3) In choosing among alternative regulatory 

approaches, select those approaches that maximize net 

benefits (including potential economic, environmental, 

public health and safety, and other advantages; 

distributive impacts; and equity); 

(4) To the extent feasible, specify performance 

objectives, rather than the behavior or manner of 

compliance a regulated entity must adopt; and 

(5) Identify and assess available alternatives to 

direct regulation, including economic incentives--such as 

user fees or marketable permits--to encourage the desired 

behavior, or provide information that enables the public to 

make choices. 

Executive Order 13563 also requires an agency “to use 

the best available techniques to quantify anticipated 
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576 

present and future benefits and costs as accurately as 

possible.” The Office of Information and Regulatory 

Affairs of OMB has emphasized that these techniques may 

include “identifying changing future compliance costs that 

might result from technological innovation or anticipated 

behavioral changes.” 

We are issuing these final regulations only on a 

reasoned determination that their benefits justify their 

costs. 

Consistent with these Executive Orders, we assessed 

all costs and benefits of available regulatory 

alternatives, including the alternative of not regulating. 

Our reasoned bases for rulemaking include the nonquantified benefits of our chosen regulatory approach and 

the negative effects of not regulating in this manner. The 

information in this RIA measures the effect of these policy 

decisions on stakeholders and the Federal government as 

required by and in accordance with Executive Orders 12866 
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577 

and 13563.163 Based on the analysis that follows, the 

Department believes that these final regulations are 

consistent with the principles in Executive Orders 12866 

and 13563. 

We also have determined that this regulatory action 

does not unduly interfere with State, local, and tribal 

governments in the exercise of their governmental 

functions. State, local, and tribal governments will be 

able to continue to take actions to protect borrowers at 

institutions of higher education, and these final 

regulations do not interfere with other government’s 

actions. As explained in the preamble, actions taken by 

State Attorneys General may provide evidence for borrowers 

to use in making claims, but nothing in the regulations 

163 Although the Department may designate certain classes of 

scientific, financial, and statistical information as influential under 

its Guidelines, the Department does not designate the information in 

this Regulatory Impact Analysis as influential and provides this 

information to comply with Executive Orders 12866 and 13563. U.S. 

Dep’t of Educ., Information Quality Guidelines (Oct. 17, 2005), 

available at https://www2.ed.gov/policy/gen/guid/iq/iqg.html.
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requires or limits such investigations or other state 

government action. 

As required by OMB circular A-4, we compare the final 

regulations to the current regulations, which are the 2016 

final regulations. In this regulatory impact analysis, we 

discuss the need for regulatory action, the potential costs 

and benefits, net budget impacts, assumptions, limitations, 

and data sources, as well as the regulatory alternatives we 

considered. 

As further detailed in the Net Budget Impacts section, 

this final regulatory action is expected to have an annual 

effect on the economy of approximately $550 million in 

transfers among borrowers, institutions, and the Federal 

Government related to defense to repayment and closed 

school discharges, as well as $1.15 million in costs to 

comply with paperwork requirements. This economic estimate 

was produced by comparing the proposed regulation to the 

current regulation under the President’s Budget 2020 

baseline (PB2020) budget estimates. The required 

Accounting Statement is included in the Net Budget Impacts 

section. 

Elsewhere, under the Paperwork Reduction Act of 1995, 

we identify and explain burdens specifically associated 
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with the information collection requirements included in 

this regulation. 

Pursuant to the Congressional Review Act (5 U.S.C. 801 

et seq.), the Office of Information and Regulatory Affairs 

designated this rule as a “major rule”, as defined by 5 

U.S.C. 804(2). 

1. Need for Regulatory Action 

These final regulations address a significant increase 

in burden resulting from the vast increase in borrower 

defense claims since 2015. These final regulations reduce 

this burden in a number of ways, as discussed further in 

the Costs, Benefits, and Transfers section of this RIA. 

Although the borrower defense to repayment regulations 

have provided an option for borrower relief since 1995, in 

2015, the number of borrower defense to repayment claims 

increased dramatically when certain institutions filed for 

bankruptcy. Students enrolled at those campuses and those 

who had left the institution within 120 days of its closure 

were eligible for a closed school loan discharge. The 

Department decided to also provide student loan discharge 

to additional borrowers who did not qualify for a closed 

school loan discharge, but could qualify under the defense 

to repayment regulation (34 CFR 685.206(c)). The 
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Department encouraged impacted borrowers to submit defense 

to repayment claims, which it agreed to consider for all 

institutional-related loans. This resulted in a 

significant increase in claim volume compared to the prior 

years: 7,152 claims received by September 30, 2015; 82,612 

claims received by September 30, 2016, 165,880 applications 

received by June 30, 2018; 200,630 applications received by 

September 30, 2018; 218,366 applications by December 31, 

2018; 239,937 by March 31, 2019 

. This growth significantly expanded the potential 

cost to the Federal budget. 

In addition, provisions in the 2016 final regulations 

enable the Secretary to initiate defense to repayment 

claims on behalf of entire classes of borrowers. 

Initiating the group discharge process is extremely 

burdensome on the Department and results in inefficiency 

and delays for individual borrowers. It also has the 

potential of providing loan forgiveness to borrowers who 

were not subject to a misrepresentation, did not make a 

decision based on the misrepresentation, or did not suffer 

financial harm as a result of their decision. The 2016 

final regulations impose onerous administrative burdens on 

the Department. Indeed, the Department must: identify the 
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members of the group; determine that there are common facts 

and claims that apply to borrowers; designate a Department 

official to present the group’s claim in a fact-finding 

process; provide each member of the group with notice that 

allows the borrower to opt out of the proceeding; if the 

school is still open, notify the school of the basis of the 

group’s borrower defense, the initiation of the factfinding process, and of any procedure by which the school 

may request records and respond; and bear the burden of 

proving that the claim is valid.164 This process is 

cumbersome and does not provide an efficient approach. 

The group discharge process, which we are not 

including in these final regulations for loans first 

disbursed on or after July 1, 2020, may otherwise create 

large and unnecessary liabilities for taxpayer funds. To 

make a determination as to a borrower defense to repayment 

claim under these final regulations, it is necessary to 

164 34 CFR 685.222(g)-(h); U.S. Dep’t of Educ., Student Assistance 

General Provisions, Final Regulations, 81 FR 75,926, 75,955 (Nov. 1, 

2016).
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have a completed application from each individual borrower, 

to consider information from both the borrower and the 

institution, and to examine the facts and circumstances of 

each borrower’s individual situation. Presuming borrowers’ 

reliance on a school’s misrepresentation would not properly 

balance the Department’s responsibilities to protect 

students as well as taxpayer dollars. Schools are still 

subject to the consequences of their misrepresentations 

under this standard and, if necessary, the Secretary 

retains the discretion to establish facts regarding 

misrepresentation claims put forward by a group of 

borrowers. 

These final regulations also eliminate the pre-dispute 

arbitration and class action waiver ban in the 2016 final 

regulations, reflecting the Department’s position that 

arbitration can be a beneficial process for students and 

recent court decisions holding that such bans violate the 

Federal Arbitration Act (FAA).165 Instead, the final 

regulations favor disclosure and transparency by requiring 

schools relying upon mandatory pre-dispute arbitration 

165 Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018).
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583 

agreements to provide plain language about the meaning of 

the restriction and the process for accessing arbitration. 

With the clear disclosures on institutions’ admissions 

information webpage, in the admissions section of the 

institution’s catalogue, and discussion in entrance 

counseling, the Department believes students can make 

informed decisions about enrolling at institutions that 

require such pre-dispute mandatory arbitration agreements 

versus those that do not. The final regulations also 

eliminate requirements for institutions to submit 

arbitration documentation to the Department. 

The increased number of school closures in recent 

years has prompted the Department to review regulations 

related to closed schools and make changes to them. Under 

the 2016 final regulations, students who are enrolled at 

institutions that close, as well as those who left the 

institution no more than 120 days prior to the closure, are 

entitled to a closed school loan discharge, provided that 

the student does not transfer credits from the closed 

school and complete the program at another institution. To 

allow more borrowers to make better informed decisions 

regarding whether to continue attending the school while 

also allowing them to benefit from the intended purpose of 
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584 

the regulations without the need for a determination as to 

whether exceptional circumstances exist, the Department 

extends the closed school discharge window for Direct Loan 

borrowers from 120 days to 180 days prior to the school’s 

closure. In these final regulations, a borrower would 

qualify for a closed school discharge as long as the 

borrower did not transfer to complete their program, or 

accept the opportunity to complete his or her program 

through an orderly teach-out at the closing school or 

through a partnership with another school. Borrowers who 

choose the option of participating in a teach-out would not 

qualify for a closed school discharge, unless the closing 

institution or other institution conducting the teach-out 

failed to meet the material terms of the closing 

institution’s teach-out plan, such that the borrower was 

unable to complete the program of study in which the 

borrower was enrolled. This mirrors the existing 

regulations that disallow students who transferred credits 

from the closed school to another school, or who finished 

the program elsewhere, to qualify for the closed school 

loan discharge. 

These regulations also revise the current regulations 

providing for automatic closed school loan discharge for 
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585 

eligible Direct Loan borrowers who do not re-enroll in 

another title IV-eligible institution within three years of 

their school’s closure to apply to schools that closed on 

or after November 1, 2013 and before July 1, 2020. This is 

in line with the Department’s preference for opt-in 

requirements rather than opt-out requirements, such as in 

the case of Trial Enrollment Periods. 

(https://ifap.ed.gov/dpcletters/GEN1112.html). 

The automatic closed school discharge provision also 

increases the cost to the taxpayer, including for borrowers 

who are not seeking relief, because default provisions 

typically capture a much larger population than opt-in 

provisions. For this and the other reasons articulated in 

the preamble, the final regulations require borrowers to 

submit an application to receive a closed school loan 

discharge. 

The final regulations also update the Department’s 

regulations regarding false certification loan discharges. 

Under these final regulations, if a student does not obtain 

or provide the school with an official high school 

transcript, but attests in writing under penalty of perjury 

that he or she has completed a high school degree, the 

borrower may receive title IV financial aid, but will not 
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586 

then be eligible for a false certification discharge if the 

borrower had misstated the truth in signing the 

attestation. 

These final regulations also address several 

provisions related to determining the financial 

responsibility of institutions and requiring letter of 

credit or other financial protection in the event that the 

school’s financial health is threatened. The Financial 

Accounting Standards Board (FASB) recently issued updated 

accounting standards that change the way that leases are 

reported in financial statements and thus considered by the 

Department in determining whether an institution is 

financially responsible. To align with these new standards 

and current practice, these regulations update the 

definition of terms used in 34 CFR part 668, subpart L, 

appendices A and B, which are used to calculate an 

institution’s composite score. The Department intends to 

recalibrate the composite score methodology to better align 

it with FASB standards in a future rulemaking, but in the 

meantime, these regulations mitigate the impact of changes 

in the accounting standards and accounting practice by 

updating the definition of terms and not penalizing 
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587 

institutions for business decisions they made regarding 

leases or long-term debt. 

In addition, the final regulations adjust the 

financial responsibility requirements to account for 

certain triggering events that occur between audit cycles. 

As in the 2016 final rule, instead of relying solely on 

information contained in an institution’s audited financial 

statements, which are submitted to the Department six to 

nine months after the end of the institution’s fiscal year, 

we will continue to determine at the time that certain 

events occur whether those events have a material adverse 

effect on the institution’s financial condition. In cases 

where the Department determines that an event poses a 

material adverse risk, this approach will enable us to 

address that risk quickly by taking the steps necessary to 

protect the Federal interest. 

These final regulations take a similar approach to the 

2016 final regulations which are currently in effect, but 

here we focus on known and quantifiable debts or 

liabilities. For example, instead of relying on 

speculative liabilities stemming from pending lawsuits or 

defense to repayment claims, under these final regulations, 

only actual liabilities incurred from lawsuits or defense 
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588 

to repayment discharges could trigger surety requirements. 

As explained in the preamble, we are revising some of the 

triggering events for which surety may be required if the 

potential consequences of those events pose a severe and 

imminent risk to the Federal interest (for example, SEC or 

stock exchange actions). 

We have also revised or reclassified some of the 

triggering events, such as high cohort default rates, State 

agency violations, and accrediting agency actions, that 

could have a material adverse effect on an institution’s 

operations or its ability to continue operating. These 

final regulations direct the Department to fully consider 

the circumstances surrounding those events before making a 

determination that the institution is not financially 

responsible. In that regard, these final regulations do 

not contain certain mandatory triggering events that were 

included in the 2016 final regulations because the cost and 

burden of seeking surety is significant. In many cases the 

2016 final regulations specified speculative events as 

triggering events such as pending litigation or pending 

defense to repayment claims, that can in many cases be 

resolved with no or minimal financial impact on the 

institution. As discussed in the preamble, these final 
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589 

regulations also do not include as a mandatory triggering 

event the results of a financial stress test, which was 

included in the 2016 final regulations without an 

explanation of what that stress test would be and on what 

empirical basis it would be developed. 

2. Summary of Comments and Changes from the NPRM 

 Changes from the NPRM generally fall into two 

categories: borrower defense claims and closed school 

discharges. Table 1 expands further upon these changes. 

Table 1: Summary of Key Changes in the Final 

Regulations from the NPRM 

Provision Regulation Section Description of Change fr 

NPRM

Defense 

to repayment 

685.206(e)(2) Establishes a 

preponderance of the evidence 

standard with requirements fo 

reasonable reliance and 

financial harm. 

Establishes that borrowe 

may submit an application, 

regardless of the status of 

their loans.

Borrower 

Defense Period 

of limitation 

685.206(e)(6) Places a three-year 

limitation on borrower defens 

claims relating to loans firs 

disbursed on or after July 1, 

2020. For borrowers subject t 

a pre-dispute arbitration 

agreement, arbitration suspen 

the comments of the three-yea 

limitations period from the 
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590 

time arbitration is requested 

until the final outcome. 

Exceptions also possible for 

consideration of new evidence 

when a final arbitration ruli 

or a final, contested, nondefault judgment on the merit 

by a State or Federal Court 

that establishes that the 

institution made a 

misrepresentation. 

Borrower 

defenses – 

Adjudication 

Process 

685.206(e)(9)(ii) 

and (10) 

Permits the Secretary to 

consider evidence in her 

possession provided that the 

Secretary permits the borrowe 

and the institution to review 

and respond to this evidence 

and to submit additional 

evidence. Establishes that a 

borrower will have the 

opportunity to review a 

school’s submission and to 

respond to issues raised in 

that submission.

Borrower 

defense 

partial relief 

for approved 

claims

685.206(e)(4) Clarifies that the 

Secretary shall estimate the 

financial harm experienced by 

the borrower. 

Defense 

to RepaymentRole of the 

School in the 

Adjudication 

Process 

685.206(e)(10) Clarifies what evidence 

constitutes financial harm. 

Process 

for asserting 

or requesting 

a discharge 

682.402, 685.212 Establishes an applicati 

process for borrower defense 

claims, suspension of 

collection during processing 

said claim, adjudication of 

borrower defense claims, 

notification requirements pos

adjudication. 

Clarifies that borrower 

defense standards and 
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591 

Departmental process apply to 

loans repaid by a Direct 

Consolidation Loan.

Borrower 

DefensesAdjudication 

Process 

685.206, 685.212 Revises the circumstance 

when the Secretary may extend 

the time period when a borrow 

may assert a defense to 

repayment or may reopen the 

borrower’s defense to repayme 

application to consider 

evidence that was not 

previously considered. 

Automatically grants 

forbearance on the loan for 

which a borrower defense to 

repayment has been asserted, 

the borrower is not in defaul 

on the loan, unless the 

borrower declines such 

forbearance.

Closed 

school 

discharges 

685.214 Changes the eligibility 

criteria to exclude borrowers 

who continue their education 

through a teach-out or by 

transferring credits, as 

opposed to those who have bee 

offered a teach-out by a 

closing school.

Closed 

school 

discharges

674.33 and 682.402 No longer making closed 

school discharge changes to 

FFEL or Perkins regulations.

Financial 

Responsibility

668.171, 668.172, 

668.175 

Revised provision relate 

to withdrawal of owner’s equi 

and the treatment of capital 

distributions equivalent to 

wages. Included new 

discretionary trigger for 

institutions with high annual 

dropout rates. Revised 

treatment of discretionary 

triggers so that when the 

institution is subject to two 

or more discretionary 

triggering events in the peri 

between composite score 

calculations, those events 
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592 

become mandatory triggering 

events unless a triggering 

event is cured before the 

subsequent event occurs. 

Leases entered into on or aft 

December 15, 2018, will be 

treated as required under ASU 

2016-02 while those entered 

before then will be 

grandfathered. Please see Tab 

2 for further description of 

financial responsibility 

triggers.

Additionally, after further consideration, we are 

keeping many of the regulatory changes that were included 

in the 2016 final regulations. Some of the revisions the 

Department proposed in the 2018 NPRM were essentially the 

same as or similar to the revisions made in the 2016 final 

regulations, which are currently in effect. The Department 

is not rescinding or further amending the following 

regulations in title 34 of the Code of Federal Regulations, 

even to the extent we proposed changes to those regulations 

in the 2018 NPRM: 668.94, 682.202(b) – guaranty agency 

collection fees, 682.211(i)(7), 682.405(b)(4)(ii), 

682.410(b)(4) and (b)(6)(viii), and 685.200 – subsidized 

usage period and interest accrual. 

Comments: Some commenters assert that the proposed 

regulations would limit the circumstances in which a 
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593 

borrower may seek loan cancellation based on school 

misconduct to “defensive,” post-default administrative 

collection proceedings, and that this is demonstrated by 

its incorporation into the Department’s analysis. The NPRM 

identifies the 2016 final regulations as the baseline for 

the impact analysis in its three options. The commenters 

argue that the option of using the 1995 regulations as a 

more lenient option is invalid because it is the same as 

the baseline with respect to the Department’s acceptance of 

affirmative claims. Likewise, the Department’s option of 

limiting consideration of borrower defenses to repayment to 

post-default collection proceedings would be a change not 

only from the 2016 final regulations, but from the pre-2016 

practice as well. As a result, the commenter claims it 

represents a new scenario. The commenters assert that 

these inaccuracies undermine the compliance of this NPRM 

with Executive Orders 12866 and 13563. 

Another commenter asserted that using the 2016 final 

regulations as a baseline for the impact analysis is 

problematic because the Department’s conclusion that 

borrowers will benefit from increased transparency with 

respect to the required disclosures is contingent upon a 

regulatory environment in which pre-dispute arbitration 
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594 

agreements and class action waivers are permitted, but not 

subject to robust disclosures. Additionally, this 

commenter notes that the Department is not “assuming a 

budgetary impact resulting from prepayments attributable to 

the possible availability of funds from judgments or 

settlement of claims related to Federal student loans.”166 

This commenter contends this assumption does not support 

the Department’s assertion that borrower may recover more 

from schools in arbitration than through a lawsuit. 

Discussion: We thank the commenters for their 

submissions on the types of claims the Department should 

accept. Upon further consideration, the Department changed 

its position on the posture (i.e., defensive and 

affirmative) from which borrowers may submit borrower 

defense to repayment applications. Affirmative claims are 

permitted in these final regulations, and that is reflected 

in the Regulatory Impact Analysis. These regulations 

include a three-year limitations period for both 

affirmative and defensive claims. These regulations also 

promulgate a different Federal standard than the 2016 final 

166 83 FR 37299.
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595 

regulations. The limitations period and Federal standard 

in these regulations limit the circumstances in which a 

borrower’s loan may be cancelled with respect to a 

defensive claim during a post-default administrative 

collection proceeding. 

We disagree with commenters who state that we used the 

wrong baseline or were inconsistent in our application of 

the baseline. The Regulatory Impact Analysis, per OMB 

Circular A-4, is required to compare to the world without 

the proposed regulations, which would be the 2016 final 

regulations. This baseline is clearly stated in the 

Regulatory Alternatives Considered section and in various 

sections throughout the analysis. Further, the Department 

computed various impact scenarios and discussed other 

regulatory options that were considered. With respect to 

the discussion of pre-dispute arbitration agreements in the 

Costs, Benefits and Transfers section of this RIA, the 

Department does describe the change compared to the 2016 

final regulations but also points out the benefits of the 

required disclosures. Accordingly, the Department believes 

it is in compliance with Executive Orders 12866 and 13563. 

Changes: None. 
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Comments: A commenter stated that methods by which 

the Department estimates lifetime default rates under 

Alternative A overestimate the share of borrowers who could 

raise a defensive claim under this rule, even if strategic 

defaults would occur. The commenter also noted that 

borrowers with defensive claims would only be able to file 

a claim during the timeframe governing a collections action 

and only after that action has been initiated - but those 

actions are not universally applied, nor are those 

timeframes well understood by borrowers. Further, the 

Department received numerous comments recommending that 

defense to repayment be made available to all borrowers, 

including those in regular repayment status, default and 

collections. According to these commenters, in all cases 

of collection proceedings, administrative hurdles such as 

filing claims within the timeframe for filing an 

affirmative defense will disproportionately affect 

borrowers with valid claims, as those borrowers are 

unlikely to be notified of their rights under the proposed 

rules, causing them financial harm. In order to avoid 

this, commenters suggested that the Department should 

examine data on the initiation of collection processes to 

determine for how many borrowers per year it initiates debt 
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597 

collection proceedings like those described in Alternative 

A; reduce the share of defensive claims to parallel the 

share the defaulters per year placed in those proceedings 

with an opportunity to challenge its initiation; and 

consider whether a small inflation is appropriate to 

account for borrowers who default strictly to file a claim. 

In the final regulations, commenters suggested that the 

Department should detail the revision it makes to these 

numbers and publish those data to better inform 

stakeholders of the underlying information informing the 

budget estimates. 

Discussion: The Department appreciates the 

commenter’s concern that the defensive claims percentage 

overstates the share of borrowers who would be able to file 

a claim. The suggestions about analysis based on the share 

of defaulters in collections proceedings who present a 

defense are appreciated, but the Department did not have 

that data available and the changes to the final 

regulations make that analysis less relevant to the final 

regulations we adopt here. The final regulations do allow 

those in all repayment statuses to apply for a borrower 

defense discharge. If we did reduce the defensive claims 

percentage as the commenter suggests, we know the transfers 
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598 

from the Federal government to affected borrowers would be 

reduced, as shown in the sensitivity analyses presented in 

the 2018 NPRM and in these final regulations. As discussed 

in the Net Budget Impact section, the defensive claims 

percentage has been replaced by the Allowable Claims 

percentage based on the number of claims filed within the 

three-year timeframe applicable under these final 

regulations. 

As detailed in the preamble section on Affirmative and 

Defensive Claims, the Department agreed with commenters 

that it is appropriate to accept both affirmative and 

defensive claims and this approach balances concerns about 

incentivizing strategic defaults, effects on borrowers, and 

administrative burden on the Department. 

 As described in the Borrower Defenses – 

Limitations Period for Filing a Borrower Defense Claim 

section of the preamble, the Department has determined that 

a three-year limitations period for both affirmative and 

defensive claims is appropriate. In order to mitigate the 

risk that borrowers with a valid claim will not be notified 

of their rights in time to file a borrower defense to 

repayment application, the final regulations provide that 

the Secretary may extend the time period for filing a 
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599 

borrower defense to repayment if there is a final, nondefault judgment on the merits by a State or Federal court 

that has not been appealed or that is not subject to 

further appeal and that establishes the institution made a 

misrepresentation as defined in § 685.206(e)(3). The 

Secretary also may extend the limitations period for a 

final decision by a duly appointed arbitrator or 

arbitration panel that establishes the institution made a 

misrepresentation as defined in § 685.206(e)(3). 

Changes: The Department revised § 685.206(e)(7) to 

provide for the circumstances in which the Secretary may 

extend the limitations period to file a borrower defense to 

repayment application. 

Comments: One commenter cites Executive Order 12291 

which requires both that agencies describe potential 

benefits of the rule, including any beneficial effects that 

cannot be quantified in monetary terms, identify those 

likely to receive the benefits, and ensure that the 

potential benefits to society for the regulation outweigh 

the potential costs to society. In order to accomplish 

this, the commenter asserted the Department should add 

several components to the regulatory impact analysis of 

these final regulations, including: quantifying the total 
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600 

share of loan volume and the total share of borrowers 

affected by institutional misconduct that meets the 

standard it expects will receive relief on their loans; 

detailing the average share of relief it expects borrowers 

in each sector to receive; and conducting a quantitative 

analysis that directly compares the benefits under this 

rule against the costs (particularly to borrowers), to 

create a true cost-benefit analysis. The commenters said 

that the RIA also needs to address the non-monetary 

component of the benefit-cost analysis, and one component 

of this analysis should be the fairness of the rule to 

borrowers. For example, the Department indicates that some 

borrowers who should be eligible for claims based on the 

misconduct of their institutions will be unable to have 

their loans discharged due to the way the Department has 

designed the process. 

Discussion: First, we note that Executive Order 12291 

was revoked by Executive Order 12866 on September 30, 1993, 

though EO 12866 contains similar provisions as 12291 for 

these purposes. The monetized estimates in the Regulatory 

Impact Analysis are based on the budget estimates, which 

can be found in the Net Budget Impacts section. The 

assumptions described there are based on a percent of loan 
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601 

volume and, like the 2016 final regulations, do not specify 

a number or percent of borrowers affected as the share of 

loan volume affected could be reached under a range of 

scenarios and involve many borrowers with relatively small 

balances or a mix of borrowers with higher balances. Other 

impacts, including expected burdens and benefits are 

discussed in the Costs, Benefits, and Transfers and 

Paperwork Reduction Act of 1995 sections. The Department 

believes its NPRM and these final regulations are in 

compliance with Executive Order 12866. 

The Department addresses the cost-benefit analysis of 

these regulations extensively in the preamble. The 

Department explains why the Federal standard in these final 

regulations is more appropriate than the Federal standard 

in the 2016 final regulations and also how the adjudication 

process provides more robust due process protections for 

both borrowers and schools. These final regulations 

provide a fair process for borrowers while also protecting 

a Federal asset and safeguarding the interests of the 

Federal taxpayers. 

Changes: None. 

Comments: Some commenters argued that an estimated 

tax burden between $2 billion and $40+ billion over ten 
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602 

years is of such a large range that it indicates the 

Department is unsure of the tax burden that these 

regulations will have. In fact, some commenters suggested 

that the Department withdraw the NPRM and resubmit it with 

an accurately stated baseline and budget impact scenarios, 

and allow the public additional time to comment on the 

proposed regulation. 

Discussion: We disagree with the commenters who state 

that the regulations would result in between $2 and $40 

billion increased burden on taxpayers. The range presented 

by the commenter refers to the 2016 NPRM,167 and that range 

was narrowed for the 2016 final regulations. The 

Department has always acknowledged uncertainty in its 

borrower defense estimates, as reflected in the additional 

scenarios presented in the Net Budget Impacts section of 

this RIA. Further, the Accounting Statement contained in 

the NPRM shows a savings to taxpayer funds of $619.2 

167 81 F.R. 39394. Net Budget Impact section of NPRM published June 

16, 2016 presented a number of scenarios with a range of impacts 

between $1.997 to $42.698 billion.
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603 

million annually. The final regulations revise this 

estimate to $549.7 million. 

Changes: None. 

Comments: One commenter noted that the Department 

should clarify the assumptions in each component of the net 

budget impact, i.e. determine the degree to which the 

Department accounted for data on collections proceedings 

within the default rates it examined for the defensive 

applications percent to account for the share of defaulted 

borrowers who experienced a given collection proceeding in 

a year and the narrow timeframe (30-65 days) in which 

borrowers will have to file a defense to repayment claim. 

Also, commenters asked that the Department clarify how the 

RIA accounts for the elimination of a group process; how it 

evaluates the evidence requirements associated with 

demonstrating how a misrepresentation meets the standard of 

having been made with reckless disregard or intent; and how 

it accounts for recoveries of discharged funds through a 

proceeding with the institution as opposed to the financial 

protection triggers. To do this, commenters suggested that 

the Department could conduct additional sensitivity 

analyses to show how each aspect of the proposed rule 

interacts with the remainder of the rule, and the 
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604 

implications estimates. Current sensitivity analyses do 

not test all of these items; and neither the sensitivity 

analyses nor the alternative scenarios account for how a 

group process would alter the benefits to borrowers under 

this rule. The commenters also stated that the Department 

should clarify that the net budget impact, not the 

annualized figures presented in the classification of 

expenditures, is the primary budget estimate and clarify 

the total impact it expects this rule to have on borrowers. 

Discussion: The Department thanks the commenters for 

identifying an area of the analysis that may have been 

unclear. The Department has clarified the impacts of 

eliminating the borrower defense to repayment group 

discharge process in the Costs, Benefits, and Transfers and 

Regulatory Alternatives Considered sections. The 

Department also notes that the Federal standard and the 

definition of misrepresentation o longer require intent, as 

discussed in the “Federal Standard” and “Misrepresentation” 

sections of the Preamble. Requests for additional 

sensitivity analysis and clarifications about the budget 

assumptions are addressed within the Net Budget Impacts 

section of this RIA. 
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Changes: Additional discussion and sensitivity runs 

regarding borrower defense estimates were added to the Net 

Budget Impacts section. 

Comments: One commenter stated that because the two 

large institutions that closed used forced arbitration, the 

Department does not have the data on offsetting funds so it 

cannot account for the reduced likelihood that injured 

students will recover any damages when their only option 

for bringing a claim is in arbitration. The Department’s 

statements about students’ likely recovery also do not show 

that those few students who do prevail in arbitration are 

more likely to obtain greater awards. At a minimum, the 

commenters asserted that the Department must contend with 

available evidence regarding these students’ experiences in 

arbitration, which show that arbitration does not provide 

meaningful relief. They also said that the Department 

should justify the assertion that lawsuits are any less 

likely to have merit than arbitration demands. 

Discussion: This commenter erroneously assumed that 

allowing institutions to use pre-dispute arbitration 

agreements prevents borrowers from accessing the 

Department’s borrower defense to repayment process. A 

borrower’s only option is not arbitration if a borrower 
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606 

signs a pre-dispute arbitration agreement. Under these 

final regulations, even if a borrower signs an agreement 

for pre-dispute arbitration, the borrower has access to the 

Department’s borrower defense to repayment process. The 

borrower may file a borrower defense to repayment 

application before the arbitration begins, during the 

arbitration, or after the arbitration as long as the 

borrower otherwise meets the requirements for submitting a 

borrower defense to repayment application under these final 

regulations. Additionally, these final regulations suspend 

the commencement of the limitations period for submitting a 

borrower defense to repayment application for the time 

period beginning on the date that a written request for 

arbitration is filed and concluding on the date the 

arbitrator submits, in writing, a final decision, final 

award, or other final determination to the parties. 

The Department disagrees that what occurred at certain 

institutions should determine the Department’s policy 

regarding pre-dispute arbitration agreements. What 

occurred at one or two schools does not bind the 

Department’s policy determinations and is not indicative of 

what occurs at schools throughout the country. 
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The Department has not asserted that lawsuits are less 

likely to have merit than arbitration demands or that 

borrowers who do prevail in arbitration will, in all cases, 

receive greater awards. The Department has asserted that 

arbitration may be more accessible to borrowers since it 

does not require legal counsel and can be carried out more 

quickly than a legal process that may drag on for years.168 

Even if arbitration does not provide meaningful relief, 

borrowers may still submit a borrower defense to repayment 

application and obtain additional relief. 

The Department has clarified the impacts of mandatory, 

pre-dispute arbitration relative to borrower defense to 

repayment in the Costs, Benefits, and Transfers section. 

Specifically, the Department’s analysis now centers around 

the strong public policy preference in favor of arbitration 

as set forth in statute and in Supreme Court jurisprudence. 

As explained at length in the Preamble, arbitration 

provides significant advantages over traditional litigation 

in court, including: party control over the process; 

typically lower cost and shorter resolution time; flexible 

168 83 FR 37265.
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process; confidentiality and privacy controls; awards that 

are fair, final, and enforceable; qualified arbitrators 

with specialized knowledge and experience; and broad user 

satisfaction. Requests for clarification about what is 

accounted for in the budget estimates are addressed in the 

Net Budget Impact section of this RIA. 

Changes: None. 

Comments: One commenter expressed concerns that 

inconsistent standards were used throughout the NPRM with 

regard to comparison with the pre-2016 regulations and 2016 

final regulations. The commenter asserted that this 

inconsistency of positions, inconsistent use of existing 

data, and inconsistent reliance on different regulations 

are indicative of arbitrary decision making. They also 

asserted that the Department did not provide a strong 

rationale for the assertion that the small number of claims 

data from prior to 2015 are acceptable to guide policy, yet 

the more recent experience with larger numbers of claims is 

not, specifically in terms breach of contract. 

Furthermore, the commenter stated that the Department 

provided no empirical evidence that an easy claims process 

may result in borrowers filing claims due to 
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dissatisfaction as opposed to misrepresentation, but 

dismisses data as useful evidence to guide decision making. 

This commenter asserts that the Department has not 

conducted any data analysis on existing claims to indicate 

the share of claims that were defensive or affirmative, nor 

whether Have we conducted such an analysis? This commenter also 

requests that the Department address concerns raised by the 

Project on Predatory Student Lending,169 demonstrating that 

the Department has accepted affirmative claims since at 

least 2000. Additionally, this commenter asserts that the 

Department has not provided a reasoned explanation for the 

elimination of a group claims process. The commenter 

contends that the Department provides no evidence for or 

analysis of the claim that the group discharge process may 

create large and unnecessary liabilities for taxpayer 

funds. 

Discussion: We disagree with the commenters who state 

that the standards we applied in the Regulatory Impact 

169 https://predatorystudentlending.org/press-releases/departmenteducations-borrower-defense-includes-fundamental-lie-documents-showpress-release/
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Analysis were inconsistent. The Regulatory Impact 

Analysis, per OMB Circular A-4, requires the agency compare 

impacts of the proposed regulation to the world without the 

proposed regulations, which in this case would have been 

the 2016 final regulations. This baseline is clearly 

stated in the Alternatives Considered section and in 

various sections throughout the analysis. Further, the 

Department analyzed data from its Borrower Defense database 

and made them available during the negotiating sessions.170 

Although 22 percent of claims had been completed as of 

November 2017 (29,780/135,050), they were not a 

representative sample of the universe of all claims. The 

data in 2017 was skewed because so many of the claims were 

from a very small number of institutions. This remains the 

case today. For that reason, the Department’s data were 

insufficient for use in decision-making relative to claim 

outcomes. 

Additionally, it is reasonable to conclude that 

borrowers are more likely to submit a borrower defense to 

170www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefen

sedataanalysis11118.docx
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repayment claim if the standard governing these claims is 

lower. The commenter acknowledges that there have been a 

larger number of borrower defense to repayment 

applications. The great volume of borrower defense to 

repayment applications submitted under the 2016 final 

regulations, which provides a more lenient standard than 

these final regulations, may indicate that borrowers are 

more likely to submit a borrower defense to repayment claim 

if the standard governing these claims is lower. While the 

Department has not yet processed all of the filed claims, 

of the total number of applications reviewed so far, over 

9,000 applications have been denied, for reasons that 

include: borrowers who attended the institution, but not 

during the time period of the institution’s 

misrepresentation; claims submitted without evidence; and 

claims that were made without any basis for relief. 

The Department agrees with commenters regarding the 

affirmative claims received prior to 2015. We intend to 

update the Borrower Defense Database to include older 

records not received through an application. 

The Department acknowledges that it accepted 

affirmative claims in the past. An analysis on the number 

of claims that were affirmative or defensive or of the 
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correlation between an affirmative claim and a finding 

against the borrower is not necessary as the Department 

will continue to allow both affirmative and defensive 

claims to be filed. As discussed earlier in the preamble 

to these final regulations, the Department is adopting the 

approach in both instances of Alternative B from its 

proposed regulatory text for loans first disbursed on or 

after July 1, 2020, which will allow for both affirmative 

and defensive claims, and those changes are reflected in 

the Regulatory Impact Analysis. 

The Department’s reasoned explanation for eliminating 

the group claims process is in the relevant sections of the 

preamble. 

Changes: Changes regarding the Department’s decision 

to accept both affirmative and defensive claims are 

reflected in the assumptions used for the Net Budget Impact 

section of this analysis. 

Comments: Some commenters expressed concern that the 

proposed regulations would lead to costly and frivolous 

lawsuits at the expense of taxpayers, while doing little to 

help students by comparison. Another commenter stated that 

the NPRM provided no evidence of students who, under 

current borrower defense rules, asserted a defense to 
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613 

repayment simply because they regretted their educational 

choices. One the other hand, another commenter felt that 

the proposed regulations would save taxpayers several 

billions of dollars from false claims over the next decade, 

while also providing necessary accountability in the system 

to prevent fraud. 

Discussion: The Department appreciates the support of 

the commenter who asserts that these final regulations will 

result in a significant savings to Federal taxpayers. 

The Department’s decision to accept both affirmative 

and defensive borrower defense to repayment applications 

may reduce lawsuits between borrowers and institutions. 

More borrowers will be able to file defense to repayment 

applications than if the Department accepted only defensive 

claims. The school has an opportunity to respond to the 

borrower’s allegations, and the borrower also has an 

opportunity to address the issues and evidence raised in 

the school’s response. The Department’s borrower defense 

to repayment process is more accessible and less costly 

than litigation for a borrower who seeks relief. Through 

the Department’s process, the borrower will receive any 

evidence the school may have against the borrower’s 

allegations and will be better able to assess whether to 
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614 

pursue litigation if they are unsatisfied with the result 

of their borrower defense to repayment claim. The 

Department has clarified the impacts of lawsuits relative 

to borrower defense to repayment and also its assumptions 

regarding borrower motivation in the Costs, Benefits, and 

Transfers section. 

Additionally, in the 2018 NPRM, the Department did not 

assert that borrowers are seeking a defense to repayment 

because they regret their educational choices. The 

Department stated: “The Department has an obligation to 

enforce the Master Promissory Note, which makes clear the 

students are not relieved of their repayment obligations if 

they later regret the choices they made.”171 The 

Department does not weigh the motives of students who file 

a borrower defense to repayment application. The 

Department is implementing regulations that will more 

rigorously enforce the terms and conditions in the Master 

Promissory Note. 

171 83 FR 37,243.
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Changes: As noted in the Net Budget Impacts section, 

we have revised the assumptions to include affirmative as 

well as defensive claims. 

Comments: One commenter expressed concern that the 

proposed regulations would narrow the standards under which 

claims would be adjudicated. The reduction of claims that 

result would not be the result of changes in institutional 

behavior due to disincentives to misbehave, but rather from 

process changes imposed on borrowers. Commenters also 

suggested that defensive claims would provide greater 

advantages to students in a collections proceeding than a 

student who has continued to pay her loan since the student 

in repayment would not be able to seek relief through 

defense to repayment. 

Discussion: Based upon the Department’s revised 

position relative to which borrowers may submit borrower 

defense to repayment applications, the period of 

limitation, and the revised evidentiary standard, we 

increased our estimate of the percent of loan volume 

subject to a potential claim as compared to the NPRM, as 

reflected in the Allowable Claims percentage in Table 3 

compared to the Defensive Claims percentage in Table 5 of 

the NPRM. We do still expect that the annual number will 
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616 

be less than that anticipated under the 2016 final 

regulations. The Department believes its final regulations 

protect borrowers, whether in default or not, from 

institutional misrepresentation while holding institutions 

accountable for their actions. 

The Department discusses why its Federal standard and 

adjudication process are appropriate and will sufficiently 

address institutional misconduct in the preamble and more 

specifically in the Federal Standard and Adjudication 

Process sections of the Preamble. 

We agree with the commenter that borrowers who are in 

default and are filing defensive claims should not have 

greater advantages than borrowers who have been paying off 

their loans and who are making affirmative claims. 

Accordingly, these final regulations provide the same 

limitations period of three years for both affirmative and 

defensive claims in § 685.206(e)(6). 

Changes: As discussed above, we made revisions to the 

Allowable Claims percentage in Table 3, as compared to the 

Defensive Claims percentage in Table 5 of the NPRM. 

Additionally, the Department revised § 685.206(e)(6) to 

provide a three-year limitations period for both 

affirmative and defensive claims. 
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Comments: Another commenter noted that the Department 

needs to account for the costs to students and justify how 

the regulations will improve conduct of schools by holding 

individual institutions accountable and thereby deterring 

misconduct by other schools. Another commenter stated that 

the Department does not indicate what economic analysis 

justifies placing on students the burden of showing 

schools’ intentional deception. Another commenter 

mentioned that the Department’s estimates in the net budget 

impact do not contain the potential for significant 

institutional liabilities, as the proposed regulations have 

fewer financial protection triggers, resulting in lower 

levels of recovery. Accordingly, the Department’s 

assumption that these proposed regulations will have the 

same deterrent effect is impractical and unreasonable. 

Through other departmental actions unrelated to this 

rule, the commenter stated it is likely that the frequency 

of unlawful conduct will actually increase. 

An additional commenter stated that assumptions 

underlying this forecast that students could be left with 

“narrowed educational options as a result of unwarranted 

school closures” appear without basis in fact or reason. 

The commenter asserts that not only would putting primary 
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618 

responsibility for purveying accurate information on 

schools be no more of a burden than is normally expected of 

any honest commercial enterprise, but it would improve 

overall free market competition by enabling honest schools 

to flourish in a reliably transparent marketplace at the 

expense of the dishonest ones. Commenters asserted that 

the Department needs to show why it would be too burdensome 

on schools’ potential productivity to require them to take 

the precautions needed to assure their provision of 

accurate information to prospective students and why 

students should be expected to be efficient and effective 

evaluators of the accuracy of schools’ promotional efforts. 

Discussion: We disagree with commenters who state that 

we did not account for costs to borrowers. These are 

covered in the Costs, Benefits, and Transfers, Net Budget 

Impacts, and Paperwork Reduction Act of 1995 sections. 

Further, in response to comments, the final regulations 

revise our proposed borrower defense to repayment standard, 

which now requires an application and a preponderance of 

the evidence showing the borrower relied upon the 

misrepresentation of the school and that the reliance 

resulted in financial harm to the borrower. The standard 

in these final regulations does not require students to 
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prove schools’ intent to deceive. We agree with commenters 

that all institutions should bear the burden of their 

misrepresentations, which is why the Department intends to 

recoup its losses from institutions due to borrower defense 

discharges. Despite the commenter’s concern, the financial 

triggers we have included in the final regulations are 

better calibrated to link the triggering events to a 

precise and accurate picture of an institution’s financial 

health. The pattern and maximum rate of recoveries is 

reduced from the PB2020 baseline, but the recovery rate 

remains significant and will reduce help offset borrower 

defense discharges. 

The comments about the specific budget assumptions and 

the potential deterrent effect of the regulations are 

addressed in the Net Budget Impacts section of this RIA. 

Other Departmental actions unrelated to this rule are 

not at issue in promulgating these final regulations. The 

commenter is welcome to submit comments in response to 

other proposed regulations if the commenter believes that 

the Department’s other actions will somehow increase 

unlawful conduct. While it is true that the Department’s 

regulations may have interactive effects, the Department 

does not agree that the proposed changes to the 
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620 

accreditation regulations described in the NPRM published 

June 12, 2019, will lead to a substantial increase in 

conduct that could generate borrower defense claims. Even 

if an influx of bad actors were to occur and go unchecked 

as suggested by the commenter, we believe the range of 

outcomes described in the Net Budget Impact sensitivity 

runs capture the potential effects. 

The Department agrees with commenters that 

institutions should be held accountable for making a 

misrepresentation, as defined in these final regulations. 

The Department does not believe that it is too burdensome 

for institutions to provide accurate information to their 

students. Borrowers have choices in the education 

marketplace, and these final regulations seek to eliminate, 

prevent, and address unlawful conduct. The Department 

explains why its Federal standard, the definition of 

misrepresentation, and the adjudication process adequately 

address unlawful conduct in the applicable sections of the 

preamble. 

Changes: None. 

Comments: One commenter mentioned that lifting the ban 

on pre-dispute arbitration clauses, class action waivers, 
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621 

and internal dispute processes and deleting provisions that 

would require reporting on the number of arbitrations and 

judicial proceedings, award sizes, and status of students 

would allow institutions to limit the flow of information 

regarding abuses, misrepresentations, and fraudulent 

activity. The resulting delay of information would add 

costs to the taxpayer and burden to borrowers. In fact, 

another commenter opines that the Department does not state 

key costs and overstates relative benefits of rescinding 

the 2016 provisions restricting funds to schools that use 

forced arbitration and class-action waivers and replacing 

them with an “information-only” approach. Although the NPRM 

claims that borrowers will benefit due to transparency, the 

data would be helpful to law enforcement and future student 

loan borrowers. 

Another commenter contends that the Department has no 

support for the assertion that permitting forced 

arbitration will reduce the cost impact of unjustified 

lawsuits. This commenter also contends that the Department 

does not acknowledge one of the benefits of the 2016 final 

regulations in deterring misconduct of schools and 

recommends that the Department assess the reduction in 

deterrence as a cost. 
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Discussion: The Department supports the use of 

internal dispute resolution processes as a way for disputes 

to be resolved expeditiously, which was not prohibited by 

the 2016 final regulations. An internal dispute resolution 

process is often a vehicle for a borrower to receive relief 

directly from an institution, in a cost-effective and 

timely manner. The use of an internal dispute resolution 

process can be a vehicle for potential resolution, without 

placing the burden on the Department to adjudicate. 

The Department also reminds the commenters that 

borrowers who have entered into a pre-dispute arbitration 

agreement or endorsed a class action waiver may still avail 

themselves of the borrower defense to repayment process 

offered in these final regulations. Indeed, the Department 

will toll the limitations period for filing a borrower 

defense to repayment application until the final 

arbitration award is entered. As previously stated, the 

borrower, however, may file a borrower defense to repayment 

application before the arbitration proceeding, during the 

proceeding, or after the proceeding. The Department does 

not wish to create a burden in requiring institutions to 

report the number of arbitrations and judicial proceedings, 
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623 

award sizes, and various other matters. As detailed in the 

Paperwork Reduction Act discussion of Section 685.300, 

these changes are estimated to reduce burden by 179,362 

hours and $6.56 million annually. 

Additionally, the final regulations on financial 

responsibility standards do require institutions to report 

the occurrence of risk events that may have a material 

impact on their financial stability or ability to operate. 

The Department does not assert that arbitration will 

reduce the cost impact of unjustified lawsuits only but 

instead that arbitration generally eases burdens on the 

overtaxed U.S. court system.172 The section on “Pre-Dispute 

Arbitration Agreements, Class Action Waivers and Internal 

Dispute Processes” in the preamble provides a more fulsome 

justification for the Department’s policy determinations. 

Finally, the Department believes that these final 

regulations also deter unlawful conduct by an institution, 

and the commenter does not provide any evidence to support 

the assumption that these final regulations will not do so. 

Accordingly, the Department will not assess the reduction 

172 83 FR 37265.
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624 

in deterrence as a cost. However, in response to the 

commenter’s points about reduced deterrence, the Department 

added a sensitivity scenario assuming no deterrent effect 

on institutional conduct in the Net Budget Impacts section 

of this RIA. 

Changes: .As mentioned above, we added a sensitivity 

scenario assuming no deterrent effect on institutional 

conduct in the Net Budget Impacts section of this RIA. 

Comments: One commenter noted that the Department’s 

analysis of benefits to borrowers makes unsupported 

assertions regarding the advantages of arbitration relative 

to litigation in court. The commenter said that available 

evidence in the higher education context does not support 

the Department’s predictions. Another commenter stated 

that the NPRM provides no explanation for decreasing the 

estimate of students at proprietary schools that would be 

impacted by arbitration clauses from 66 percent to 50 

percent. The impact of both in costs to students and to 

the number of students directly affected needs to be 

reevaluated. 

Discussion: We thank the commenters who provided 

counter-analysis on mandatory arbitration clauses. We 

disagree with commenters who state the budget estimate is 
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625 

poorly explained; a specific estimate for students affected 

by the provision identified by the commenter is not 

included in either the 2016 budget estimate or the NPRM 

budget estimate. We believe the commenter is referring to 

the Paperwork Reduction Act burden calculation that in the 

2016 final rule that assumed 66 percent of students would 

receive the notices required in § 685.300(e) or (f).173 No 

specific basis was described for the 66 percent. In the 

NPRM published July 31, 2018, the Department used the 

percent of students who use the Department’s online 

entrance counseling as a basis for its assumption that 50 

percent of students would be affected by pre-dispute 

arbitration agreements.174 Additional detail about the 

burden calculation is provided in the Paperwork Reduction 

Act discussion related to arbitration disclosures. 

The Department’s reasons for allowing borrowers and 

schools to enter into a pre-dispute arbitration agreement 

and class action waivers, and the benefits of this policy 

173 81 FR 76067. See burden calculation for Section 685.300(e) and 

(f).

174 83 FR 37306. See burden calculation for Section 658.304.
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626 

are explained more fully in the “Pre-dispute Arbitration 

Agreements, Class Action Waivers and Internal Dispute 

Processes” section in the Preamble. 

Changes: No change necessary. 

Comment: One commenter noted that the Department’s 

definition of small businesses under the Regulatory 

Flexibility Act does not make sufficient use of Department 

data, defines a small institution in an arbitrary manner, 

and that this definition is not in line with the definition 

used by the Small Business Administration. The commenter 

asserted that the Department should rely on the IPEDS 

finance survey to identify institutions with less than $7 

million in annual revenue. The commenter stated that the 

Department should consider the typical size of nonprofit 

institutions in evaluating whether they qualify as dominant 

in their fields by calculating the median for four-year and 

less-than-four-year nonprofits. They also said that this 

definition would be more responsive going forward, by 

reflecting potential changes in the education marketplace 

through adjustments to the median in future calculations. 

For public institutions, the commenter said the Department 

should explain why it chose to measure them based on 

student enrollment, when the proposed regulations noted 
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627 

that public institutions are usually determined to be small 

organizations based on the population size overseen by 

their operating government. If a justification cannot be 

made for Department’s determinations, the commenter said it 

should revert to the definition it has historically used 

until it can work with institutions of higher education to 

find a more accurate threshold. 

Discussion: We disagree with the commenter who stated 

that the Department’s reasons for proposing a definition of 

small institutions are unclear. While the Department did 

use the IPEDS finance survey to identify proprietary 

institutions that were considered small for previous 

regulations including the 2016 final regulations, we 

believe the enrollment-based definition provides a better 

standard that can be applied consistently across types of 

institutions. As we stated in the NPRM, the Department 

does not have data to apply the Small Business 

Administration’s definition for institutions; specifically, 

we do not have data to identify which private nonprofit 

institutions are dominant in their field nor do we have 

data on the governing body for public institutions. We 

disagree with commenters who suggest that a “typical” size 

of nonprofit institutions should be used to determine 
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628 

whether the institution is dominant in its field. Further, 

we disagree with the commenter’s suggestion to use median 

(50th percentile) enrollment as the threshold for 

identifying small institutions; no evidence presented by 

the commenter suggests that the bottom 50 percent of 

institutions are small. In fact, selecting a percentile 

threshold without an analytical basis for selection of that 

threshold would be an unsupported conclusion. 

We disagree with the commenter who stated that the 

definition of small institutions proposed by the Department 

was arbitrary and capricious. As stated in the NPRM, the 

definition was based upon IPEDS data from 2016, and we used 

statistical clustering techniques to identify the smallest 

enrollment groups. Specifically, coverage of and 

correlations between revenue, title IV volume, FTE 

enrollment, and number of students enrolled were evaluated 

for all institutions that responded to the 2016 IPEDS 

survey. Because this definition should work for all 

institutions, and not just title IV participating 

institutions, title IV funds were rejected as a variable to 

measure size. Further, research found that revenue had 

poor coverage and was not well correlated with enrollment 

in the public and private nonprofit sectors, so it was also 
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629 

rejected as a variable to measure size. Department data do 

have good coverage, for all institutions, in enrollment 

data. Therefore, enrollment data were selected as the 

variable to measure size. Additionally, data were grouped 

into two-year and four-year institutions based on visual 

differences in data distribution. 

We used a k-means model to identify optimal numbers of 

clusters by determining local maxima in the pseudo F 

statistic (SAS Support, Usage Note 22540, available at: 

support.sas.com/kb/22/540.html and SAS Community, Tip: Kmeans clustering in SAS - comparing PROC FASTCLUS and PROC 

HPCLUS, available at: https://communities.sas.com/t5/SASCommunities-Library/Tip-K-means-clustering-in-SAScomparing-PROC-FASTCLUS-and-PROC/ta-p/221369). We then 

used a centroid method to identify clusters (SAS Institute 

Inc, 2008, Introduction to Clustering Procedures: SAS/STAT® 

9.2 User’s Guide, Cary, NC: SAS Institute Inc. available 

at: 

support.sas.com/documentation/cdl/en/statugclustering/61759

/PDF/default/statugclustering.pdf) and confirmed visually. 

The smallest cluster of four (0 – 505) was used for the 

two-year institutions’ definition, and the two smallest 

clusters of six (0 – 425 and 425 – 1015) were used for the 
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630 

four-year institutions’ definition. The thresholds were 

rounded to the nearest 100 for simplicity and to allow for 

annual variation. Further, the results were deemed 

sufficient by visual inspection for each control (public, 

private, and proprietary). Finally, the four-year 

definition further confirms the existing IPEDS definition 

for a small institution. 

Changes: None. 

Comments: One commenter stated that given policy 

changes in the proposed regulations, the Department assumes 

too high a recovery rate from institutions. This commenter 

contends that the assumptions should be revisited and the 

percentage for recovery should be reduced. They also note 

that the proposed regulations include fewer financial 

protections than what the Department laid out in the 2016 

final regulations, many of which were early-warning 

indicators. The commenter asserted that the financial 

triggers included in the proposed regulations are much less 

predictive of problems and will apply to very few colleges 

than those included in the 2016 final regulations. They 

also asserted that these triggering events constitute such 

significant evidence of concern that it may well be too 

late to prevent further damage and liabilities for 
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taxpayers will likely not provide enough financial 

protection to explain the difference between the recovery 

percentages estimated in the 2016 final regulations and 

those included in the 2018 NPRM. Accordingly, the 

commenter said that use of the triggers will not increase 

the effectiveness of financial protection over time. Thus, 

they said there is little reason to believe the share of 

borrower defense discharges recovered from institutions 

will increase over time at all; it may even decrease, since 

some of these events will likely lead to the closure of the 

school and the removal of the riskiest institutions from 

the marketplace. 

Discussion: The Department appreciates the 

commenter’s detailed comments about the recovery rate 

assumption and addresses the comment in the Net Budget 

Impacts section of this RIA. The top recovery rate in the 

main scenario was reduced to 20 percent. Additionally, the 

sensitivity run related to recovery rates and the norecovery scenario described after Table 4 are designed to 

reflect the possibility that recoveries will be lower than 

anticipated in the main estimate, and the Department 

believes this is appropriate to address the concerns raised 

by the commenter about the level of recoveries. 
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Changes: Recovery rate assumption updated as 

described in Net Budget Impacts section.ne. 

3. Costs, Benefits, and Transfers 

These final regulations will affect all parties 

participating in the title IV, HEA programs. In the 

following sections, the Department discusses the effects 

these proposed regulations may have on borrowers, 

institutions, guaranty agencies, and the Federal 

government. 

3.1. Borrowers 

These final regulations would affect borrowers through 

borrower defense to repayment applications, closed school 

discharges, false certification discharges, loan 

rehabilitation, and institutional disclosures. Borrowers 

may benefit from an ability to appeal to the Secretary if a 

guaranty agency denies their closed school discharge 

application, from lower tuition and increased campus 

stability associated with longer leases, and from a more 

generous “look back” period with regard to closed school 

loan discharges. 

In response to comments, the Department will provide 

the opportunity to seek loan relief through borrower 
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defense to repayment to all borrowers, regardless of that 

borrower’s repayment status. Some borrowers may incur 

burden to review institutional disclosures on mandatory 

arbitration and class action waivers or complete 

applications for loan discharges, and there could be 

additional burden to borrowers who would otherwise, through 

no affirmative action on their part, be included in a 

class-action proceeding. 

3.1.1. Borrower Defenses 

Upon further consideration and in response to 

comments, the Department will provide the opportunity to 

seek loan relief through borrower defense to repayment to 

all borrowers, regardless of that borrower’s repayment 

status. However, the Federal defense to repayment standard 

for loans first disbursed on or after July 1, 2020 includes 

certain limits and conditions to prevent frivolous or stale 

claims, including a three-year period within which to apply 

after exiting the institution and a requirement that 

borrowers demonstrate both reliance and harm. The 

Department estimates this change will result in more 

applications relative to the NPRM, but fewer than that 

expected under the 2016 final regulations. Borrowers are 

more likely to have their borrower defense to repayment 
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634 

applications processed and decided more quickly if the 

Department has a smaller volume of claims. 

 

Relative to the 2016 regulations, the final 

regulations do not include a group claim process because 

the evidence standard and the fact-based determination of 

the borrower’s harm that the Department is requiring in 

these final regulations necessitates that each claim be 

adjudicated separately to determine the borrower’s reliance 

on the institution’s alleged misrepresentation. The 

definition of misrepresentation in these final regulations 

would make borrowers who may have been included in the 

group determination that cannot prove individual reliance 

and harm ineligible for borrower defense loan discharges. 

When borrower defense to repayment discharge 

applications are successful, dollars are transferred from 

the Federal government to borrowers because borrowers are 

relieved of an obligation to pay the government for the 

loans being discharged. As further detailed in the Net 

Budget Impacts section, the Department estimates that 

annualized transfers from the Federal Government to 

affected borrowers, partially reimbursed by institutions, 

would be reduced by $512.5 million. This is based on the 
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635 

difference in cashflows associated with loan discharges 

when these final regulations are compared to the 2016 final 

regulations as estimated in the President’s Budget 2020 

baseline and discounted at 7 percent. To the extent 

borrowers with successful defense to repayment claims have 

subsidized loans, the elimination or recalculation of the 

borrowers’ subsidized usage periods could relieve them of 

their responsibility for accrued interest and make them 

eligible for additional subsidized loans. 

A defense to repayment discharge is one remedy 

available to students, among other available avenues for 

relief. Students harmed by institutional 

misrepresentations continue to have the right to seek 

relief directly from the institution through arbitration, 

lawsuits in State court, or other available means. 

Borrowers would possibly receive quicker and more generous 

financial remedies from institutions through these means 

since schools may be more motivated to make students whole 

through the arbitration process in order to avoid defense 

to repayment claims. The 2016 final regulations prohibited 

mandatory pre-dispute arbitration agreements, and while 

institutions may have continued to provide voluntary 

arbitration, schools may not have made it obvious to 
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636 

students how to avail themselves of arbitration 

opportunities. The final regulations do not prohibit 

institutions from including mandatory pre-dispute 

arbitration clauses and class action waivers in enrollment 

agreements, but require institutions to provide the 

borrower with information about the meaning of mandatory 

arbitration clauses, class action waivers, and how to use 

the arbitration process in the event of a complaint against 

the institution. The benefit of arbitration is that it is 

more accessible and less costly to students and 

institutions than litigation. For borrowers who seek 

relief from a court, there may be additional advantages 

since courts can award damages beyond the loan value, which 

the Department cannot do; although, this could be offset by 

the expense in both time and dollars of a lawsuit. In 

addition, borrowers who seek relief through arbitration may 

also be awarded repayment of tuition charges that were paid 

in cash or through other forms of credit, which the 

Department cannot do. 

3.1.2. Closed School Discharges 

Some borrowers may be impacted by the changes to the 

closed school discharge regulations. These final 

regulations would, for a loan first disbursed on or after 
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637 

July 1, 2020, extend the window for a Direct Loan 

borrower’s eligibility for a closed school discharge from 

120 to 180 days from the date the school closed. Under the 

final regulations, a borrower whose school closed would 

qualify for a closed school discharge unless the borrower 

accepted a teach-out opportunity approved by the 

institution’s accrediting agency and, if applicable, the 

institution’s State authorizing agency; unless the school 

failed to meet the material terms of the teach-out plan 

approved by the school’s accrediting agency and, if 

applicable, the school’s State authorizing agency, such 

that borrower was unable to complete the program of study 

in which the borrower was enrolled. The final regulations 

also provide that borrowers who transfer their credits to 

another institution would not be eligible for a closed 

school discharge. These final regulations also revise the 

provision in the 2016 Direct Loan regulations that provides 

for an automatic closed school discharge without an 

application for students that did not receive a closed 

school discharge or re-enroll at a title IV participating 

institution within three years of a school’s closure to 

apply to schools that closed on or after November 1, 2013 

and before July 1, 2020. While the automatic discharge 
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638 

would have benefitted some students who no longer would 

need to submit an application to receive relief, it may 

have disadvantaged students who wish to continue their 

education at a later time or provide proof of credit 

completion to future employers. There could also be tax 

implications associated with closed school loan discharges, 

and borrowers should be aware of those implications and 

given the opportunity to make a decision according to their 

needs and priorities. 

The expansion of the eligibility period for a closed 

school discharge will increase the number of students 

eligible under this provision and encourage institutions to 

provide opportunities for students to complete their 

programs in the event that a school plans to close. The 

reduced availability of closed school discharges because of 

the elimination of the three-year automatic discharge for 

schools that close on or after July 1, 2020 may reduce debt 

relief for students. As further detailed in the Net Budget 

Impacts section, the Department estimates that annualized 

closed school discharge transfers from the Federal 

Government to affected borrowers would be reduced by $37.2 

million. This is based on the difference in cashflows 

associated with loan discharges when the final regulations 
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639 

are compared to the 2016 final regulations as estimated in 

the President’s Budget 2020 baseline (PB2020) and 

discounted at 7 percent. 

The Department’s accreditation standards175 require 

accreditors to approve teach-out plans at institutions 

under certain circumstances, which emphasizes the 

importance of these plans to ensuring that students have a 

chance to complete their program should their school close. 

Teach-out plans that would require extended commuting time 

for students or that do not cover the same academic 

programs as the closing institution likely would not be 

approved by accreditors. In addition, an institution whose 

financial position is so degraded that it could not provide 

adequate instructional or support services would similarly 

likely not have their teach-out plan approved. In the case 

of the precipitous closures of certain institutions in 2015 

and 2016, it is possible that enabling those institutions 

to offer teach-out plans to their current students–-

including by arranging teach-outs plans delivered by other 

institutions or under the oversight of a qualified third 

175 34 CFR 602.24(c).
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640 

party--could have benefited students and saved hundreds of 

millions of dollars of taxpayer funds . 

Large numbers of small, private non-profit colleges 

could close in the next 10 years, which could significantly 

increase the number of borrowers applying for closed school 

discharges if these institutions are not encouraged to 

provide high quality teach-out options to their students.176

For example, Mt. Ida College announced177 that it would 

close at the end of the Spring 2018 semester and while the 

institution had considered entering into a teach-out 

arrangement with another institution, this did not 

materialize. While there may be other institutions that 

have accepted credits earned at Mt. Ida, due to the 

distance between Mt. Ida and other campuses, it may be 

impractical for the student to attend another 

institution.178 A proper teach-out plan may have allowed 

176 www.insidehighered.com/news/2017/11/13/spate-recent-collegeclosures-has-some-seeking-long-predicted-consolidation-taking.

177 www.insidehighered.com/news/2018/04/09/mount-ida-after-tryingmerger-will-shut-down.

178 www.insidehighered.com/news/2018/04/23/when-college-goes-undereveryone-suffers-mount-idas-faculty-feels-particular-sense.
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641 

more students to complete their program. The requirement of 

accreditors to approve such options ensures protection for 

borrowers to ensure that a teach-out plan provides an 

accessible and high-quality option for students to complete 

the program. 

3.1.3. False Certification Discharges 

Some borrowers may be impacted by the changes to the 

false certification discharge regulations, although this 

provision of the final regulations simply updates the 

regulations to codify current practice required as a result 

of the removal of the ability to benefit option as a 

pathway to eligibility for title IV aid. In the past, a 

student unable to obtain a high school diploma could still 

receive title IV funds if he or she could demonstrate that 

he or she could benefit from a college education. 

With that pathway eliminated by a statutory change, 

prospective students unable to obtain their high school 

transcripts when applying for admission to a postsecondary 

institution would be allowed to certify to their 

institutions that they graduated from high school or 

completed a home school program and qualify for Federal 

financial aid. At the same time, it will disallow students 

who misrepresent the truth in signing such an attestation 
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642 

from subsequently seeking a false certification discharge. 

Although the Department has not seen an increase in false 

certification discharges as a result of the elimination of 

the ability to benefit option, given the increased 

awareness of various loan discharge programs, the 

Department believes it is prudent to set forth in 

regulation that if a student falsely attests to having 

received a high school diploma, the student would not be 

eligible for a false certification discharge. Codifying 

this practice will not have a significant impact, but will 

ensure that students who completed high school but are 

unable to obtain an official diploma or transcript will 

retain the opportunity to participate in postsecondary 

education. The Department does not believe that there are 

significant numbers of students who are unable to obtain an 

official transcript or diploma, but recent experiences 

related to working with institutions following natural 

disasters demonstrates that this alternative for those 

unable to obtain an official transcript is important. 

3.1.4. Institutional Disclosures of Mandatory 

Arbitration Requirements and Class Action Waivers 

Borrowers, students, and their families would benefit 

from increased transparency from institutions’ disclosures 
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643 

of mandatory arbitration clauses and class action lawsuit 

waivers in their enrollment agreements. Under the final 

regulations, institutions would be required to disclose 

that their enrollment agreements contain class action 

waivers and mandatory pre-dispute arbitration clauses. 

Institutions would be required to make these disclosures to 

students, prospective students, and the public on 

institutions’ websites and in the admission’s section of 

their catalogue. Further, borrowers would be notified of 

these during entrance counselling. As further discussed in 

the Paperwork Reduction Act section, we estimate there is 5 

minutes of burden to 342,407 borrowers annually at $16.30179

per hour to review these notifications during entrance 

counseling, for an annual burden of $446,506. 

As institutions began preparing to implement the 2016 

final regulations, some eliminated both mandatory and 

voluntary arbitration provisions to be sure they would be 

in compliance with the letter and spirit of the 

179 Students’ hourly rate estimated using BLS for Sales and Related 

Workers, All Other, available at: 

www.bls.gov/oes/2017/may/oes_nat.htm#41-9099.
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644 

regulations. Under the newly finalized regulations, 

institutions would be able to include these provisions in 

their enrollment agreements. The effect will be to allow 

schools to require borrowers to redress their grievances 

through a quicker and less costly process, which we believe 

will benefit both the institution and the borrower by 

introducing the judgment of an impartial third party, but 

at a lower cost and burden than litigation. Arbitration 

may be in the best interest of the student because it could 

negate the need to hire legal counsel and result in 

adjudication of a claim more quickly than in a lawsuit or 

the Department’s 2016 borrower defense claim adjudication 

process. Mandatory arbitration also reduces the cost 

impact of unjustified lawsuits to institutions and to 

future students, since litigation costs may be ultimately 

passed on to current and future students through tuition 

and fees. As discussed in more depth in the preamble, 

arbitration also increases the likelihood that damages will 

be paid directly to students, rather than used to pay legal 

fees. 

However, with the removal of the requirement to report 

certain arbitration information to the Department, if more 

disputes are resolved in arbitration there may be less 
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645 

feedback to the Department, the public and prospective 

students about potential issues at institutions. This may 

extend the period that misrepresentation by institutions 

may go undetected, potentially exposing more borrowers and 

increasing taxpayer exposure to potential claims. 

3.2. Institutions 

Institutions will be impacted by the final regulations 

in the areas of borrower defenses, closed school 

discharges, false certification discharges, FASB accounting 

standards, financial responsibility standards, and 

information disclosure. The benefits to institutions 

include a decrease in the number of reimbursement requests 

resulting from Department-decided loan discharges based on 

borrower defenses, closed school, and false certification; 

an increased involvement in the borrower defense 

adjudication process; the ability to continue to receive 

the benefit from the cost savings associated with existing 

longer-term leases and reduced relocation costs until such 

time as the composite score methodology can be updated 

through future negotiated rulemaking; and the ability to 

incorporate arbitration and class action waivers in 

enrollment agreements. Institutions may incur costs from 

increased arbitration and internal dispute resolution 
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646 

processes, providing teach-out plans in the event of a 

planned school closure, and compliance with required 

disclosure and reporting requirements. 

3.2.1. Borrower Defenses 

Many institutions, those that do not have a 

significant number of claims filed against them would not 

incur additional burden as a result of the final regulatory 

changes in the borrower defense to repayment regulations. 

Those institutions against which claims are filed will be 

given the opportunity to provide evidence to the Department 

during claim adjudication. Further, these final 

regulations include a three-year period of limitations, 

which aligns with institutions’ records retention 

requirements. We further estimate that successful defense 

to repayment applications under the Federal standard and 

process will affect only a small proportion of 

institutions. The Department expects that the changes in 

these regulations would result in fewer successful defense 

to repayment applications as compared to the 2016 final 

regulations, and therefore fewer discharges of loans. 

Therefore, the Department expects to request fewer 

repayment transfers from institutions to cover discharges 

of borrowers’ loans. Under the main budget estimate 
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647 

explained further in the Net Budget Impacts section, the 

Department estimates an annual reduction of reimbursements 

of borrower defense claims from institutions to the 

government of $153.4 million under the seven percent 

discount rate. . 

However, the Department believes that by requiring 

institutions that utilize mandatory arbitration clauses and 

class action waivers to provide plain language disclosures 

along with additional information at entrance counseling, 

more students may utilize arbitration to settle disputes. 

As a result, institutions may have increased costs related 

to increased use of internal dispute processes; although, 

the Department was unable to monetize those costs as it has 

limited information about the procedures used in different 

institutions and the associated costs . 

3.2.2. Closed School Discharges 

A small percentage of institutions close annually, 

with 630 closures at the 8-digit OPEID branch level in 

2018. Some institutions provide teach-out opportunities to 

enable students to complete their programs and others 

leaving students to navigate the closure on their own, 

resulting in their eligibility for closed school loan 

discharges. The final regulations expand the eligibility 
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648 

window for students with Direct loans first disbursed on or 

after July 1, 2020, who left the institution but are still 

eligible to receive closed school loan discharges from 120 

to 180 days. The final regulations also clarify that a 

borrower who accepts a teach-out plan would not qualify for 

a closed school discharge, unless the institution failed to 

meet the material terms of the teach-out plan, such that 

the borrower was unable to complete the program of study in 

which the borrower was enrolled. 

The Department has worked with a number of schools 

that have successfully completed teach-out plans. As 

additional schools close in the future, the Department 

wants to encourage them to offer orderly teach-outs rather 

than close without making arrangements to protect their 

students. We believe the final regulations will encourage 

institutions to provide teach-out opportunities, despite 

their potential high cost, if doing so would reduce the 

total liability that could result from having to reimburse 

the Secretary for losses due to closed school discharges. 

Title IV-granting institutions are required by their 
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649 

accreditors180 to have an approved teach-out plan on file 

and to update that plan with more specific information in 

the event that the institution is financially distressed, 

is in danger of losing accreditation or State 

authorization, or is considering a voluntary teach-out for 

other reasons. Accreditors, and in some cases, State 

authorizing agencies, must approve teach-out plans and 

carefully monitor teach-out activities. Students who opt 

to participate in an approved teach-out plan and who are 

provided that opportunity as outlined in the plan will not 

be eligible for a closed school loan discharge under this 

provision. As in the current regulation, students who 

transfer their credits will also not be eligible for a 

closed school discharge. 

The Department is revising the regulatory provision 

that provides automatic closed school discharges for Direct 

Loan borrowers who do not complete their program within 

three years after the school closed to apply to schools 

that closed on or after November 1, 2013 and before July 1, 

2020. This is expected to reduce closed school discharges 

180 34 CFR 602.24(c).
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650 

and the potential institutional liability associated with 

them. 

3.2.3. False Certification Discharges 

A small percentage of institutions are affected by 

false certification discharges annually. The final 

regulations would permit institutions to obtain a written 

assurance from prospective students who completed high 

school but are unable to obtain their high school 

transcripts when applying for admission and Federal 

financial aid, without exposing themselves to financial 

liabilities should those students misrepresent the truth in 

their attestations. To ensure that the unintended 

consequence of this policy change is not an increase in the 

frequency or cost of false certification discharges, the 

Department believes it is necessary to specify that a 

student who misrepresents his or her high school completion 

status under penalty of perjury cannot then receive a false 

certification loan discharge due to non-completion of high 

school or a home school program. The final regulations 

will protect institutions as they seek to serve students 

who are pursuing postsecondary education but cannot obtain 

an official diploma or transcript. We believe this final 

regulation will not have a significant impact on 
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651 

institutions because the Department receives very few false 

certification discharge requests and, as discussed further 

in the Net Budget Impacts section, the Department does not 

include any false certification discharge recoupment 

transfers in its estimate. 

3.2.4. Financial Responsibility Standards 

Both the 2016 final regulations and these final 

regulations include conditions under which institutions 

would have to provide a letter of credit or other form of 

financial protection in order to continue to participate in 

the title IV, HEA programs. The following table compares 

the financial responsibility triggers established by the 

2016 final regulations and in these final regulations. 

Mandatory events or actions automatically result in a 

determination that the institution is not financially 

responsible and trigger a request for a letter of credit or 

other financial protection from the institution, whereas 

discretionary events or actions give the Secretary the 

discretion to make that determination at the time the event 

or action may occur. In a change from the NPRM, if an 

institution is subject to two discretionary events within 

the period between calculation of composite scores, the 

events will be treated as mandatory events unless a 
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652 

triggering event is resolved before any subsequent event(s) 

occurs. These final regulations also keep high annual 

dropout rates as a discretionary trigger, as was the case 

in the 2016 final rule, with the specific threshold to be 

determined in the future. 

Table 2: Financial Responsibility Triggers 

Financia

l 

Responsibility 

Trigger

2016 

Regulation Final Regulation Change 

Summary

Mandatory Actions or Events: Recalculated composite score < 1.0

Action 

or Event 

triggers 

Secretary 

decision and 

may result in 

a letter of 

credit or 

other 

financial 

protection to 

Department

Actual or 

projected 

expenses incurred 

from a triggering 

event

Actual expense 

incurred from a triggering 

event

Eliminates 

projected 

expenses 

Defense 

to repayment 

that does or 

could lead to 

an institution 

repaying 

government for 

discharges

Department 

has received or 

adjudicated 

claims associated 

with the 

institution

Department has 

discharged loans resulting 

from adjudicated claims

Changed 

from 

Discretionary to 

Mandatory or 

reduced to actual 

discharges only
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653 

Lawsuits 

and Other 

Actions that 

leads or could 

lead to 

institution 

paying a debt 

or incurring a 

liability

Final 

judgment in a 

judicial 

proceeding, 

administrative 

proceeding or 

determination, 

or final 

settlement; 

legal action 

brought by a 

Federal or State 

Authority 

pending for 120 

days; or other 

lawsuits that 

have survived a 

motion for 

summary judgment 

or the time for 

such a motion 

has passed

Final judgment or 

determination in a judicial 

or administrative 

proceeding or action

Reduced to 

final judgments 

or determinations 

with public 

records

Withdraw

al of Owner's 

Equity at 

proprietary 

institutions

Excludes 

transfers between 

institutions with 

a common 

composite score

Excludes transfers to 

affiliated entities 

included in composite 

score, reduces reporting of 

wage-equivalent 

distributions

Revised, 

clarifies the 

most common types 

of withdrawals

Mandatory Actions or Events

NonTitle IV 

Revenue 

(90/10): fails 

in most recent 

fiscal year

At 

proprietary 

institutions

At proprietary 

institutions Reclassified as a 

discretionary 

trigger

Cohort 

Default Rates

Two most 

recent rates are 

30 percent or 

above after any 

challenges or 

appeals

Two most recent rates 

are 30 percent or above 

after any challenges or 

appeals

Reclassified as a 

discretionary 

trigger

SEC or 

Exchange 

Actions 

regarding the 

institution’s 

stock 

(Publicly 

Traded 

Institutions)

Warned SEC 

may suspend 

trading; failed 

to file required 

report with SEC 

on-time; 

notified of 

noncompliance 

with Stock 

exchange 

requirements; or 

Stock delisted

SEC suspends trading 

or stock delisted

Changed 

from an SEC 

warning, which 

does not require 

shareholder 

notification, to 

events in which 

shareholder 

notification is 

required.
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654 

Accredit

or Actions – 

Teach-Outs

Accreditor 

requires 

institution to 

submit a teachout plan for 

closing the 

institution, a 

branch, or 

additional 

location

Removed Regulatory 

update 

Gainful 

Employment

Programs 

one year away 

from losing their 

eligibility for 

title IV, HEA 

program funds due 

to GE metrics

Removed Regulatory 

update

Discretionary Actions or Events

Accredit

or Actions – 

probation, 

show-cause, or 

other 

equivalent or 

greater action

Accreditor 

takes action on 

institution

Institutional 

accreditor issues a showcause order that, if not 

resolved, would result in 

the loss of institutional 

accreditation; 

accreditation is removed

Limits 

trigger to 

accreditor 

actions that do 

or could 

imminently lead 

to loss of 

institutional 

accreditation 

and/or closure of 

the school

Security 

or Loan 

Agreement 

violations

Creditor 

requires an 

increase in 

collateral, a 

change in 

contractual 

obligations, an 

increase in 

interest rates or 

payments, or 

other sanctions, 

penalties, or 

fees

Creditor requires an 

increase in collateral, a 

change in contractual 

obligations, an increase in 

interest rates or payments, 

or other sanctions, 

penalties, or fees

No Change

Cited 

for Failing 

State 

licensing or 

authorizing 

agency 

requirements

Notified of 

noncompliance 

with any 

provision

Notified of 

noncompliance relating to 

termination or withdrawal 

of licensure or 

authorization if 

institution does not take 

corrective action

Reduced 

reporting of 

State actions
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Signific

ant 

Fluctuations 

in Pell Grant 

and Direct 

Loan funds

Changes in 

consecutive award 

years, or over a 

period of award 

years, not due to 

title IV program 

changes

Removed None , not 

directly relevant 

Financia

l Stress Test

developed or 

adopted by the 

Secretary

Institutio

n fails the test 

but specific 

stress test 

never proposed 

or developed

Removed None 

because test 

never created 

High 

Drop-Out 

Rates, as 

defined by the 

Secretary

Institution 

has high annual 

drop-out rate but 

Specific 

threshold never 

developed

Included, a revision 

from the NPRM.

None 

Anticipa

ted Borrower 

Defense Claims

Secretary 

predicts claims 

as a result of a 

lawsuit, 

settlement, 

judgment, or 

finding from a 

State or Federal 

administrative 

proceeding

Removed Reduced 

Liability

Some institutions may incur burden from the 

requirement to report any action or event described in § 

668.171(e) within the specified number of days after the 

action or event occurs. As further explained in the 

Paperwork Reduction Act of 1995 section, the Department 

estimates the burden for reporting these events to the 

Secretary would be 720 hours annually for private schools 

and 2,274 hours for proprietary institutions for a total 
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656 

burden of 2,994 hours. Using an hourly rate of $44.41,181

we estimate that the costs incurred by this regulatory 

change would be $132,964 annually ($44.41*2,994). 

FASB is a standard-setting body that establishes 

generally accepted accounting principles and the Department 

requires that institutions participating in the title IV, 

HEA programs file audited financial statements annually, 

with the audits performed under FASB standards. Therefore, 

financial statements will begin to contain elements that 

are either new or reported differently, including long-term 

lease liabilities. This topic was not addressed in the 

2016 final regulations, but was included in the 2018 NPRM. 

Changes in the definition of terms used under the 

financial responsibility standards will align the 

regulations with current practice and FASB standards.182 

However, the new FASB lease standard could negatively 

affect or cause an institution to fail the composite score 

and the Department has no mechanism to make a timely 

adjustment to the composite score calculation to 

181 Hourly wage data uses the Bureau of Labor Statistics, available 

at swww.bls.gov/ooh/management/postsecondary-educationadministrators.thm. 182 www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350.
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657 

accommodate this change. The Department also has no data 

to understand what the impact of this change will be on 

institutional composite scores. Therefore, the Department 

must obtain audited financial statements prepared in 

accordance with FASB standards, and will calculate one 

composite score for an institution by grandfathering in 

leases entered into prior to December 15, 2018 (preimplementation leases) and applying the new standard to any 

leases entered into on or after that date (post 

implementation leases). 

The Department may use the data it will collect under 

the final regulations to conduct analyses that might inform 

future rulemaking to update the composite score 

methodology. As explained further in the Paperwork 

Reduction Act of 1995 section, 1,896 proprietary 

institutions and 1,799 private institutions will each need 

1 hour annually to prepare a Supplemental Schedule to post 

along with their annual audit ((1,896+1,799) x 1 hour x 

$44.41). This will result in an additional annual burden 

of $164,095. The Department is not yet receiving these 

data on institutions’ financial statements, so it is unable 

to quantify anticipated changes. 
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3.2.5. Enrollment agreements 

The final regulations would permit institutions to 

include mandatory arbitration clauses and class action 

waivers in enrollment agreements they have with students 

receiving title IV financial aid. These provisions were 

prohibited by the 2016 regulations. The recent Supreme 

Court decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 

1612 (2018) held that arbitration clauses in employment 

contracts must be enforced by the courts as written, in 

essence confirming the right of private parties to sign 

contracts that compel arbitration and waive class action 

rights. Institutions may benefit from arbitration in that 

it is a faster and less expensive way to resolve disputes, 

while reducing reputational effects; however, they may 

incur costs resulting from an increased use of arbitration 

under the final regulations. 

3.2.6. Institutional Disclosures 

Some institutions will incur costs under the proposed 

disclosure requirements. Institutions that include 

mandatory pre-dispute arbitration clauses or class action 

waivers in their enrollment agreements would be required to 

make certain disclosures. As further explained in the 

Paperwork Reduction Act of 1995 section, the Department 
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estimates the burden for making these disclosures would 

affect 944 proprietary institutions for a total of 4,720 

hours annually. Using an hourly rate of $44.41,183 we 

estimate the costs incurred by this regulatory change would 

be $209,615. Also as discussed in the Paperwork Reduction 

Act of 1995 section, we estimate these same institutions 

would be required to include this information to borrowers 

during entrance counseling, for a further burden of 3 hours 

each annually, totaling $125,769 annually (944*3*44.41). 

Therefore, we estimate the total burden for disclosures 

would be $335,384 annually ($209,615 + $125,769). 

3.3. Guaranty Agencies 

In the 2018 NPRM, the Department estimated one-time 

costs of $14,922 and annual costs of $3,286 for systems 

updates and reporting related to borrowers eligible for 

closed school discharges and for forwarding escalated 

review requests to the Secretary. As noted in the preamble 

discussion of Departmental Review of Guaranty Agency Denial 

183 Hourly wage data uses the Bureau of Labor Statistics, available 

at www.bls.gov/ooh/management/postsecondary-educationadministrators.thm.
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660 

of Closed School Discharge Requests, these provisions are 

currently in effect from the 2016 Final Rule and are not 

included in these final regulations. Therefore, the 

estimated costs from the NPRM are not included in this 

Regulatory Impact Analysis. The Department does not have 

data on interest capitalization and collection costs for 

rehabilitated loans to estimate the impact of the changes 

in the final regulations. 

3.4. Federal Government 

These final regulations would affect the Federal 

government’s administration of the title IV, HEA programs. 

The Federal government would benefit in several ways, 

including reductions in student loan discharge transfers, 

reduced administrative burden, and increased access to 

data. The Federal government would incur costs to update 

its IT systems to implement the changes. The changes to 

the financial responsibility triggers may reduce recoveries 

relative to the 2016 final rule. The Department believes 

that it has retained many of the key triggers, but, as 

noted in the Net Budget Impacts section, these changes 

could increase the costs to taxpayers. 
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3.4.1. Borrower Defenses 

The final regulations permit borrowers to submit 

claims to the Department regardless of loan status but 

impose a statute of limitations. It is more likely that 

the cost of misrepresentation would be incurred by 

institutions committing the act or omission than the 

taxpayer, because the Department would recoup defense to 

repayment discharge transfers from institutions. Further, 

because the Department estimates it will receive fewer 

borrower defense applications under the final regulations 

than under the 2016 regulations, the Department expects a 

reduction in administrative burden. 

 

3.4.2. Loan Discharges 

Under the final regulations, the Department would 

expect to process and award fewer closed school and 

potentially fewer false certification loan discharges than 

it would have under the 2016 regulations. To the extent 

defense to repayment, closed school, and false 

certification loan discharges are not reimbursed by 

institutions, Federal government resources that could have 

been used for other purposes will be transferred to 

affected borrowers. As further detailed in the Net Budget 
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662 

Impacts section, the Department estimates that annualized 

transfers from the Federal government to affected 

borrowers, partially reimbursed by institutions, would be 

reduced by $512.5 million for borrower defenses and $37.2 

million for closed school discharges with reductions in 

reimbursement from institutions of $153.4 million annually. 

This is based on the difference in cashflows associated 

with loan discharges when the final regulation is compared 

to the President’s Budget 2020 baseline (PB2020) and 

discounted at 7 percent. 

The Department has also determined that it is the 

appropriate party to provide affected students with a 

closed school discharge application and a written 

disclosure describing the benefits and consequences of a 

closed school discharge. When institutions were expected 

to fill this role, the estimated burden was approximately 

$70,000. As the Department already is in contact with 

affected students and has the relevant materials, we do not 

expect a significant increase in administrative burden 

after some initial set up costs. 

3.4.3. Financial Responsibility Standards 

The Department will benefit from receiving updated 

financial statements consistent with FASB standards and 
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663 

therefore would have data necessary for developing updated 

composite score regulations through future rulemaking. The 

financial responsibility disclosures will enable the 

Department to receive the information necessary to 

calculate the composite score. 

The Department would incur one-time costs for 

modifying eZ-Audit and other systems to collect the data 

needed to calculate composite scores under the new FASB 

reporting requirements and other systems to collect 

financial responsibility disclosures. The Department has 

not yet conducted the Independent Government Cost Estimate 

(IGCE) to determine the costs for making these system 

changes. However, the Department has not yet developed 

its internal process for implementing the final 

regulations, which may necessitate a software modification 

or individually-generated calculations; consequently, it is 

unable to estimate the change in administrative burden. 

Therefore, the Department is unable to estimate its burden 

for implementing the regulatory changes in the financial 

responsibility provisions. 

4. Net Budget Impacts 

These final regulations are estimated to have a net 

Federal budget impact over the 2020-2029 loan cohorts of $-
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664 

11.075 billion in the primary estimate scenario, including 

$-9.812 billion for changes to the defense to repayment 

provisions and $-1.262 billion for changes related to 

closed school discharges. A cohort reflects all loans 

originated in a given fiscal year. Consistent with the 

requirements of the Credit Reform Act of 1990, budget cost 

estimates for the student loan programs reflect the 

estimated net present value of all future nonadministrative Federal costs associated with a cohort of 

loans. Several comments were received about the 

assumptions for the budget estimate presented in the NPRM 

and those are addressed in the Discussion portion of this 

Net Budget Impact section. 

The Net Budget Impact compare these regulations to the 

2016 final regulations as estimate in the 2020 President’s 

Budget baseline (PB2020). This baseline assumed that the 

borrower defense regulations published by the Department on 

November 1, 2016, would go into effect and utilized the 
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665 

primary estimate scenario,184 described in the final rule 

published February 14, 2018.185 The primary difference with 

the PB2019 baseline was the effective date and the cohorts 

subject to the Federal standard established by the 2016 

final rule with cohorts 2017 to 2019 being subject to the 

2016 federal standard in the PB2020 baseline. Several 

commenters objected to the use of the PB2019 baseline as 

the basis for the budget estimate in the NPRM and the 

discrepancy with the framing of the regulation in 

comparison to the 1995 regulation in other sections of the 

NPRM and believed it could violate the APA. The Department 

maintains that the most recent budget baseline, now PB2020, 

is the appropriate baseline for estimating the net budget 

impact of these final regulations. In the absence of these 

regulations, the 2016 final regulations would go into 

effect and that is reflected in the PB2020 baseline. We 

believe this comparison is appropriate and accurately 

184 See 81 FR 76057 published November 1, 2016, available at 

ifap.ed.gov/fregisters/attachments/FR110116.pdf.

185 See 83 FR 6468, available at www.gpo.gov/fdsys/pkg/FR-2018-02-

14/pdf/2018-03090.pdf
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666 

captures that these final regulations are expected to 

reduce the amount of claims paid to students by the Federal 

government and reduce the institutional liability for 

reimbursing those claims. 

The final regulatory provisions with the greatest 

impact on the Federal budget are those related to the 

discharge of borrowers’ loans. Borrowers may pursue closed 

school, false certification, or defense to repayment 

discharges. The precise allocation across the types of 

discharges will depend on the borrower’s eligibility and 

ease of pursuing the different discharges, and we recognize 

that some applications may be fluid in classification 

between defense to repayment and the other discharges, 

particularly closed school. In this analysis, we assign 

any estimated effects from defense to repayment 

applications to the defense to repayment estimate and the 

remaining effects associated with eligibility and process 

changes related to closed school discharges to the closed 

school discharge estimate. 

4.1. Defense to Repayment Discharges 

As noted previously, the Department had to incorporate 

the changes to the defense to repayment provisions related 

to the 2016 final regulations into its ongoing budget 
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667 

estimates, and changes described here are evaluated against 

that baseline. In our main estimate, based on the 

assumptions described in Table 3, we present our best 

estimate of the impact of the changes to the defense to 

repayment provisions in the final regulation. 

4.1.1. Assumptions and Estimation Process 

The net present value of the reduced stream of cash 

flows compared to what the Department would have expected 

from a particular cohort, risk group, and loan type 

generates the expected cost of the proposed regulations. 

We applied an assumed level of school misconduct, allowable 

claims, defense to repayment applications success, and 

recoveries from institutions (respectively labeled as 

Conduct Percent, Allowable Applications Percent, Borrower 

Percent, and Recovery Percent in Table [3]) to loan volume 

estimates to generate the estimated net number of borrower 

defense applications for each cohort, loan type, and 

sector. Table [3] presents the assumptions for the main 

budget estimate with the budget estimate for each scenario 

presented in Table [4]. We also estimated the impact if 

the Department received no recoveries from institutions, 

the results of which are discussed after Table 4. 
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668 

The model can be described as follows: to generate 

gross claims (gc), loan volumes (lv) by sector were 

multiplied by the Conduct Percent (cp), the Allowable 

Applications Percent (aap) and the Borrower Percent (bp); 

to generate net claims (nc) processed in the Student Loan 

Model, gross claims were then multiplied by the Recovery 

Percent (rp). That is, gc = (lv * cp * aap * bp) and nc = 

gc – (gc * rp). The Conduct Percent represents the share 

of loan volume estimated to be affected by institutional 

behavior resulting in a defense to repayment application. 

The Borrower Percent captures the percent of loan volume 

associated with approved defense to repayment applications, 

with factors such as an individual claims process, proof of 

reliance and financial harm requirement being key 

determinants of the reduced level compared to the PB2020 

baseline. The Recovery Percent estimates the percent of 

gross claims reimbursed by institutions. The Allowable 

Applications Percent replaces the Defensive Claims Percent 

from the NPRM and captures the share of applications 

estimated to be made within the 3-year timeframe for 

borrowers in all repayment statuses to apply for defense to 

repayment. The numbers in Table 3 are the percentages 
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applied for the main estimate and PB2020 baseline scenarios 

for each assumption for cohorts 2020-2029. 

Table 3: Assumptions for Main Budget Estimate Compared 

to PB2020 Baseline 

Conduct Percent

PB2020 

Baseline 

Final Rule

Cohort Pub Priv Prop Pub Priv Prop

2020 1.7 1.7 11.6 1.62 1.62 11.02

2021 1.5 1.5 9.8 1.43 1.43 9.31

2022 1.4 1.4 8.8 1.33 1.33 8.36

2023 1.3 1.3 8.4 1.24 1.24 7.98

2024 1.2 1.2 8 1.14 1.14 7.6

2025 1.2 1.2 7.8 1.14 1.14 7.41

2026 1.1 1.1 7.7 1.05 1.05 7.32

2027 1.1 1.1 7.7 1.05 1.05 7.32

2028 1.1 1.1 7.7 1.05 1.05 7.32

2029 1.1 1.1 7.7 1.05 1.05 7.32

Allowable Applications Percent (Not in PB2020 Baseline)

Pub Priv Prop
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670 

All 

Cohorts

70

70 70

Borrower Percent

PB2020 Baseline Final Rule

Cohort Pub Priv Prop Pub Priv Prop

2020 42.4 42.4 54.6 3.3 3.3 4.95

2021 46.7 46.7 60 3.75 3.75 5.475

2022 50 50 63 4.125 4.125 5.925

2023 50 50 65 4.5 4.5 6.3

2024 50 50 65 4.8 4.8 6.75

2025 50 50 65 5.25 5.25 6.975

2026 50 50 65 5.25 5.25 7.5

2027 50 50 65 5.25 5.25 7.5

2028 50 50 65 5.25 5.25 7.5

2029 50 50 65 5.25 5.25 7.5

Recovery Percent

PB2020 Baseline Final Rule

Cohort Pub Priv Prop Pub Priv Prop

2020 75 28.8 28.8 75 16 16

2021 75 31.68 31.68 75 20 20

2022 75 33.26 33.26 75 20 20

2023 75 34.93 34.93 75 20 20
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671 

2024 75 36.67 36.67 75 20 20

2025 75 37.4 37.4 75 20 20

2026 75 37.4 37.4 75 20 20

2027 75 37.4 37.4 75 20 20

2028 75 37.4 37.4 75 20 20

2029 75 37.4 37.4 75 20 20

As in previous estimates, the recovery percentage 

reflects the fact that public institutions are not subject 

to the changes in the financial responsibility triggers 

because of their presumed backing by their respective 

States, which has never depended upon or been linked to a 

specific provision of any borrower defense regulation. 

Therefore, the PB2020 baseline and main recovery scenarios 

are the same for public institutions and set at a high 

level to reflect the Department’s confidence in recovering 

amounts from the expected low number of claims against 

public institutions. The decrease in the recovery 

percentage assumption for private and proprietary 

institutions compared to the PB2020 baseline reflects the 

removal or modification of some financial responsibility 

triggers as described in Table 2. We do not specify how 

many institutions are represented in the estimate as the 
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672 

assumptions are based on loan volumes and the scenario 

could represent a substantial number of institutions 

engaging in acts giving rise to defense to repayment 

applications or could represent a small number of 

institutions with significant loan volume subject to a 

large number of applications. According to Federal Student 

Aid data center loan volume reports, the five largest 

proprietary institutions in loan volume received 25.7 

percent of Direct Loans disbursed in the proprietary sector 

in award year 2017-18 and the 50 largest proprietary 

institutions represent 70.7 percent of Direct Loans 

disbursed in that same time period.186 We were conservative 

in our estimates of the share of volume captured in the 

conduct percentage and the number of applications submitted 

in the Allowable Applications percentage as we did not want 

to underestimate costs associated with changes to the 

borrower defense regulations. Due to the similarities 

186 Federal Student Aid, Student Aid Data: Title IV Program Volume 

by School Direct Loan Program AY2015-16, Q4, available at 

studentaid.ed.gov/sa/about/data-center/student/title-iv accessed August 

22, 2016.
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673 

between the conduct covered by the standard in the proposed 

regulations and the standard in the 2016 final regulations, 

as described in the Discussion segment, the Conduct Percent 

did not change from the PB2020 Baseline as much as the 

Borrower Percent. Changes to the definition of 

misrepresentation to require reasonable reliance and a 

materiality threshold, as further described in the Analysis 

of Comments and Changes –Evidentiary Standard for Asserting 

a Borrower Defense section of this preamble are reflected 

in the changes to the Borrower Percent as part of the 

likelihood of the borrower succeeding with their defense to 

repayment. As recent loan cohorts progress further in 

their repayment cycles, if future data indicate that the 

percent of volume affected by conduct that meets the 

standard that would give rise to defense to repayment 

applications differs from current estimates, that 

difference will be reflected in future baseline reestimates. 

4.1.2. Discussion 

The Department has some additional experience with 

processing defense to repayment applications and data on 

the approximately 230,000 applications received since 2015, 

but while this information has helped inform these 
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674 

estimates, it does not eliminate the uncertainty about 

institutional and borrower response to the final 

regulations. As noted earlier, given the limited number of 

applications that the Department has adjudicated, both in 

number and sector of institutions that are represented in 

this number, our data may not reflect the final results of 

the Department’s review and approval process. 

As a result of comments received and the Department’s 

continued internal deliberations, a number of changes were 

made from the proposed regulation in the NPRM published 

July 31, 2018. Several commenters suggested allowing 

affirmative claims, expanding the timeframe for borrowers 

to make claims, and not requiring student borrowers to 

prove an institution’s intent to mislead them. A number of 

commenters expressed concern that the Department’s 

alternative in the proposed rule, which would provide 

relief to borrowers in a collection proceeding, could 

encourage students to engage in strategic defaults and 

would give preferential treatment to borrowers in default 

as compared to those in repayment. The Department agrees 

with these concerns and therefore is removing the 

references to affirmative or defensive claims. Instead, 

these final regulations provide a borrower -– regardless of 
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675 

whether that borrower is in repayment, forbearance, 

deferment, default, or collection –- an opportunity to 

submit a borrower defense to repayment application for loan 

forgiveness. Other commenters expressed concern that 

affirmative claims could lead to an increase in frivolous 

claims, which could increase the cost of responding to 

these claims on the part of the institution and the 

Department. In order to reduce the number of unjustified 

claims, the Department has included in these final 

regulations that borrowers must prove reasonable reliance 

on the institution’s misrepresentation, that the 

misrepresentation caused financial harm to the borrower, 

and that the borrower submitted a borrower defense to 

repayment application three years from the date of 

graduation or withdrawal from the institution. The 

Department believes that a borrower would know within three 

years of departing the institution whether the institution 

had made a misrepresentation to the borrower and caused the 

borrower financial harm. This three-year period also 

aligns with the Department’s records retention policies, 

which is important since the final regulation seeks to 

enable the Department to review a complete record, 

including the institution’s response to the student’s 
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676 

allegations of misrepresentation. That change is reflected 

in the Allowable Applications Percent and would likely 

reduce the estimated savings from the proposed regulations 

in the NPRM, although the precise outcome depends upon the 

balance between the 3-year timeframe for filing and 

removing the limitation to defensive claims only. Although 

some commenters supported the use of a preponderance of 

evidence standard in adjudicating claims, others commented 

that given the tendency for institutional 

misrepresentations to be referred to as fraud, the 

Department’s standard should more closely align with that 

required by most states in adjudicating claims of consumer 

fraud. The Department has decided to retain the 

preponderance of evidence standard to provide a reasonable 

opportunity for a borrower to seek and receive student loan 

relief. Therefore, more borrowers, including those not in 

default or collections, will have an opportunity to prove 

their defense to repayment application should be approved, 

but the borrowers will have to prove more elements of 

misrepresentation including materiality, with the budget 

effects of the two changes going in opposite directions. 

Nothing in this regulation interferes with other rights of 

the borrower, including during a collections procedure, to 
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677 

assert equitable defenses, such as equitable recoupment. By 

itself, the Federal standard is not expected to 

significantly change the percent of loan volume subject to 

conduct that might give rise to a borrower defense claim. 

The changes in the misrepresentation definition and removal 

of the breach of contract claims will have some downward 

effect, so the conduct percent is assumed to be 95 percent 

of the PB2020 baseline level.. 

In addition, some commenters addressed specific 

aspects of the Department’s assumptions and budget estimate 

or provided additional information for the Department to 

consider. These comments are addressed below in the 

discussion relevant to the specific assumptions. 

As has been estimated previously, we are incorporating 

a deterrent effect of the borrower defense to repayment 

provisions on institutional behavior as is reflected in the 

decrease in the conduct percent in Table [3]. One 

commenter challenged the inclusion of a deterrent effect as 

unreasonable because several of the mechanisms that would 

act as a deterrent under the 2016 rule would not be 

included in these final regulations. The commenter argued 

that the prohibition of pre-dispute arbitration and 
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678 

increased financial responsibility triggers in the 2016 

rule would result in higher liabilities and increased 

transparency with respect to institutional 

misrepresentation and form a basis for a deterrent effect 

on institutional conduct in the 2016 rule. According to the 

commenter, allowing pre-dispute mandatory arbitration and 

the reduced applications and resulting liabilities reduces 

the reputational risk to institutions and makes the 

inclusion of a deterrent effect unreasonable. This 

commenter also asserts that there will likely be an 

increase in the percentage of unlawful conduct due to the 

elimination of the gainful employment rule in addition to 

these final regulations. The Department acknowledges that 

the financial responsibility triggers have changed and the 

mechanisms to influence institutional conduct are different 

under these final regulations, but we still believe that 

the potential liability, political risk, and some 

reputational risk will continue to have some deterrent 

effect. We recognize that the timing or extent of this 

effect may vary from that under the 2016 rule and have 

developed an alternative scenario with no deterrent effect 

in the additional scenarios presented in Table 4 to capture 

the possibility raised by the commenter that institutions 
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679 

will not modify their behavior. A commenter also 

questioned the recovery percentage applied given the 

changes in the financial protection triggers compared to 

the 2016 rule. In particular, the commenter pointed to the 

increased timeframe for recovery and the increased number 

of more predictive financial responsibility triggers in the 

2016 rule as reasons for higher recovery rates that 

increased over time from about 25 percent to 37 percent. 

The Department appreciates the comment and agrees with the 

commenter that the changes in the timeframe for recovery 

and changes in the triggers in the final regulations will 

reduce the percentage of gross claims recovered from 

institutions, as was reflected in the reduced recovery 

percentage in the NPRM of 16 percent to 25 percent compared 

to the PB2020 baseline of 28 to 37 percent. As there is 

limited information about recoveries related to borrower 

defense claims currently being processed, the exact 

percentage that will be recovered is uncertain, as it was 

for the 2016 final regulations, and the Department and the 

commenter disagree on the extent to which recoveries will 

be reduced by the timeframe and the changes in triggers 

that the Department supports for the reasons detailed in 

the Analysis of Comments and Changes related to the 
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680 

Financial Responsibility provisions. These final 

regulations also revise the treatment of discretionary 

events so that they are treated as mandatory events if 

multiple events occur in the period between the calculation 

of composite scores, unless a triggering event is resolved 

before subsequent events occur. The discretionary trigger 

related to high dropout rates was also included after being 

removed in the NPRM. We believe these changes support the 

recovery level the Department has assumed for its 

estimates. Additionally, the sensitivity run related to 

recovery rates and the no-recovery scenario described after 

Table 4 are designed to reflect the possibility that 

recoveries will be lower than anticipated in the main 

estimate, and the Department believes this is appropriate 

to address the concerns raised by the commenter about the 

level of recoveries. Upon consideration, the Department 

does agree that the ramp-up in recovery rates is likely 

aggressive compared to the 2016 final regulations which 

included triggering events at earlier stages that the 

Department now considers an overreach. The ramp-up in 

recoveries has been modified to reflect this 

reconsideration, as demonstrated in Table 3. 
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681 

Overall, we expect that the changes in the final 

regulations that will reduce the anticipated number of 

borrower defense applications are related more to changes 

in the process , not due to changes in the type of conduct 

on the part of an institution that would result in a 

successful defense, as demonstrated by the 95 percent 

overlap compared to the PB2020 baseline. 

The final regulations modify the framework in which 

borrower defense to repayment applications are submitted in 

response to certain collection activities initiated by the 

Department, specifically administrative wage garnishment, 

Treasury offset, credit bureau default reporting, and 

Federal salary offset. As has always been the case, 

borrowers will be able to seek relief from their 

institutions in State or Federal courts or from State or 

Federal agencies, or through arbitration, but defense to 

repayment applications through the Department will be 

reserved to applications made in the first three years 

after the borrower leaves the institution. In the estimate 

for the NPRM, the Department used the assumed default rates 

by student loan model risk group to estimate the percent of 

loan volume associated with borrowers who, over the life of 

the loan, might be in a position to raise a defense to 
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682 

repayment. As the final regulations allow applications 

within three years of leaving an institution, the 

Department looked at existing borrower defense claims by 

time to submission from the date the borrower completed or 

exited the program. Approximately 30 percent of existing 

claims were submitted within 3-years or less. The 

Department anticipates that this share will increase when 

borrowers have the incentive to file within the 3-year 

timeframe established by the final regulations. Therefore, 

we used the approximately 67 percent of existing claims 

filed within 5 years as the basis for the 70 percent 

assumed for the Allowable Applications Percent in Table [3] 

to capture the potential effect of this incentive. 

Several process changes contribute to the reduction in 

the Borrower Percent compared to the PB2020 baseline 

assumption. A separate assumption for the allowable 

applications provision was explicitly included so it could 

be varied in sensitivity runs or in response to comments. 

Specifically, the final regulations modify the definition 

of misrepresentation. This requires borrowers to prove 

reliance upon the misrepresentation and the financial harm 

they experienced. Another significant factor is the 
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683 

emphasis on determinations of individual applications and 

the lack of an explicit process for aggregating like 

applications. The Department will be able to group like 

applications against an institution for more efficient 

processing, but, even if there is a finding that covers 

multiple borrowers, relief will be determined on an 

individual basis and be related to the level of financial 

harm proven by the borrower. Together, these changes could 

require more effort on the part of individual borrowers to 

submit a borrower defense application, which is reflected 

in the change in the Borrower Percent assumption. 

The net budget impact of the emphasis on other avenues 

for relief is complicated by the potential for amounts 

received in lawsuits, arbitration, or agency actions to 

reduce the amount borrowers would be eligible to receive 

through a defense to repayment filing. While it would be 

prudent for borrowers to use any funds received with 

respect to the Federal loans in such proceedings to pay off 

the loans, there is no mechanism in the proposed 

regulations to require this. This offset of funds received 

in other actions was also a feature in the 2016 final 

regulations, but the majority of applications processed did 

not have offsetting funds to consider due to the 
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684 

precipitous closure of two large institutions. 

Accordingly, we are not assuming a budgetary impact 

resulting from prepayments attributable to the possible 

availability of funds from judgments or settlement of 

claims related to Federal student loans. Another factor 

that could affect the number of defense applications 

presented is the role of State Attorneys General or State 

agencies in pursuing actions or settlements with 

institutions about which they receive complaints. The 

level of attention paid to this area of consumer protection 

could alert borrowers in a position to apply for a defense 

to repayment and result in a different number of 

applications than the Department anticipates. Evidence 

developed in such proceedings could be used by borrowers to 

support their individual applications. However, unlike in 

the 2016 final regulations, final judgments on the merits 

of such lawsuits or other allegations made by State 

Attorneys General will not provide an automatic basis for a 

successful borrower defense application, further 

contributing to the reduction of the assumed borrower 

percent. 

The Department has used data available on defense to 

repayment applications, associated loan volumes, 
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Departmental expertise, the discussions at negotiated 

rulemaking, information about past investigations into the 

type of institutional acts or omissions that would give 

rise to defense to repayment applications, and decisions of 

the Department to create new sanctions and apply them to 

institutions thus instigating precipitous closures to 

develop the main estimate and sensitivity scenarios that we 

believe will capture the range of net budget impacts 

associated with the defense to repayment regulations. 

4.1.3. Additional Scenarios 

The Department recognizes the uncertainty associated 

with the factors contributing to the main budget assumption 

presented in Table 3. For example, allowing institutions 

to present evidence may result in fewer unjustified 

findings of misrepresentation that lead to an adjudicated 

claim. We have not included the impact of this potential 

evidence in our calculations as we have no basis for 

determining the impact that an institutional defense will 

have on the adjudication of applications. The uncertainty 

in the defense to repayment estimate, given the unknown 

level of future school conduct that could give rise to 

claims; institutions’ reaction to the regulations to 

eliminate such activities; the impact of allowing 
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686 

institutions to present evidence in response to borrowers’ 

applications; the expansion of College Scorecard data to 

include program level outcomes, potentially reducing the 

opportunity for misrepresentation by providing information 

on outcomes on a common basis; the extent of full versus 

partial relief granted; the level of State activity are 

reflected in additional analyses that demonstrate the 

effect of changes in the specific assumption being tested. 

Some commenters suggested additional runs that would single 

out individual aspects of the assumptions like the 

individual versus group processing of claims, a factor the 

commenter correctly points out is a major contributor to 

the reduction in the borrower percentage. However, the 

borrower defense assumptions have never been specified by 

individual components and the data to do so is limited, so 

the sensitivity runs are designed to capture the effect of 

changes in the assumptions, whatever the combination of 

factors that may cause the change. The Department believes 

this is appropriate and avoids a false sense of precision 

about the effect of changes to specific components of the 

assumptions. 

The Department designed the following scenarios to 

isolate the assumption being evaluated and adjust it in the 
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687 

direction that would increase costs, increasing the 

Allowable Applications or Borrower Percent and decreasing 

the recovery percent. The first scenario the Department 

considered is that the Allowable Applications Percent will 

increase by 15 percent (AAP15). This could occur if 

economic conditions or strategic behavior by borrowers 

increase defaults or more borrowers than anticipated file 

applications within the 3-year window. In the second 

scenario the Department increased the Borrower Percent by 

25 percent (Bor25) to reflect the possibility that 

outreach, model applications, or other efforts by students 

may increase the percent of loan volume associated with 

successful defense to repayment applications. As the gross 

borrower defense claims are generated by multiplying the 

estimated volumes by the Conduct Percent, Allowable 

Applications Percent, and the Borrower Percent, the 

scenarios capture the impact of a 15 percent or 25 percent 

change in any one of those assumptions. The Recovery 

Percentage is applied to the gross claims to generate the 

net claims, so the RECS scenario reduces recoveries by 

approximately 40 percent to demonstrate the impact of that 

assumption. We also included the combined scenario that 

includes those changes together as they may likely occur 
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688 

simultaneously. In response to commenter concerns about the 

potential absence of a deterrent effect on institutional 

behavior, we have added a scenario that keeps the highest 

level of the conduct percentage across all cohorts in the 

No Deter scenario. The final scenario (Bor50) takes a 

different approach and recognizes that the borrower percent 

changed significantly from the 2016 final rule. As we have 

discussed throughout the Net Budget Impact section, the 

impact associated with the changes made in these final 

regulations is speculative, so this run assumes a 50 

percent reduction in the borrower percent from the 2016 

final rule assumptions that are in the PB2020 budget 

baseline. This would reflect a scenario where many 

borrowers who may have been brought in through a group 

claim submit applications and are able to provide the 

information to support their application. The net budget 

impacts of the various additional scenarios compared to the 

PB2020 baseline range from $-7.97 billion to $-9.70 billion 

and are presented in Table 4. 
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Table 4: Budget Estimates for Additional Borrower 

Defense Scenarios 

Scenario 

Estimated Costs

for Cohorts 

2020-2029 

(Outlays in $mns) 

Main Estimate -9,812

AAP15 $-9,699

Bor25 $-9,656

Recs40 $-9,690

No deterrence $-9,567

Combined $-9,047

Bor50 $-7,972

The transfers among the Federal government, affected 

borrowers, and institutions associated with each scenario 

above are included in Table 5, with the difference in 

amounts transferred to borrowers and received from 

institutions generating the budget impact in Table 3. The 

amounts in Table 4 assume the Federal Government will 

recover from institutions some portion of amounts 

discharged. In the absence of any recovery from 

institutions, taxpayers would bear the full cost of 
This is an unofficial version. The official version will 

be published in the Federal Register. 

690 

approved defense to repayment applications. For the 

primary budget estimate, the annualized costs with no 

recovery are approximately $498 million at a 3 percent 

discount rate and $512.5 million at a 7 percent discount 

rate. This potential increase in costs demonstrates the 

effect that recoveries from institutions have on the net 

budget impact of the final defense to repayment 

regulations. 

4.2. Closed School Discharges 

In addition to the provisions previously discussed, 

the final regulations also would make two changes to the 

closed school discharge process that are expected to have 

an estimated net budget impact of -$1.2621 billion, of 

which -$187 million is a modification to past cohorts 

related to the elimination of the automatic three-year 

discharge for schools that close on or after July 1, 2020. 

The combined effect of the elimination of the three-year 

automatic discharge and the expansion of the eligibility 

window to 180 days for Direct Loan borrowers is -$1,075 

million for cohorts 2020-2029. In the NPRM version, 

students offered a teach-out opportunity approved by the 

institution’s accrediting agency and State authorizing 

agency were not eligible for a closed school discharge. In 
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691 

the final regulations, students are eligible to receive a 

closed school loan discharge unless they transfer their 

credits, or participate in an approved teach-out plan. Once 

a borrower chooses to participate in an approved teach-out 

plan, they are no longer eligible for a closed school loan 

discharge unless the institution fails to materially meet 

the requirements of the approved teach-out plan. As with 

the estimates related to the borrower defense to repayment 

provisions, the net budget impact estimates for the closed 

school discharge provisions are developed from the PB2020 

budget baseline that accounted for the delayed 

implementation of the 2016 final regulations and assumed 

the 2016 final regulations would take effect on July 1, 

2019. 

As described in the regulation, the standard path to 

such a discharge will require borrowers to submit an 

application. The savings from eliminating the three-year 

automatic closed school discharge provisions offset the 

costs of expanding the eligibility window to 180 days for 

cohorts 2020-2029. The precise interaction between the two 

effects is uncertain as outreach and better information for 

borrowers about the closed school loan discharge process 

may increase the rate of borrowers who submit applications. 
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692 

In estimating the effect of the 2016 final regulations, the 

Department looked at all Direct Loan borrowers at schools 

that closed from 2008–2011 to see the percentage of loan 

volume associated with borrowers that had not received a 

closed school discharge and had no NSLDS record of title-IV 

aided enrollment in the three years following their 

school’s closure and found it was approximately double the 

amount of those who received a discharge. This could be 

because the students received a teach-out or transferred 

credits and completed their program without additional 

title IV aid, or it could be that the students did not 

apply for the discharge because of a lack of awareness or 

other reasons. Whatever the reason, in estimating the 

potential cost of the 3-year automatic discharge provision 

in the PB2020 baseline, the Department applied this 

increase to the closed school discharge rate. For these 

final regulations, we have reversed the increase attributed 

to the 3-year automatic discharge. 

The volume of additional discharges that might result 

from the expansion of the window is also difficult to 

predict. The Department analyzed borrowers who were 

enrolled within 180 days of the closure date for 

institutions that closed between July 1, 2011 and February 
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693 

13, 2018 and found that borrowers who withdrew within the 

121 to 180-day time frame would increase loan volumes 

eligible for discharge by approximately nine percent. 

However, it is possible that some borrowers who complete 

their programs in that window or the current 120-day window 

for eligibility would choose to withdraw and pursue a 

closed school loan discharge instead of completing the 

program if the school closure is known in advance. The 

likelihood of this is unclear as it might depend on the 

relative length of the program, the time the borrower has 

remaining in the program, and the borrower’s perception of 

the value of the credential versus the burden of starting 

the program over again as compared to the prospect of debt 

relief. Further, if the student knows that the school 

plans to close, it is likely because the school has 

implemented a teach-out plan, which would negate the 

borrower’s ability to claim a closed school discharge if 

borrower accepts the teach-out. For these reasons, the 

Department did not adjust for this strategic withdrawal 

factor in estimating the impact of the expansion of the 

eligibility window. 

The incentives in the final regulations with respect 
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694 

to teach-outs are similar to the existing regulations for 

both institutions and borrowers, so the Department has 

reversed the 65 percent reduction in the baseline closed 

school discharges estimated in the NPRM, reducing the 

overall savings estimated for the closed school discharge 

provision. As is demonstrated by the estimated net savings 

from the closed school discharge changes, the removal of 

the three-year automatic discharge provisions is still 

expected to reduce the anticipated closed school discharge 

claims significantly more than the expansion of the window 

to 180 days increases them. 

4.3. Other Provisions 

The final regulations will also make a number of 

changes that are not estimated to have a significant net 

budget impact including changes to the financial 

responsibility standards and treatment of leases, false 

certification discharges, guaranty agency collection fees 

and capitalization, and the calculation of the borrower’s 

subsidized usage period process. The false certification 

discharge changes update the regulations to reflect current 

practices. The proposed regulations would also make 

borrowers who provide a written attestation of high school 

completion in place of an earned but unavailable high 
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695 

school diploma ineligible for a false certification 

discharge. In FY2017, false certification discharges 

totaled approximately $7 million. As before, we do not 

expect a significant change in false certification 

discharge claims that would result in a significant budget 

impact from this change in terms or use of an application 

that has been available at least ten years in place of a 

sworn statement. False certification discharges may 

decrease due to the ineligibility of borrowers who submit a 

written attestation in place of a high school diploma, but 

given the low level of false certification discharges in 

the baseline, even if a large share were eliminated, it 

would not have a significant net budget impact. Therefore, 

we do not estimate an increase in false certification 

discharge claims or their associated discharge value. 

Some borrowers may be eligible for additional 

subsidized loans and no longer be responsible for accrued 

interest on their subsidized loans as a result of their 

subsidized usage period being eliminated or recalculated 

because of a closed school, false certification, unpaid 

refund, or defense to repayment discharge. As in the 

2016 final regulations, we believe the institutions 

primarily affected by the 150 percent subsidized usage 
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696 

regulation are not those expected to generate many of the 

applicable discharges, so this reflection of current 

practice is not expected to have a significant budget 

impact. 

5. Accounting Statement 

As required by OMB Circular A-4 we have prepared an 

accounting statement showing the classification of the 

expenditures associated with the provisions of these 

regulations (see Table 5). This table provides our best 

estimate of the changes in annual monetized transfers as a 

result of these proposed regulations. The amounts 

presented in the Accounting Statement are generated by 

discounting the change in cashflows related to borrower 

discharges for cohorts 2020 to 2029 from the PB2020 

baseline at 7 percent and 3 percent and annualizing them. 

This is a different calculation than the one used to 

generate the subsidy cost reflected in the net budget 

impact, which is focused on summarizing costs at the cohort 

level. As the life of a cohort is estimated to last 40 

years, the discounting does have a significant effect on 

the impact of the difference in cashflows in the outyears. 

Expenditures are classified as transfers from the Federal 

Government to affected student loan borrowers.
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697 

Table 5: Accounting Statement: Classification of 

Estimated Expenditures (in millions)

Category Benefits

Disclosure to borrowers about use of 

mandatory pre-dispute arbitration clauses 

and potential increase in settlements 

between borrowers and institutions. 

Not Quantified 

Reduced administrative burden 

related to processing defense to 

repayment applications. 

Not Quantified 

Cost reductions associated with 

paperwork compliance requirements 

7%

-

$6.01

3%

-

$6.02

Category Costs

Changes in Department’s systems to 

collect relevant information and 

calculate revised composite score 

Not Quantified 

Category Transfers

Reduced defense to repayment 

discharges from the Federal Government to 

affected borrowers (partially borne by 

affected institutions, via 

reimbursements. 

7%

$-

512.5

3%

$-

498.0

Reduced reimbursements of borrower 

defense claims from affected institutions 

to affected student borrowers, via the 

Federal government. 

$-

153.4

$-

149.0

Reduced closed school discharges 

from the Federal Government to affected 

borrowers 

$-

37.2

$-

40.6
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698 

Previous Accounting Statements by the Department, 

including for the 2016 final regulations, presented a 

number that was the average cost for a single cohort. If 

calculated in that manner, the reduced transfers for 

defense to repayment from the Federal government to 

affected borrowers would be $-1,377.0 billion, 

reimbursements would be reduced $-414.08 million, and 

closed school discharge transfers would be reduced $-140.61 

million at a 7 percent discount rate. 

6. Regulatory Alternatives Considered 

In response to comments received and the Department’s 

further internal consideration of these final regulations, 

the Department reviewed and considered various changes to 

the final regulations detailed in this document. The 

changes made in response to comments are described in the 

Analysis of Comments and Changes section of this preamble. 

We summarize below the major proposals that we considered 

but which we ultimately declined to implement in these 

regulations. 

In particular, the Department extensively reviewed the 

financial responsibility provisions and related disclosures 

and arbitration provisions of these final regulations. In 

developing these final regulations, the Department 
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699 

considered the budgetary impact, administrative burden, and 

effectiveness of the options it considered. 

Table 6--Comparison of Alternatives 

Topic Basel

ine 

Altern

atives 

Propos

al 

Final 

Borrow

er Defense 

claims 

accepted 

Affir

mative and 

defensive 

Defens

ive only, 

Affirmative 

and 

defensive, 

Affirm

ative and 

defensive 

with a 

limitation 

period 

Defens

ive only 

Claims 

from any 

borrower 

within 

three years 

after 

leaving the 

institution

, 

regardless 

of the 

borrower’s 

repayment 

status, 

with some 

extension 

for those 

who are 
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700 

involved in 

arbitration 

hearings 

Party 

that 

adjudicates 

borrower 

defense 

claims 

Depar

tment 

Depart

ment, 

State 

court or 

arbiter 

Depart

ment 

Depart

ment 

Standa

rd for 

borrower 

defense 

claims 

Feder

al 

Standard 

State 

laws, 

Federal 

standard 

Federa

l standard 

Federa

l standard 

Borrow

er defense 

application 

process 

Appli

cation 

Submit 

judgment 

from state 

court or 

similar 

using 

application

, Submit 

sworn 

Select 

borrower 

defense in 

response to 

wage 

garnishment 

or similar 

actions 

Applic

ation 
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701 

attestation 

or 

application

, select 

borrower 

defense in 

response to 

wage 

garnishment 

or similar 

actions, 

and 

Application

Loans 

associated 

with BD 

claims 

Forbe

arance 

during 

adjudicati

on and 

interest 

accrues 

Forbea

rance 

during 

adjudicatio

n process 

and 

interest 

accrues; 

forbearance 

Forbea

rance not 

necessary 

Forbea

rance 

during 

adjudicatio

n and 

interest 

accrues 
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702 

not 

necessary 

Closed 

school 

discharge 

eligibility 

window 

120 

days 

120, 

150, and 

180 days 

180 

days 

180 

days 

Closed 

school 

discharge 

exclusions 

Borro

wer 

completed 

teach-out 

or 

transferre

d credits 

Borrow

er 

completed 

teach-out 

or 

transferred 

credits, 

School 

offered a 

teach-out 

plan 

School 

offered a 

teach-out 

plan 

Borrow

er 

completed 

teach-out 

or 

transferred 

credits 

Compos

ite score 

calculation 

and 

timeline 

No 

FASB 

updates 

No 

changes 

until full 

negotiation 

of 

Higher 

of current 

or FASBupdated 

Curren

t leases 

grandfather

ed; FASB 
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703 

composite 

score; no 

grace 

period or 

phase-in 

for FASB 

updates; 

higher of 

current or 

FASBupdated 

score 

forever; 

and higher 

of current 

or FASBupdated 

score for 6 

years, then 

FASBupdated 

score 

score 

forever 

applies on 

renewal. 
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704 

Financ

ial 

responsibil

ity 

triggers 

Repor

ting that 

automatica

lly 

results in 

surety 

request 

New 

reporting 

that may 

result in 

surety 

request, 

new 

reporting 

that 

automatical

ly results 

in surety 

request 

New 

reporting 

that may 

result in 

surety 

request 

New 

reporting 

that may 

result in 

surety 

request 

Notifi

cation of 

mandatory 

arbitration 

and class 

action 

waivers 

Prohi

bits 

mandatory 

arbitratio

n clauses 

and class 

action 

waivers 

On 

website, 

during 

entrance 

and exit 

counseling, 

and 

annually by 

email to 

students; 

Notifi

cation of 

students on 

website and 

entrance 

counseling 

Notifi

cation of 

students on 

website and 

during 

entrance 

counseling 
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705 

no required 

notificatio

n beyond 

the 

enrollment 

agreement; 

notificatio

n of 

students on 

website and 

during 

entrance 

counseling 

6.2. Summary of Final Regulations 

The final regulations amend the baseline regulations 

to update composite score calculations to comply with new 

FASB standards, but provide a grandfathering period for 

existing leases; require institutions to disclose fewer 

adverse events to the Department; require notification 

regarding mandatory pre-dispute arbitration clauses or 

agreements or class-action prohibitions; expand the closed 

school discharge eligibility period; modify the conditions 
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706 

under which a Direct Loan borrower may qualify for false 

certification and closed school discharges; eliminate the 

automatic closed school discharge for schools that closed 

on or after July 1, 2020; revise the Federal standard for 

borrower defense claims for loans disbursed on or after 

July 1, 2020; eliminate the borrower defense group 

application provision for loans disbursed on or after July 

1, 2020; and request evidence from institutions prior to 

completing adjudication of any borrower defense claims. 

Finally, there are changes to the regulations collection 

costs charged by guaranty agencies. 

6.3. Discussion of Alternatives 

The Department considered a broad range of provisions 

relative to borrower defenses to repayment. One option 

would require borrowers to submit a judgment from a Federal 

or State court or arbitration panel to qualify for a 

defense to repayment discharge, which would not include a 

process for the Department to adjudicate claims because 

claimants would already have obtained a decision from a 

court or arbitrator at the State level. This alternative 

would place an increased burden on borrowers if they decide 

to hire a lawyer in order to present their claims to a 

State court or incur costs associated with an arbitration 
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707 

proceeding. Moreover, because consumer protection laws 

vary by State, a borrower filing a claim in one State may 

be subject to different criteria compared to a borrower 

filing a defense to repayment claim in another State. It 

may also be unclear as to which State serves as the 

relevant jurisdiction for a given borrower. A second option 

would be to rescind the 2016 regulations on borrower 

defenses and go back to the 1995 regulations. In this 

alternative the Department would accept only defensive 

borrower defense claims to repayment applications or 

attestations and adjudicate them, applying a State law 

standard. Under this alternative, borrowers could elect to 

have loans placed in forbearance while their claims are 

adjudicated. 

The Department considered keeping the closed school 

discharge eligibility window at 120 days or expanding it to 

150 or 180 days. Further, one option excludes students 

whose institutions offer them a teach-out plan from such a 

discharge, while another option excludes borrowers who 

complete a teach-out or transfer credits. One alternative 

considered for the false certification discharge provisions 

included rescission of the technical changes in the 2016 

final regulations. 
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708 

Relative to pre-dispute arbitration and class-action 

waiver policies, alternatives included requiring an 

institution to notify current and potential students on its 

website, at entrance and exit counselling for all title IV 

borrowers, and annually to all enrolled students by email; 

and requiring no notification beyond the enrollment 

agreement. 

Lastly, alternatives were considered related to 

financial responsibility. One option would implement 

revisions to FASB standards in the calculation of an 

institution’s composite score without a transition period 

and would prevent an institution from appealing the 

composite score calculation while others provided for a 

transition period or made no changes at all. Whether the 

Department would require (automatically, discretionarily, 

or at all) that the institution automatically provide a 

surety in the event that a financial responsibility risk 

event occurs was considered. 

7. Regulatory Flexibility Act 

Section 605 of the Regulatory Flexibility Act (5 

U.S.C. 603(a)) allows an agency to certify a rule if the 

rulemaking does not have a significant economic impact on a 

substantial number of small entities. This certification 
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709 

was revised from the NPRM based upon public comment to 

improve its clarity. . 

Comments: The Small Business Association Office of 

Advocacy expressed concern that the Department has 

certified that the proposed rule will not have a 

significant economic impact on a substantial number of 

small entities without providing a sufficient factual basis 

for the certification as required by the Regulatory 

Flexibility Act. The commenter stated that, at a minimum, 

the factual basis should include: (1) identification of the 

regulated small entities based on the North American 

Industry Classification System; (2) the estimated number of 

regulated small entities; (3) a description of the economic 

impact of the rule on small entities; and (4) an 

explanation of why either the number of small entities is 

not substantial or the economic impact is not significant 

under the RFA. They noted that the Department’s estimated 

costs are assumed to be the same for large and small 

entities, which the commenter objected to on the basis that 

small institutions have reduced economies of scale. The 

commenter objected to the Department’s statement that 

potential economic impacts would be minimal and entirely 

beneficial to small institutions, and claimed the 
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710 

Department lacked data to support the statement. The 

commenter suggested that the Department should analyze 

significant alternatives, including: an early claim 

resolution process to minimize the potential cost of 

borrower defense claims; allowing borrowers to bring 

affirmative claims against institutions up to three years 

after the date of graduation; and applying a clear and 

convincing evidentiary standard. 

The commenter also points out that, currently, the 

Department requires institutions to maintain student data 

for three years after a student’s graduation, but if a 

borrower may bring a claim at any point in repayment, 

schools must maintain student data for decades. 

Nevertheless, the record contains no information on how 

high this cost could be. The commenter expressed concern 

that the need to maintain student data will impose 

significant liability on small institutions for 

cybersecurity and student privacy. The commenter stated 

that these costs to smaller institutions should be 

analyzed, and recommended that the Department publish for 

public comment either a supplemental certification with a 

valid factual basis or an Initial Regulatory Flexibility 

Analysis (IRFA) before proceeding with this rulemaking. 
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711 

Discussion: We disagree that the Department did not 

provide sufficient factual basis for the Regulatory 

Flexibility Act certification. Specifically, the 

Department proposed in the Federal Register and requested 

comment on a definition of small institutions that it is 

capable of computing using its own data (see: SBA Office of 

Advocacy, August 2017, A Guide for Government Agencies: How 

to Comply with the Regulatory Flexibility Act, p. 15, 

available at: www.sba.gov/sites/default/files/advocacy/Howto-Comply-with-the-RFA-WEB.pdf). We have revised our 

certification to increase clarity and to account for 

changes in the final regulations, including a three-year 

period of limitations on borrower defense to repayment 

applications, including affirmative claims, from the date 

the borrower is no longer enrolled at the institution. 

Finally, the Department defines significant economic impact 

as a burden or cost to small institutions, and its 

estimates build upon those from the Net Budget Impacts and 

Paperwork Reduction Act of 1995 sections. As compared to 

the PB2020 baseline that assumed implementation of the 2016 

final rule, the impacts of the borrower defense changes are 

benefits or reduced recoupments, and zero dollars are 

estimated as impacts of closed school and false 
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712 

certification discharges. Compliance costs for changes to 

financial responsibility reporting of risk events, 

disclosure of forced arbitration clauses are minimal. 

Specifically, the annual costs per entity were estimated at 

$178 to $266 and $489 the first year with $133 in 

subsequent years, respectively. Further, the two latter 

costs only occur at institutions that either have 

documented risks to their financial responsibility or that 

are proactively choosing to require mandatory pre-dispute 

arbitration agreements or class action waivers. While 

economies of scale may exist for larger institutions, the 

Department does not have information on the cost 

differential between types of institutions. the Department 

does not assume different costs for small institutions, 

especially for data storage for which additional options 

are being developed on a regular basis. 

As to proposed alternatives, the Department notes that 

claim resolution can occur between borrowers and 

institutions freely without the Department’s involvement, 

via mediation or arbitration, or through other avenues if 

the parties so choose. These final regulations permit 

claims within a three-year limitation period with limited 

exceptions for borrowers engage in proceedings that would 
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713 

involve the institution and therefore indefinite records 

retention will not be required. Additionally, for reasons 

discussed at greater length above, the final rule adopts a 

preponderance of the evidence standard. 

Changes: Added information about percent of small 

proprietary institutions under $7 million threshold 

previously used by the Department for informational 

purposes. 

This rule directly affects all public nonprofit and 

proprietary institutions participating in title IV programs 

relative to the proposed financial responsibility 

provisions; it also affects a small proportion of 

institutions participating in title IV programs in each 

sector relative to the loan discharge requirements. As 

found in the Paperwork Reduction Act of 1995 section, there 

are currently 5,868 institutions participating in title IV 

programs, of which 1,799 are private nonprofit and 1,896are 

proprietary. Table 6 presents an estimated number and 

percent of small institutions using the Department’s 

enrollment based definition for small institution. This 

definition applies equally across control categories and 

defines a small institution as one with under 500 FTE for 
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714 

2-yr or less institutions, and 1,000 FTE for 4-year 

institutions. 

Table 6: Small Institutions under Enrollment-Based 

Definition 

Leve

l

Type Smal

l

Tota

l

Perce

nt

2-

year

Public 342 1,24

0

28%

2-

year

Private 219 259 85%

2-

year

Proprieta

ry 

2,14

7

2,46

3

87%

4-

year

Public 64 759 8%

4-

year

Private 799 1,67

2

48%

4-

year

Proprieta

ry 

425 558 76%

Total 3,99

6

6,95

1

57%

In previous regulations, the Department used the small 

business definitions based on tax status that defined “nonprofit institutions” as “small organizations” if they are 
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715 

independently owned and operated and not dominant in their 

field of operation, or as “small entities” if they are 

institutions controlled by governmental entities with 

populations below 50,000. Compared to those definitions of 

small institutions which resulted in the Department 

considering all private nonprofit institutions as small and 

no public institutions as small, we think the enrollmentbased approach establishes a reasonable framework 

applicable to all postsecondary institutions. Under the 

previous definition, proprietary institutions were 

considered small if they are independently owned and 

operated and not dominant in their field of operation with 

total annual revenue below $7,000,000. Using FY2017 IPEDs 

finance data for proprietary institutions, 50 percent of 

four-year and 90 percent of two-year or less proprietary 

institutions would be considered small. The enrollmentbased definition captures a similar share of proprietary 

institutions will having the benefit of allowing comparison 

to other types of institutions on a consistent basis. 

 Table 7 summarizes the estimated number of 

institutions affected by these final regulations. 

Table 7: Estimated Count of Small Institutions 

Affected by the Final Regulations 
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716 

Small 

Institutions 

Affected

As % of 

Small 

Institutions

Borrower Defense 355 9%

Closed School 57 1%

False Certification 183 5%

Composite Score 2565 64%

Composite Score 

Recalculation 641 16%

Risk Event Reporting 417 10%

Mandatory 

Arbitration Disclosure 806 20%

 

The Department has determined that the negative 

economic impact on small entities affected by the 

regulations will not be significant. As further explained 

in the Net Budget Impacts section, the Department estimates 

a reduction in recoupment due to borrower defense 

provisions and zero change in recoupment for closed school 

and false certification provisions. As further explained 

in the Paperwork Reduction Act of 1995 section, compliance 

costs associated with the financial responsibility 

reporting and disclosure requirement changes are minimal 

and occur only at institutions that either have documented 

risks to their financial responsibility or that require 

pre-dispute mandatory arbitration agreements or classaction waivers. Table 8 captures estimated compliance 

costs per entity and across small institutions. 
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717 

Table 8: Compliance Costs for Small Institutions 

Compliance Area

Small 

Institutions 

Affected

Cost Range per 

Institution

Estimated Overall Cost 

Range

Financial 

responsibility 

reporting 417 $178 $266 $74,226 $110,922 

Mandatory 

arbitration 

disclosure 806 $133 $489* $107,198 $394,134 

 Accordingly, the Secretary hereby certifies that 

these regulations will not have a significant economic 

impact on a substantial number of small entities. 

8. Paperwork Reduction Act of 1995 

As part of its continuing effort to reduce paperwork 

and respondent burden, the Department provides the general 

public and Federal agencies with an opportunity to comment 

on proposed and continuing collections of information in 

accordance with the Paperwork Reduction Act of 1995 (PRA) 

(44 U.S.C. 3506(c)(2)(A)). This helps ensure that: The 

public understands the Department’s collection 

instructions, respondents can provide the requested data in 

the desired format, reporting burden (time and financial 

resources) is minimized, collection instruments are clearly 
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718 

understood, and the Department can properly assess the 

impact of collection requirements on respondents. 

Sections 668.41, 668.171, Appendices A & B to part 

668, subpart L, and §§ 685.206, 685.214 685.215, and 

685.304 of these final regulations contain information 

collection requirements. Additionally, burden assessed in 

sections 668.14, 668.41, 668.172, 674.33, 682.402, and 

685.300 from the 2016 final regulations and 2018 NPRM is 

being removed based on these final regulations. Under the 

PRA, the Department has or will at the required time submit 

a copy of these sections and an Information Collections 

Request to OMB for its review. 

 A Federal agency may not conduct or sponsor a 

collection of information unless OMB approves the 

collection under the PRA and the corresponding information 

collection instrument displays a currently valid OMB 

control number. Notwithstanding any other provision of 

law, no person is required to comply with, or is subject to 

penalty for failure to comply with, a collection of 

information if the collection instrument does not display a 

currently valid OMB control number. 

 In these final regulations, we have displayed the 

control numbers assigned by OMB to any information 
This is an unofficial version. The official version will 

be published in the Federal Register. 

719 

collection requirements proposed in the NPRM and adopted in 

the final regulations. 

Section 668.14 Program Participation Agreement 

 Requirement: In the 2016 final regulations, 

§668.14(b)(32) required that an institution, as part of the 

program participation agreement, provide all enrolled 

students with a closed school discharge application and a 

written disclosure describing the benefits and consequences 

of a closed school discharge after the Department initiated 

any action to terminate the participation of the school or 

any occurrence of events specified in §668.14(b)(31) 

requiring the institution submit a teach out plan. The 

Department has since determined that it is the 

Department’s, not the school’s, responsibility to provide 

this information to students, and we are rescinding this 

regulatory requirement. 

Burden Calculation: The Department removes the 

associated burden of 1,953 hours under the OMB Control 

Number 1845-0022 and will remove the hours on or after the 

effective date of the regulations. 

Student Assistance General Provisions - OMB Control Number: 

1845-0022 
This is an unofficial version. The official version will 

be published in the Federal Register. 

720 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cos

t 

$36

.55 per 

institut

ion 

fro

m 2016 

Final 

Rule 

Private - 8 -

1,912

- 

340

$-

12,427

Proprie

tary

-38 -

9,082

-

1,613

$-

58,955

TOTAL -46 -

10,994

-

1,953

$-

71,382

Section 668.41 Reporting and disclosure of 

information. 

 Requirements: Under the final changes in 

§ 668.41(h), an institution that uses pre-dispute 

arbitration agreements and/or class action waivers will be 

required to disclose that information in a written plain 

language disclosure available to enrolled and prospective 

students, and the public. The regulatory language also 

prescribes the font size and location of the information on 

its website on the same page where admissions information 

is made available as well as in the admissions section of 

the institution’s catalog. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

721 

 This replaces the previous “Loan repayment 

warning for proprietary institutions” regulatory text from 

the 2016 final regulations. 

Burden Calculation: There will be burden on schools 

to make additional disclosures of the institution's use of 

a pre-dispute arbitration agreement and/or class action 

waiver to students, prospective students, and the public 

under this final regulation. Based on informal 

conversations held with proprietary institutions during 

negotiated rulemaking and conferences, the Department 

believes such agreements are currently used primarily by 

proprietary institutions. Of the 1,888 proprietary 

institutions participating in the title IV, HEA programs, 

we estimate that 50 percent or 944 will use a pre-dispute 

arbitration agreement and/or class action waiver and will 

provide the required information electronically. We 

anticipate that it will take an average of 5 hours to 

develop, program, and post the required information to the 

websites where admission and tuition and fees information 

is made available. The estimated burden would be 4,720 

hours (944 x 5 hours) under OMB Control Number 1845-0004. 

Student Assistance General Provisions – Student Right 

to Know (SRK) - OMB Control Number: 1845-0004 
This is an unofficial version. The official version will 

be published in the Federal Register. 

722 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cost

$44.

41 per 

instituti

on 

from 

2018 NPRM 

Proprie

tary 

944 944 4,7

20 

$209

,615 

TOTAL 944 944 4,7

20 

$209

,615 

 Due to these final regulatory text changes in 

668.41(h), the previous burden assessed under the 2016 

final regulations will be removed upon the effective date 

of these regulations. 5,346 hours will be deleted from OMB 

Control Number 1845-0004 on or after the effective date of 

the regulations. 

Student Assistance General Provisions – Student Right 

to Know (SRK) - OMB Control Number: 1845-0004 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cos

t 
This is an unofficial version. The official version will 

be published in the Federal Register. 

723 

$36

.55 per 

institut

ion 

fro

m 2016 

Final 

Rule 

Proprie

tary 

-972 -

1,949 

-

5,346 

$-

195,396 

TOTAL -972 -

1,949 

-

5,346 

$-

195,396 

Section 668.171 General. 

 Requirements: Under the final § 668.171(f), in 

accordance with procedures to be established by the 

Secretary, an institution will notify the Secretary of any 

action or event described in the specified number of days 

after the action or event occurred. In the notice to the 

Secretary or in the institution's preliminary response, the 

institution may show that certain of the actions or events 
This is an unofficial version. The official version will 

be published in the Federal Register. 

724 

are not material or that the actions or events are 

resolved. 

 Burden Calculation: There will be burden on 

institutions to provide the notice to the Secretary when 

one of the actions or events occurs. We estimate that an 

institution will take two hours per action to prepare the 

appropriate notice and to provide it to the Secretary. We 

estimate that 180 private institutions may have two events 

annually to report for a total burden of 720 hours (180 

institutions × 2 events × 2 hours). We estimate that 379 

proprietary institutions may have three events annually to 

report for a total burden of 2,274 hours (379 institutions 

× 3 events × 2 hours). This total burden of 2,994 hours 

will be assessed under OMB Control Number 1845-0022. 

Student Assistance General Provisions - OMB Control 

Number: 1845-0022 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cost

$44.

41 per 

instituti

on 

from 

2018 NPRM 
This is an unofficial version. The official version will 

be published in the Federal Register. 

725 

Private 180 360 

720 

$ 

31,975 

Proprie

tary 

379 1,137 2,2

74 

$100

,988 

TOTAL 559 1,497 2,9

94 

$132

,963 

Section 668.172 Financial Ratios. 

 Requirements: The proposed changes to 

§ 668.172(d) from the NPRM have been deleted from these 

final regulations. 

 Burden Calculation: The proposed burden is being 

deleted from the Information Collection Request that was 

filed with the NPRM. There is no longer an estimated 

increase in burden of 232 hours based on changes to section 

668.172 under the OMB Control Number 1845-0022. 

Student Assistance General Provisions - OMB Control 

Number: 1845-0022 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cos

t 

$44

.41 per 
This is an unofficial version. The official version will 

be published in the Federal Register. 

726 

institut

ion 

fro

m 2018 

NPRM 

Private -450 -

450 

 -

113 

$ -

5,018 

Proprie

tary 

-474 -

474 

 -

119 

$ -

5,285 

TOTAL -924 -

924 

 -

232 

$-

10,303 

Appendix A and B for Section 668—Subpart L—Financial 

Responsibility 

 Requirements: Under final Section 2 for appendix 

A and B, proprietary and private institutions will be 

required to submit a Supplemental Schedule as part of their 

audited financial statements. With the update from the 

FASB, some elements needed to calculate the composite score 

will no longer be readily available in the audited 

financial statements, particularly for private 

institutions. With the updates to the Supplemental 

Schedule to reference the financial statements, this issue 
This is an unofficial version. The official version will 

be published in the Federal Register. 

727 

will be addressed in a convenient and transparent manner 

for both the schools and the Department by showing how the 

composite score is calculated. 

 Burden Calculation: There will be burden on 

institutions to provide the Supplemental Schedule to the 

Department. During the negotiations, the members of the 

negotiated rulemaking subcommittee indicated that they 

believed that as the information will be readily available 

upon completion of the required audit the burden would be 

minimal. We estimate that it will take each proprietary and 

private institution one hour to prepare the Supplemental 

Schedule and have it made available for posting along with 

the annual audit. We estimate that 1,799 private schools 

will require 1 hour of burden to prepare the Supplemental 

Schedule and have it made available for posting along with 

the annual audit for a total burden of 1,799 hours (1,799 

institutions × 1 hour). We estimate that 1,888 proprietary 

schools will require 1 hour of burden to prepare the 

Supplemental Schedule and have it made available for 

posting along with the annual audit for a total burden of 

1,888 hours (1,888 institutions × 1 hour). This total 

burden of 3,695 hours will be assessed under OMB Control 

Number 1845-0022. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

728 

 The total additional burden under OMB Control 

Number 1845-0022 will be 6,921 hours. 

Student Assistance General Provisions - OMB Control 

Number: 1845-0022 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cost

$44.

41 per 

instituti

on 

from 

2018 NPRM 

Private 1,799 1,799 1,7

99 

$ 

79,894 

Proprie

tary 

1,896 1,896 1,8

96 

$ 

84,201 

TOTAL 3,695 3,695 3,6

95 

$164

,095 

Section 682.402 Death, disability, closed 

school, false certification, unpaid refunds, and bankruptcy 

payments. 

 Requirements: The proposed changes to § 682.402 

regarding the requirement that a guaranty agency provide 
This is an unofficial version. The official version will 

be published in the Federal Register. 

729 

information to a borrower about how to request a review of 

the guaranty agency’s denial of a closed school discharge 

from the Secretary from the NPRM are not included in the 

final regulations. 

 Burden Calculation: The proposed burden is being 

deleted from the Information Collection Request that was 

filed with the NPRM. There is no longer an estimated 

increase in burden of 410 hours based on the changes to 

section 682.402(d)(6)(ii)(F) under OMB Control Number 1845-

0020. 

Federal Family Education Loan Program Regulations –

OMB Control Number: 1845-0020 

Institu

tion Type 

Guarant

y Agency 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cos

t 

$44

.41 per 

institut

ion 

fro

m 2018 

NPRM 

Private -11 -89 -

188 

$-

8,349 
This is an unofficial version. The official version will 

be published in the Federal Register. 

730 

Public -13 -105 -

222 

$-

9,859 

TOTAL -24 -194 -

410 

$-

18,208 

Section 685.206 Borrower responsibilities and 

defenses. 

 Requirements: Under final § 685.206(e), a defense 

to repayment discharge claim on a Direct Loan disbursed 

after July 1, 2020 will be evaluated under the Federal 

standard using an application approved by the Secretary. 

Under final § 685.206(e), a defense to repayment must be 

submitted within three years from the date the student is 

no longer enrolled at the institution. 

 Burden Calculation: We believe that the burden 

will be associated with the new form that the borrower 

receives that accompanies the notice of action from the 

Department. The new form will be completed and made 

available for comment through a full public clearance 

package before being made available for use. 

Section 685.214 Closed school discharge. 

 Requirements: Under final § 685.214(c), the 

number of days that a borrower must have withdrawn from a 
This is an unofficial version. The official version will 

be published in the Federal Register. 

731 

closed school to qualify for a closed school discharge will 

be extended from 120 days to 180 days, for loans first 

disbursed on or after July 1, 2020. Additionally, if a 

closed school provided a borrower an opportunity to 

complete his or her academic program through a teach-out 

plan approved by the school's accrediting agency and, if 

applicable, the school's State authorizing agency, the 

borrower will not qualify for a closed school discharge. 

The final regulation further provides that the Secretary 

may extend that 180 days further if there is a 

determination that exceptional circumstances justify an 

extension. 

 Burden Calculation: The extension from 120 days 

to 180 days for withdrawal prior to the closing of the 

school will require an update to the current closed school 

discharge application form with OMB Control Number 1845-

0058. We do not believe that the language update will 

change the amount of time currently assessed for the 

borrower to complete the form from those which has already 

been approved. The form update will be completed and made 

available for comment through a full public clearance 

package before being made available for use by the 

effective date of the regulations. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

732 

Section 685.215 Discharge for false 

certification of student eligibility or unauthorized 

payment. 

 Requirements: Under final § 685.215, the 

application requirements for false certification discharges 

will be amended to reflect the current practice of 

requiring a borrower to apply for the discharge using a 

Federal application form instead of a sworn statement. The 

final regulations also will remove the term “ability to 

benefit” to reflect changes to the HEA. Under the final 

regulatory changes, a Direct Loan borrower will not qualify 

for a false certification discharge based on not having a 

high school diploma in cases when the borrower did not 

obtain an official transcript or diploma from the high 

school, and the borrower provided an attestation to the 

institution that the borrower was a high school graduate. 

 Burden Calculation: The clarification to require 

the submission of a Federal application to receive a 

discharge and updating of the form to remove “ability to 

benefit” language will require an update to the current 

false certification application form with OMB Control 

Number 1845-0058. We do not believe that the language 
This is an unofficial version. The official version will 

be published in the Federal Register. 

733 

update will change the amount of time currently assessed 

for the borrower to complete the form, nor an increase in 

the number of borrowers who may qualify, to complete the 

form from those that have already been approved. The form 

update will be completed and made available for comment 

through a full public clearance package before being made 

available for use by the effective date of the regulations. 

Section 685.300 Agreements between an eligible 

school and the Secretary for participation in the Direct 

Loan Program. 

 Requirements: Under final § 685.300, paragraphs 

(d) through (i) finalized in the 2016 final regulations 

covering borrower defense claims in an internal dispute 

process, class action bans, pre-dispute arbitration 

agreements, submission of arbitral records, submission of 

judicial records, and definitions are removed from the 

regulations. 

Burden Calculation: Due to these final regulatory text 

changes, the previous burden assessed under paragraphs (e) 

through (h) in the 2016 final regulation will be removed 

upon the effective date of these regulations. 179,362 

hours will be deleted from OMB Control Number 1845-0143 on 

or after the effective date of these regulations. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

734 

Agreements between and eligible school and the 

Secretary to participate in the Direct Loan Program – OMB 

Control Number: 1845-0143 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cos

t 

$36

.55 per 

institut

ion from 

2016 

Final 

rule 

Proprie

tary 

-1,959 -

1,010,519 

-

179,362 

$-

6,555,68

1 

TOTAL -1,959 -

1,010,519 

-

179,362 

$-

6,555,68

1 

Section 685.304 Counseling Borrowers. 

 Requirements: Under final § 685.304 there are 

changes to the requirements to counsel Federal student loan 

borrowers prior to making the first disbursement of a 
This is an unofficial version. The official version will 

be published in the Federal Register. 

735 

Federal student loan (entrance counseling). Institutions 

that use pre-dispute arbitration agreements and/or class 

action waivers will be required to include in mandatory 

entrance counseling plain-language information about the 

institution's process for initiating arbitration and 

dispute resolution, including who the borrower may contact 

regarding a dispute related to educational services for 

which the loan was made. Institutions that require 

borrowers to accept a pre-dispute arbitration agreement 

and/or class action waiver will be required to provide 

information in writing to the student borrower about the 

plain language meaning of the agreement, when it would 

apply, how to enter into the process, and who to contact 

with questions. 

 Burden Calculation: We believe there will be 

burden on the institutions to create any institution 

specific pre-dispute arbitration agreement and/or class 

action waivers and provide that information in addition to 

complying with the current entrance counseling 

requirements. Of the 1,888 participating proprietary 

institutions, we estimate that 50 percent or 944 

institutions will need to create additional entrance 

counseling information regarding the use of the pre-dispute 
This is an unofficial version. The official version will 

be published in the Federal Register. 

736 

arbitration agreement and/or class action waivers to 

provide to their student borrowers. We anticipate that it 

will take an average of 3 hours to adapt the information 

provided in § 668.41 as a part of the required entrance 

counseling, to identify staff who will be able to answer 

additional questions, and to obtain evidence indicating the 

provision of the material for a total of 2,832 hours (944 × 

3 hours). 

 Additionally, we believe that there will be 

minimum additional burden for borrowers to review the 

information when completing the required entrance 

counseling and provide the required evidence that the 

borrowers received the information. In calendar year 2017, 

684,813 Direct Loan borrower completed entrance counseling 

using the Department's on-line entrance counseling. 

Assuming the same 50 percent of borrowers attend a school 

that uses pre-dispute arbitration agreements and/or class 

action waivers will require five minutes to review the 

material and provide evidence of receipt of the 

information, we estimate a total of 27,393 hours of 

additional burden (342,407 borrowers time .08 (5 minutes) = 

27,393 hours). There will be a total increase in burden of 

30,225 hours under OMB Control Number 1845-0021. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

737 

William D. Ford Federal Direct Loan Program (DL) 

Regulations – OMB Control Number: 1845-0021 

Institu

tion Type 

Respon

dent 

Respo

nses 

Bur

den 

Hours 

Cost

$44.

41 per 

instituti

on; 

$16.30 

per 

individua

l 

from 

2018 NPRM 

Proprie

tary 

 

944 

 

944 2,832 

$125

,769 

Individ

ual 

342,40

7 

342,4

07 

27,

393 

$446

,506 

TOTAL 343,35

1 

343,3

51 

30,

225 

$572

,275 

 Consistent with the discussions above, the 

following chart describes the sections of the final 

regulations involving information collections, the 
This is an unofficial version. The official version will 

be published in the Federal Register. 

738 

information being collected and the collections that the 

Department will submit to OMB for approval and public 

comment under the PRA, and the estimated costs associated 

with the information collections. The monetized net cost of 

the burden for institutions, lenders, guaranty agencies and 

students, using wage data developed using Bureau of Labor 

Statistics data, available at 

https://www.bls.gov/ooh/management/postsecondary-educationadministrators.htm is $1,078,948 for all positive entries 

as shown in the chart below. With the deletion of certain 

regulations, there will be a corresponding savings of 

$-6,850,970 upon the effective date of these 

regulations. This cost is based on an estimated hourly 

rate of $44.41 for institutions, lenders, and guaranty 

agencies and $16.30 for students unless otherwise noted in 

the table. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

739 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

§ 668.14 In the 

2016 final 

regulations, 

§668.14(b)(32) 

required that 

an institution, 

as part of the 

program 

participation 

agreement, 

provide all 

enrolled 

students with a 

closed school 

discharge 

application and 

a written 

disclosure 

describing the 

benefits and 

consequences of 

a closed school 

discharge under 

certain 

circumstance. 

The Department 

has since 

determined that 

it is the 

Department’s, 

not the 

school’s, 

responsibility 

to provide this 

information to 

students, and 

we are 

1845-

0022 

-1,953 

The 

Department 

will remove 

the hours on 

or after the 

effective 

date of the 

regulations. 

$-

71,382 

This 

amount was 

based on the 

2016 cost of 

36.55/hr for 

institutions

. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

740 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

rescinding this 

regulatory 

requirement.

§ 668.41 Under the 

final 

regulatory 

language in 

668.41(h) 

institutions 

that use predispute 

arbitration 

agreements 

and/or class 

action waivers 

1845-

0004; 

+4,720 

hours 

$209,61

5. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

741 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

will be 

required to 

disclose that 

information in 

a plain 

language 

disclosure 

available to 

enrolled and 

prospective 

students, and 

the public on 

its website 

where 

admissions and 

tuition and 

fees 

information is 

made available. 

Additional

ly due to the 

changes in the 

final 

regulatory text 

for 668.41(h), 

the burden of 

5,346 hour 

previously 

assessed in the 

2016 final 

regulations 

will be deleted 

from this 

information 

collection upon 

the effective 

The 

Department 

will remove 

the hours on 

or after the 

effective 

date of the 

regulations. 

-5,346 

hours 

$-

195,396 

This 

amount was 

based on the 

2016 cost of 

36.55/hr for 

institutions

. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

742 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

date of this 

regulatory 

package

§ 668.171 Under the 

final 

regulatory 

language in 

668.171(f) in 

accordance with 

procedures to 

be established 

by the 

Secretary, an 

institution 

will notify the 

Secretary of 

any action or 

event described 

in the 

specified 

number of days 

after the 

action or event 

occurs. In the 

notice to the 

Secretary or in 

the 

institution's 

response, the 

institution may 

show that 

certain of the 

actions or 

events are not 

material or 

that the 

actions or 

1845-

0022; 

+2,994 

hours 

$132,96

4. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

743 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

events are 

resolved

§ 668.172 The 

proposed 

changes to 

§ 668.172(d) 

from the NPRM 

have been 

deleted from 

the Final rule.

1845-

0022; 

-232 

hours 

$-

10,303. 

Appendix 

A & B of 668 

subpart L 

Under 

final Section 2 

for appendix A 

and B, 

proprietary and 

private 

institutions 

will be 

required to 

submit a 

Supplemental 

Schedule as 

part of their 

audited 

financial 

statements. 

With the update 

from the 

Financial 

Standards 

Accounting 

Board (FASB) 

some elements 

needed to 

calculate the 

composite score 

1845-

0022; +3,695 

hours 

$164,09

5. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

744 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

will no longer 

be readily 

available in 

the audited 

financial 

statements, 

particularly 

for private 

institutions. 

With the 

updates to the 

Supplemental 

Schedule to 

reference the 

financial 

statements, 

this issue will 

be addressed in 

a convenient 

and transparent 

manner for both 

the 

institutions 

and the 

Department by 

showing how the 

composite score 

is calculated

§ 

682.402 

The final 

regulations no 

longer 

incorporate the 

proposed change 

requiring 

guaranty 

agencies to 

1845-

0020; 

-410 

hours 

-

$18,208. 
This is an unofficial version. The official version will 

be published in the Federal Register. 

745 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

provide 

information to 

a borrower 

about how to 

request a 

review of an 

agency’s denial 

of a closed 

school 

discharge from 

the Secretary. 

This removes 

the proposed 

burden

§ 685.206 Under 

final 

§ 685.206(e), a 

borrower 

defense claim 

related to a 

direct loan 

disbursed after 

July 1, 2020 

will be 

evaluated under 

the Federal 

standard. Under 

final 

§ 685.206(e), a 

borrower 

defense must be 

submitted 

within three 

years from the 

date the 

borrower is no 

longer enrolled 

A new 

collection 

will be 

filed closer 

to the 

implementati

on of this 

requirement; 

+0 

hours 

$0.
This is an unofficial version. The official version will 

be published in the Federal Register. 

746 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

at the 

institution.

§ 685.214 Under the 

final 

regulations, 

the number of 

days that a 

borrower may 

have withdrawn 

from a closed 

institution to 

qualify for a 

closed school 

discharge will 

be extended 

from 120 days 

to 180 days for 

loans first 

disbursed after 

July 1, 2020. 

The final 

language 

further allows 

that the 

Secretary may 

extend that 180 

days further if 

there is a 

determination 

that 

exceptional 

circumstances 

justify an 

extension

1845-

0058; + 0 

hours 

$0.

§ 685.215 Under the 

final 

1845-

0058; 

$0.
This is an unofficial version. The official version will 

be published in the Federal Register. 

747 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

regulatory 

language in 

§ 685.215, the 

application 

requirements 

for false 

certification 

discharges are 

amended to 

reflect the 

current 

practice of 

requiring a 

borrower to 

apply for the 

discharge using 

a completed 

application 

form instead of 

a sworn 

statement. The 

final 

regulatory 

language 

removed the use 

of term 

“ability to 

benefit” to 

bring the 

definition in 

line with the 

current HEA 

language. Under 

final 

regulatory 

language, a 

Direct Loan 

+0 

hours 
This is an unofficial version. The official version will 

be published in the Federal Register. 

748 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

borrower will 

not qualify for 

a false 

certification 

discharge based 

on not having a 

high school 

diploma provide 

that in cases 

when they did 

not obtain an 

official 

transcript or 

diploma from 

the high 

school, and the 

borrower 

provided an 

attestation to 

the institution 

that the 

borrower was a 

high school 

graduate. The 

attestation 

will have to be 

provided under 

penalty of 

perjury

§ 685.300 Under 

final § 685.300 

previous 

paragraphs (d) 

through (i) 

which covered 

borrower 

defense claims 

1845-

0143 

-

179,362 

The 

Department 

will remove 

$-

6,555,681 

This 

amount was 

based on the 

2016 cost of 

36.55/hr for 
This is an unofficial version. The official version will 

be published in the Federal Register. 

749 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

in an internal 

dispute 

process, class 

action bans, 

pre-dispute 

arbitration 

agreements, 

submission of 

arbitral 

records, 

submission of 

judicial 

records, and 

definitions are 

removed from 

regulation. 

the hours on 

or after the 

effective 

date of the 

regulations.

institutions

. 

§ 685.304 Under 

final § 685.304 

there are 

changes to the 

requirements to 

counsel Federal 

student loan 

borrowers prior 

to making the 

first 

disbursement of 

a Federal 

student loan. 

Institutions 

that use predispute 

arbitration 

agreements 

and/or class 

action waivers 

include in the 

1845-

0021; 

+30,225 

hours (2,832 

institutions 

+ 27,393 

individual 

hours).

TOTAL 

$572,275.

Inst. 

125,769; 

Indiv. 

446,506; 
This is an unofficial version. The official version will 

be published in the Federal Register. 

750 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

required 

entrance 

counseling 

information on 

the 

institution's 

internal 

dispute 

resolution 

process and who 

the borrower 

may contact 

regarding a 

dispute related 

to educational 

services for 

which the loan 

was made. 

Institutions 

that require a 

pre-dispute 

arbitration 

agreement 

and/or class 

action waiver 

will be 

required to 

review with the 

student 

borrower the 

agreement and 

when it will 

apply, how to 

enter into the 

process and who 

to contact with 

questions.
This is an unofficial version. The official version will 

be published in the Federal Register. 

751 

Regulato

ry section 

Informatio

n collection 

OMB 

control No. 

and 

estimated 

burden 

(change in 

burden)

Estimat

ed costs 

Collections of Information 

The total burden hours and change in burden hours 

associated with each OMB Control number affected by the 

regulations as of the effective date of the regulations are 

as follows: 

Control 

No.

Total proposed 

burden hours

Proposed change 

in burden hours

1845-

0004 23,390 -626

1845-

0020 8,249,520 -410

1845-

0021 739,746 + 30,225

1845-

0022 2,286,015 +4,504

1845-

0143 0 -179,362

Total 11,298,671 -145,669

Accessible Format: Individuals with disabilities can 

obtain this document in an accessible format (e.g., 

braille, large print, audiotape, or compact disc) on 
This is an unofficial version. The official version will 

be published in the Federal Register. 

752 

request to the person listed under FOR FURTHER INFORMATION 

CONTACT. 

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version of this document is the document published in 

the Federal Register. You may access the official edition 

of the Federal Register and the Code of Federal Regulations 

is available via the Federal Digital System at 

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List of Subjects 

34 CFR Part 668 

Administrative practice and procedure, Colleges and 

universities, Consumer protection, Grant programs--

education, Incorporation by reference, Loan programs--

education, Reporting and recordkeeping requirements, 
This is an unofficial version. The official version will 

be published in the Federal Register. 

753 

Selective Service System, Student aid, Vocational 

education. 

34 CFR Parts 682 and 685 

Administrative practice and procedure, Colleges and 

universities, Loan programs—education, Reporting and 

recordkeeping requirements, Student aid, Vocational 

education. 

Dated: 

____________________________ 

Betsy DeVos, 

Secretary of Education. 
This is an unofficial version. The official version will be 

published in the Federal Register. 

754 

For the reasons discussed in the preamble, the Secretary of 

Education proposes to amend parts 668, 682, and 685, of title 34 

of the Code of Federal Regulations as follows: 

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS 

1. The authority citation for part 668 is revised to read 

as follows: 

AUTHORITY: 20 U.S.C. 1001-1003, 1070g, 1085, 1088, 1091, 

1092, 1094, 1099c, 1099c-1, 1221-3, and 1231a, unless otherwise 

noted. 

Section 668.14 also issued under 20 U.S.C. 1085, 1088, 

1091, 1092, 1094, 1099a-3, 1099c, and 1141. 

Section 668.41 also issued under 20 U.S.C. 1092, 1094, 

1099c. 

Section 668.91 also issued under 20 U.S.C. 1082, 1094. 

Section 668.171 also issued under 20 U.S.C. 1094 and 1099c 

and section 4 of Pub. L. 95-452, 92 Stat. 1101-1109. 

Section 668.172 also issued under 20 U.S.C. 1094 and 1099c 

and section 4 of Pub. L. 95-452, 92 Stat. 1101-1109. 

Section 668.175 also issued under 20 U.S.C. 1094 and 1099c. 

2. Section 668.14 is amended by: 

a. In paragraph (b)(30)(ii)(C), adding the word “and” 

after the words and punctuation “by the institution;” 
This is an unofficial version. The official version will be 

published in the Federal Register. 

755 

b. In paragraph (b)(31)(v), removing the punctuation and 

word “; and” and adding a period in its place. 

c. Removing paragraph (b)(32). 

d. Removing the parenthetical authority citation. 

3. Section 668.41 is amended by: 

a. In paragraph (a), in the definition of Undergraduate 

students, adding the words “at or” before below, and adding the 

word “level” after “baccalaureate”. 

b. In paragraph (c)(2), deleting the phrase “or (g)” and 

adding the phrase “(g), or (h)”. 

c. Removing and replacing paragraph (h). 

d. Removing paragraph (i). 

e. Removing the parenthetical authority citation. 

The revision reads as follows: 

§668.41 Reporting and disclosure of information. 

* * * * * 

 (h) Enrolled students, prospective students, and the 

public--disclosure of an institution’s use of pre-dispute 

arbitration agreements and/or class action waivers as a 

condition of enrollment for students receiving title IV Federal 

student aid. 

(1)(i) An institution of higher education that requires 

students receiving title IV Federal student aid to accept or 
This is an unofficial version. The official version will be 

published in the Federal Register. 

756 

agree to a pre-dispute arbitration agreement and/or a class 

action waiver as a condition of enrollment must make available 

to enrolled students, prospective students, and the public, a 

written (electronic) plain language disclosure of those 

conditions of enrollment. This plain language disclosure also 

must state that: the school cannot require the borrower to 

participate in arbitration or any internal dispute resolution 

process offered by the institution prior to filing a borrower 

defense to repayment application with the Department pursuant to 

§ 685.206(e); the school cannot, in any way, require students to 

limit, relinquish, or waive their ability to pursue filing a 

borrower defense claim, pursuant to § 685.206(e) at any time; 

and any arbitration, required by a pre-dispute arbitration 

agreement, tolls the limitations period for filing a borrower 

defense to repayment application pursuant to § 

685.206(e)(6)(ii). 

(ii) All statements in the plain language disclosure must 

be in 12-point font on the institution’s admissions information 

webpage and in the admissions section of the institution’s 

catalogue. The institution may not rely solely on an intranet 

website for the purpose of providing this notice to prospective 

students or the public. 
This is an unofficial version. The official version will be 

published in the Federal Register. 

757 

(2) For the purposes of this paragraph (h), the following 

definitions apply: 

(i) Class action means a lawsuit or an arbitration 

proceeding in which one or more parties seeks class treatment 

pursuant to Federal Rule of Civil Procedure 23 or any State 

process analogous to Federal Rule of Civil Procedure 23. 

(ii) Class action waiver means any agreement or part of an 

agreement, regardless of its form or structure, between a 

school, or a party acting on behalf of a school, and a student 

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

educational services for which the student received title IV 

funding and prevents an individual from filing or participating 

in a class action that pertains to those services. 

(iii) Pre-dispute arbitration agreement means any agreement 

or part of an agreement, regardless of its form or structure, 

between a school, or a party acting on behalf of a school, and a 

student requiring arbitration of any future dispute between the 

parties relating to the making of a Direct Loan or provision of 

educational services for which the student received title IV 

funding. 

* * * * * 
This is an unofficial version. The official version will be 

published in the Federal Register. 

758 

4. Section 668.91 is amended by revising paragraphs 

(a)(3)(ii), (iii) and (v) to read as follows and removing the 

parenthetical authority citation: 

§ 668.91 Initial and final decisions. 

(a) * * * 

(3) Notwithstanding the provisions of paragraph (a)(2) of 

this section-- 

(i) If, in a termination action against an institution, the 

hearing official finds that the institution has violated the 

provisions of § 668.14(b)(18), the hearing official also finds 

that termination of the institution's participation is 

warranted; 

(ii) If, in a termination action against a third-party 

servicer, the hearing official finds that the servicer has 

violated the provisions of § 668.14(b)(18), the hearing official 

also finds that termination of the institution's participation 

or servicer's eligibility is warranted; 

(iii) In an action brought against an institution or thirdparty servicer that involves its failure to provide a letter of 

credit, or other financial protection under § 668.15 or § 

668.171(c) or (d), the hearing official finds that the amount of 

the letter of credit or other financial protection established 

by the Secretary under § 668.175 is appropriate, unless the 
This is an unofficial version. The official version will be 

published in the Federal Register. 

759 

institution demonstrates that the amount was not warranted 

because-- 

(A) For financial protection demanded based on events or 

conditions described in § 668.171(c) or (d), the events or 

conditions no longer exist, have been resolved, or the 

institution demonstrates that it has insurance that will cover 

all potential debts and liabilities that arise from the 

triggering event or condition. The institution can demonstrate 

it has insurance that covers risk by presenting the Department 

with a copy of the insurance policy that makes clear the 

institution’s coverage; 

(B) For financial protection demanded based on the grounds 

identified in § 668.171(d), the action or event does not and 

will not have a material adverse effect on the financial 

condition, business, or results of operations of the 

institution; 

(C) The institution has proffered alternative financial 

protection that provides students and the Department adequate 

protection against losses resulting from the risks identified by 

the Secretary. Adequate protection may consist of one or more 

of the following-- 

(1) An agreement with the Secretary that a portion of the 

funds due to the institution under a reimbursement or heightened 
This is an unofficial version. The official version will be 

published in the Federal Register. 

760 

cash monitoring funding arrangement will be temporarily withheld 

in such amounts as will meet, no later than the end of a six to 

12 month period, the amount of the required financial protection 

demanded; or 

(2) Other form of financial protection specified by the 

Secretary in a notice published in the Federal Register. 

(iv) In a termination action taken against an institution 

or third-party servicer based on the grounds that the 

institution or servicer failed to comply with the requirements 

of § 668.23(c)(3), if the hearing official finds that the 

institution or servicer failed to meet those requirements, the 

hearing official finds that the termination is warranted; 

(v)(A) In a termination action against an institution based 

on the grounds that the institution is not financially 

responsible under § 668.15(c)(1), the hearing official finds 

that the termination is warranted unless the institution 

demonstrates that all applicable conditions described in § 

668.15(d)(4) have been met; and 

(B) In a termination or limitation action against an 

institution based on the grounds that the institution is not 

financially responsible-- 

(1) Upon proof of the conditions in § 668.174(a), the 

hearing official finds that the limitation or termination is 
This is an unofficial version. The official version will be 

published in the Federal Register. 

761 

warranted unless the institution demonstrates that all the 

conditions in § 668.175(h)(2) have been met; and 

(2) Upon proof of the conditions in § 668.174(b)(1), the 

hearing official finds that the limitation or termination is 

warranted unless the institution demonstrates that all 

applicable conditions described in § 668.174(b)(2) or § 

668.175(h)(2) have been met. 

* * * * * 

5. Section 668.171 is revised to read as follows: 

§ 668.171 General. 

(a) Purpose. To begin and to continue to participate in any 

title IV, HEA program, an institution must demonstrate to the 

Secretary that it is financially responsible under the standards 

established in this subpart. As provided under section 498(c)(1) 

of the HEA, the Secretary determines whether an institution is 

financially responsible based on the institution’s ability to-- 

(1) Provide the services described in its official 

publications and statements; 

(2) Meet all of its financial obligations; and 

(3) Provide the administrative resources necessary to 

comply with title IV, HEA program requirements. 

(b) General standards of financial responsibility. Except 

as provided under paragraphs (c), (d), and (h) of this section, 
This is an unofficial version. The official version will be 

published in the Federal Register. 

762 

the Secretary considers an institution to be financially 

responsible if the Secretary determines that-- 

(1) The institution's Equity, Primary Reserve, and Net 

Income ratios yield a composite score of at least 1.5, as 

provided under § 668.172 and appendices A and B to this subpart; 

(2) The institution has sufficient cash reserves to make 

required returns of unearned title IV, HEA program funds, as 

provided under § 668.173; 

(3) The institution is able to meet all of its financial 

obligations and provide the administrative resources necessary 

to comply with title IV, HEA program requirements. An 

institution is not deemed able to meet its financial or 

administrative obligations if— 

(i) It fails to make refunds under its refund policy or 

return title IV, HEA program funds for which it is responsible 

under § 668.22; 

(ii) It fails to make repayments to the Secretary for any 

debt or liability arising from the institution's participation 

in the title IV, HEA programs; or 

(iii) It is subject to an action or event described in 

paragraph (c) of this section (mandatory triggering events), or 

an action or event that the Secretary determines is likely to 

have a material adverse effect on the financial condition of the 
This is an unofficial version. The official version will be 

published in the Federal Register. 

763 

institution under paragraph (d) of this section (discretionary 

triggering events); and 

(4) The institution or persons affiliated with the 

institution are not subject to a condition of past performance 

under § 668.174(a) or (b). 

(c) Mandatory triggering events. An institution is not able 

to meet its financial or administrative obligations under 

paragraph (b)(3)(iii) of this section if-- 

(1) After the end of the fiscal year for which the 

Secretary has most recently calculated an institution’s 

composite score, one or more of the following occurs: 

(i)(A) The institution incurs a liability from a 

settlement, final judgment, or final determination arising from 

an administrative or judicial action or proceeding initiated by 

a Federal or State entity. A determination arising from an 

administrative action or proceeding initiated by a Federal or 

State entity means the determination was made only after an 

institution had notice and an opportunity to submit its position 

before a hearing official. A final determination arising from 

an administrative action or proceeding initiated by a Federal 

entity includes a final determination arising from any 

administrative action or proceeding initiated by the Secretary. 

For purposes of this section, the liability is the amount stated 
This is an unofficial version. The official version will be 

published in the Federal Register. 

764 

in the final judgment or final determination. A judgment or 

determination becomes final when the institution does not appeal 

or when the judgment or determination is not subject to further 

appeal; or 

(B) For a proprietary institution whose composite score is 

less than 1.5, there is a withdrawal of owner’s equity from the 

institution by any means (e.g., a capital distribution that is 

the equivalent of wages in a sole proprietorship or partnership, 

a distribution of dividends or return of capital, or a related 

party receivable), unless the withdrawal is a transfer to an 

entity included in the affiliated entity group on whose basis 

the institution’s composite score was calculated; and 

(ii) As a result of that liability or withdrawal, the 

institution’s recalculated composite score is less than 1.0, as 

determined by the Secretary under paragraph (e) of this section. 

(2) For a publicly traded institution-- 

(i) The U.S. Securities and Exchange Commission (SEC) 

issues an order suspending or revoking the registration of the 

institution’s securities pursuant to Section 12(j) of the 

Securities and Exchange Act of 1934 (the “Exchange Act”) or 

suspends trading of the institution’s securities on any national 

securities exchange pursuant to Section 12(k) of the Exchange 

Act; or 
This is an unofficial version. The official version will be 

published in the Federal Register. 

765 

(ii) The national securities exchange on which the 

institution’s securities are traded notifies the institution 

that it is not in compliance with the exchange’s listing 

requirements and, as a result, the institution’s securities are 

delisted, either voluntarily or involuntarily, pursuant to the 

rules of the relevant national securities exchange. 

(iii) The SEC is not in timely receipt of a required report 

and did not issue an extension to file the report. 

(3) For the period described in (c)(1) of this section, 

when the institution is subject to two or more discretionary 

triggering events, as defined in paragraph (d) of this section, 

those events become mandatory triggering events, unless a 

triggering event is resolved before any subsequent event(s) 

occurs. 

(d) Discretionary triggering events. The Secretary may 

determine that an institution is not able to meet its financial 

or administrative obligations under paragraph (b)(3)(iii) of 

this section if any of the following events is likely to have a 

material adverse effect on the financial condition of the 

institution -- 

(1) The accrediting agency for the institution issued an 

order, such as a show cause order or similar action, that, if 

not satisfied, could result in the withdrawal, revocation or 
This is an unofficial version. The official version will be 

published in the Federal Register. 

766 

suspension of institutional accreditation for failing to meet 

one or more of the agency’s standards; 

(2)(i) The institution violated a provision or requirement 

in a security or loan agreement with a creditor; and 

(ii) As provided under the terms of that security or loan 

agreement, a monetary or nonmonetary default or delinquency 

event occurs, or other events occur, that trigger or enable the 

creditor to require or impose on the institution, an increase in 

collateral, a change in contractual obligations, an increase in 

interest rates or payments, or other sanctions, penalties, or 

fees; 

(3) The institution’s State licensing or authorizing agency 

notified the institution that it has violated a State licensing 

or authorizing agency requirement and that the agency intends to 

withdraw or terminate the institution’s licensure or 

authorization if the institution does not take the steps 

necessary to come into compliance with that requirement; 

(4) For its most recently completed fiscal year, a 

proprietary institution did not receive at least 10 percent of 

its revenue from sources other than title IV, HEA program funds, 

as provided under § 668.28(c); 

(5) As calculated by the Secretary, the institution has 

high annual dropout rates; or 
This is an unofficial version. The official version will be 

published in the Federal Register. 

767 

(6) The institution’s two most recent official cohort 

default rates are 30 percent or greater, as determined under 

subpart N of this part, unless— 

(i) The institution files a challenge, request for 

adjustment, or appeal under that subpart with respect to its 

rates for one or both of those fiscal years; and 

(ii) That challenge, request, or appeal remains pending, 

results in reducing below 30 percent the official cohort default 

rate for either or both of those years, or precludes the rates 

from either or both years from resulting in a loss of 

eligibility or provisional certification. 

(e) Recalculating the composite score. The Secretary 

recalculates an institution’s most recent composite score by 

recognizing the actual amount of the liability, or cumulative 

liabilities, incurred by an institution under paragraph 

(c)(1)(i)(A) of this section as an expense or accounting for the 

actual withdrawal, or cumulative withdrawals, of owner’s equity 

under paragraph (c)(1)(i)(B) of this section as a reduction in 

equity, and accounts for that expense or withdrawal by-- 

(1) For liabilities incurred by a proprietary institution-- 

(i) For the primary reserve ratio, increasing expenses and 

decreasing adjusted equity by that amount; 
This is an unofficial version. The official version will be 

published in the Federal Register. 

768 

(ii) For the equity ratio, decreasing modified equity by 

that amount; and 

(iii) For the net income ratio, decreasing income before 

taxes by that amount; 

(2) For liabilities incurred by a non-profit institution— 

(i) For the primary reserve ratio, increasing expenses and 

decreasing expendable net assets by that amount; 

(ii) For the equity ratio, decreasing modified net assets 

by that amount; and 

(iii) For the net income ratio, decreasing change in net 

assets without donor restrictions by that amount; and 

(3) For the amount of owner’s equity withdrawn from a 

proprietary institution— 

(i) For the primary reserve ratio, decreasing adjusted 

equity by that amount; and 

(ii) For the equity ratio, decreasing modified equity by 

that amount. 

(f) Reporting requirements. (1) In accordance with 

procedures established by the Secretary, an institution must 

notify the Secretary of the following actions or events-- 

(i) For a liability incurred under paragraph (c)(1)(i)(A), 

no later than 10 days after the date of written notification to 

the institution of the final judgment or final determination; 
This is an unofficial version. The official version will be 

published in the Federal Register. 

769 

(ii) For a withdrawal of owner’s equity described in 

paragraph (c)(1)(i)(B)-- 

(A) For a capital distribution that is the equivalent of 

wages in a sole proprietorship or partnership, no later than 10 

days after the date the Secretary notifies the institution that 

its composite score is less than 1.5. In response to that 

notice, the institution must report the total amount of the 

wage-equivalent distributions it made during its prior fiscal 

year and any distributions that were made to pay any taxes 

related to the operation of the institution. During its current 

fiscal year and the first six months of its subsequent fiscal 

year (18-month period), the institution is not required to 

report any distributions to the Secretary, provided that the 

institution does not make wage-equivalent distributions that 

exceed 150 percent of the total amount of wage-equivalent 

distributions it made during its prior fiscal year, less any 

distributions that were made to pay any taxes related to the 

operation of the institution. However, if the institution makes 

wage-equivalent distributions that exceed 150 percent of the 

total amount of wage-equivalent distributions it made during 

its prior fiscal year less any distributions that were made to 

pay any taxes related to the operation of the institution at any 

time during the 18-month period, it must report each of those 
This is an unofficial version. The official version will be 

published in the Federal Register. 

770 

distributions no later than 10 days after they are made, and the 

Secretary recalculates the institution’s composite score based 

on the cumulative amount of the distributions made at that time; 

(B) For a distribution of dividends or return of capital, 

no later than 10 days after the dividends are declared or the 

amount of return of capital is approved; or 

(C) For a related party receivable, not later than 10 days 

after that receivable occurs; 

(iii) For the provisions relating to a publicly traded 

institution under paragraph (c)(2), no later than 10 days after 

the date that— 

(A) The SEC issues an order suspending or revoking the 

registration of the institution’s securities pursuant to Section 

12(j) of the Exchange Act or suspends trading of the 

institution’s securities on any national securities exchange 

pursuant to Section 12(k) of the Exchange Act; or 

(B) The national securities exchange on which the 

institution’s securities are traded involuntarily delists its 

securities, or the institution voluntarily delists its 

securities, pursuant to the rules of the relevant national 

securities exchange; 
This is an unofficial version. The official version will be 

published in the Federal Register. 

771 

(iv) For an action under paragraph (d)(1), 10 days after 

the date on which the institution is notified by its accrediting 

agency of that action; 

(v) For the loan agreement provisions in paragraph (d)(2), 

10 days after a loan violation occurs, the creditor waives the 

violation, or the creditor imposes sanctions or penalties in 

exchange or as a result of granting the waiver; 

(vi) For a State agency notice relating to terminating an 

institution’s licensure or authorization under paragraph (d)(3), 

10 days after the date on which the institution receives that 

notice; and 

(vii) For the non-title IV revenue provision in paragraph 

(d)(4), no later than 45 days after the end of the institution’s 

fiscal year, as provided in § 668.28(c)(3). 

(2) The Secretary may take an administrative action under 

paragraph (i) of this section against an institution, or 

determine that the institution is not financially responsible, 

if it fails to provide timely notice to the Secretary as 

provided under paragraph (f)(1) of this section, or fails to 

respond, within the timeframe specified by the Secretary, to any 

determination made, or request for information, by the Secretary 

under paragraph (f)(3) of this section. 
This is an unofficial version. The official version will be 

published in the Federal Register. 

772 

(3)(i) In its notice to the Secretary under this paragraph, 

or in its response to a preliminary determination by the 

Secretary that the institution is not financially responsible 

because of a triggering event under paragraph (c) or (d) of this 

section, in accordance with procedures established by the 

Secretary, the institution may-- 

(A) Demonstrate that the reported withdrawal of owner’s 

equity under paragraph (c)(1)(i)(B) was used exclusively to meet 

tax liabilities of the institution or its owners for income 

derived from the institution; 

(B) Show that the creditor waived a violation of a loan 

agreement under paragraph (d)(2). However, if the creditor 

imposes additional constraints or requirements as a condition of 

waiving the violation, or imposes penalties or requirements 

under paragraph (d)(2)(ii), the institution must identify and 

describe those penalties, constraints, or requirements and 

demonstrate that complying with those actions will not adversely 

affect the institution’s ability to meet its financial 

obligations; 

(C) Show that the triggering event has been resolved, or 

demonstrate that the institution has insurance that will cover 

all or part of the liabilities that arise under paragraph 

(c)(1)(i)(A); or 
This is an unofficial version. The official version will be 

published in the Federal Register. 

773 

(D) Explain or provide information about the conditions or 

circumstances that precipitated a triggering event under 

paragraph (c) or (d) that demonstrates that the triggering event 

has not or will not have a material adverse effect on the 

institution. 

(ii) The Secretary will consider the information provided 

by the institution in determining whether to issue a final 

determination that the institution is not financially 

responsible. 

(g) Public institutions. (1) The Secretary considers a 

domestic public institution to be financially responsible if the 

institution-- 

(i)(A) Notifies the Secretary that it is designated as a 

public institution by the State, local, or municipal government 

entity, tribal authority, or other government entity that has 

the legal authority to make that designation; and 

(B) Provides a letter from an official of that State or 

other government entity confirming that the institution is a 

public institution; and 

(ii) Is not subject to a condition of past performance 

under § 668.174. 

(2) The Secretary considers a foreign public institution to 

be financially responsible if the institution-- 
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774 

(i)(A) Notifies the Secretary that it is designated as a 

public institution by the country or other government entity 

that has the legal authority to make that designation; and 

(B) Provides documentation from an official of that country 

or other government entity confirming that the institution is a 

public institution and is backed by the full faith and credit of 

the country or other government entity; and 

(ii) Is not subject to a condition of past performance 

under § 668.174. 

(h) Audit opinions and disclosures. Even if an 

institution satisfies all of the general standards of financial 

responsibility under paragraph (b) of this section, the 

Secretary does not consider the institution to be financially 

responsible if, in the institution’s audited financial 

statements, the opinion expressed by the auditor was an adverse, 

qualified, or disclaimed opinion, or the financial statements 

contain a disclosure in the notes to the financial statements 

that there is substantial doubt about the institution’s ability 

to continue as a going concern as required by accounting 

standards, unless the Secretary determines that a qualified or 

disclaimed opinion does not have a significant bearing on the 

institution's financial condition, or that the substantial doubt 
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775 

about the institution’s ability to continue as going concern has 

been alleviated. 

 (i) Administrative actions. If the Secretary determines 

that an institution is not financially responsible under the 

standards and provisions of this section or under an alternative 

standard in § 668.175, or the institution does not submit its 

financial and compliance audits by the date and in the manner 

required under § 668.23, the Secretary may-- 

(1) Initiate an action under subpart G of this part to fine 

the institution, or limit, suspend, or terminate the 

institution's participation in the title IV, HEA programs; or 

(2) For an institution that is provisionally certified, 

take an action against the institution under the procedures 

established in § 668.13(d). 
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6. Section 668.172 is amended by: 

a. Adding new paragraphs (d) and (e). 

b. Removing the parenthetical authority citation. 

The additions read as follows: 

§ 668.172 Financial Ratios. 

* * * * * 

(d) Accounting for operating leases. The Secretary accounts 

for operating leases by-- 

(1) Applying FASB Accounting Standards Update (ASU) 2016-

02, Leases (Topic 842) to all leases the institution has entered 

into on or after December 15, 2018 (post-implementation 

operating/financing leases), as specified in the Supplemental 

Schedule (see Section 2 of Appendix A to this subpart and 

Section 2 of Appendix B to this subpart); 

(2) Treating leases the institution entered into prior to 

December 15, 2018 (pre-implementation operating/financing 

leases), as they would have been treated prior to the 

requirements of ASU 2016-02, as long as the institution provides 

information about those leases on the Supplemental Schedule and 

a note in, or on the face of, its audited financial statements; 

and 

(3) Accounting for any adjustments, such as any options 

exercised by the institution to extend the life of a pre-
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777 

implementation operating/finance lease, as post-implementation 

operating/finance leases. 

(e) Incorporation by Reference. (1) The material 

required in this section is incorporated by reference into this 

section with the approval of the Director of the Federal 

Register under 5 U.S.C. 552(a) and 1 CFR part 51. All approved 

material is available for inspection at U.S. Department of 

Education, Office of the General Counsel, 202-401-6000, and is 

available from the sources indicated below. It is also 

available for inspection at the National Archives and Records 

Administration (NARA). For information on the availability of 

this material at NARA, email fedreg.legal@nara.gov or go to 

www.archives.gov/federal-register/cfr/ibr-locations.html. 

 (2) Financial Accounting Standards Board (FASB), 401 

Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, (203) 847-0700, 

www.fasb.org. 

 (i) Accounting Standards Update (ASU) 2016-02, Leases 

(Topic 842), (February 2016). 

(ii) [Reserved] 

* * * * * 

7. Section 668.175 is amended by: 

a. Revising paragraphs (a) through (c). 

b. Revising paragraph (f). 
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778 

c. Revising paragraph (h). 

d. Removing the parenthetical authority citation. 

The revisions and addition read as follows: 

§ 668.175 Alternative standards and requirements. 

(a) General. An institution that is not financially 

responsible under the general standards and provisions in § 

668.171, may begin or continue to participate in the title IV, 

HEA programs by qualifying under an alternate standard set forth 

in this section. 

(b) Letter of Credit or surety alternative for new 

institutions. A new institution that is not financially 

responsible solely because the Secretary determines that its 

composite score is less than 1.5, qualifies as a financially 

responsible institution by submitting an irrevocable letter of 

credit that is acceptable and payable to the Secretary, or 

providing other surety described under paragraph (h)(2)(i) of 

this section, for an amount equal to at least one-half of the 

amount of title IV, HEA program funds that the Secretary 

determines the institution will receive during its initial year 

of participation. A new institution is an institution that seeks 

to participate for the first time in the title IV, HEA programs. 

(c) Financial protection alternative for participating 

institutions. A participating institution that is not 
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779 

financially responsible either because it does not satisfy one 

or more of the standards of financial responsibility under § 

668.171(b), (c) or (d), or because of an audit opinion or going 

concern disclosure described under § 668.171(h), qualifies as a 

financially responsible institution by submitting an irrevocable 

letter of credit that is acceptable and payable to the 

Secretary, or providing other financial protection described 

under paragraph (h) of this section, for an amount determined by 

the Secretary that is not less than one-half of the title IV, 

HEA program funds received by the institution during its most 

recently completed fiscal year, except that this requirement 

does not apply to a public institution. 

* * * * * * 

(f) Provisional certification alternative. (1) The 

Secretary may permit an institution that is not financially 

responsible to participate in the title IV, HEA programs under a 

provisional certification for no more than three consecutive 

years if -- 

(i) The institution is not financially responsible because 

it does not satisfy the general standards under § 668.171(b), 

its recalculated composite score under § 668.171(e) is less than 

1.0, it is subject to an action or event under § 668.171(c), or 

an action or event under paragraph (d) that has an adverse 
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780 

material effect on the institution as determined by the 

Secretary, or because of an audit opinion or going concern 

disclosure described in § 668.171(h); or 

(ii) The institution is not financially responsible because 

of a condition of past performance, as provided under § 

668.174(a), and the institution demonstrates to the Secretary 

that it has satisfied or resolved that condition; and 

(2) Under this alternative, the institution must— 

(i) Provide to the Secretary an irrevocable letter of 

credit that is acceptable and payable to the Secretary, or 

provide other financial protection described under paragraph (h) 

of this section, for an amount determined by the Secretary that 

is not less than 10 percent of the title IV, HEA program funds 

received by the institution during its most recently completed 

fiscal year, except that this requirement does not apply to a 

public institution that the Secretary determines is backed by 

the full faith and credit of the State; 

(ii) Demonstrate that it was current on its debt payments 

and has met all of its financial obligations, as required under 

§ 668.171(b)(3), for its two most recent fiscal years; and 

(iii) Comply with the provisions under the zone 

alternative, as provided under paragraph (d)(2) and (3) of this 

section. 
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(3) If at the end of the period for which the Secretary 

provisionally certified the institution, the institution is 

still not financially responsible, the Secretary may again 

permit the institution to participate under a provisional 

certification but the Secretary-- 

(i) May require the institution, or one or more persons or 

entities that exercise substantial control over the institution, 

as determined under § 668.174(b)(1) and (c), or both, to provide 

to the Secretary financial guarantees for an amount determined 

by the Secretary to be sufficient to satisfy any potential 

liabilities that may arise from the institution's participation 

in the title IV, HEA programs; 

(ii) May require one or more of the persons or entities 

that exercise substantial control over the institution, as 

determined under § 668.174(b)(1) and (c), to be jointly or 

severally liable for any liabilities that may arise from the 

institution’s participation in the title IV, HEA programs; and 

(iii) May require the institution to provide, or continue 

to provide, the financial protection resulting from an event 

described in § 668.171(c) and (d) until the institution meets 

the requirements of paragraph (f)(4) of this section. 
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782 

(4) The Secretary maintains the full amount of financial 

protection provided by the institution under this section until 

the Secretary first determines that the institution has— 

(i) A composite score of 1.0 or greater based on a review 

of the audited financial statements for the fiscal year in which 

all liabilities from any event described in § 668.171(c) or (d) 

on which financial protection was required; or 

(ii) A recalculated composite score of 1.0 or greater, and 

any event or condition described in § 668.171(c) or (d) has 

ceased to exist. 

* * * * * * 

(h) Financial protection. (1) In accordance with 

procedures established by the Secretary or as part of an 

agreement with an institution under this section, the Secretary 

may use the funds from that financial protection to satisfy the 

debts, liabilities, or reimbursable costs, including costs 

associated with teach-outs as allowed by the Department, owed to 

the Secretary that are not otherwise paid directly by the 

institution. 

(2) In lieu of submitting a letter of credit for the amount 

required by the Secretary under this section, the Secretary may 

permit an institution to— 
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783 

(i) Provide the amount required in the form of other surety 

or financial protection that the Secretary specifies in a notice 

published in the Federal Register; 

(ii) Provide cash for the amount required; or 

(iii) Enter into an arrangement under which the Secretary 

offsets the amount of title IV, HEA program funds that an 

institution has earned in a manner that ensures that, no later 

than the end of a six to twelve-month period selected by the 

Secretary, the amount offset equals the amount of financial 

protection the institution is required to provide. The 

Secretary provides to the institution any funds not used for 

the purposes described in paragraph (h)(1) of this section 

during the period covered by the agreement, or provides the 

institution any remaining funds if the institution subsequently 

submits other financial protection for the amount originally 

required. 

8. Appendix A to subpart L of part 668 is revised to read 

as follows: 
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784 
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785 
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786 
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787 
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788 
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789 
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790 

9. Appendix B to Subpart L of part 668 is revised to read as 
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791 

follows:
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792 
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793 
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794 
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795 
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796 
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797 
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798 
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799 
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800 

 
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PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM 

10. The authority citation for part 682 is revised to read 

as follows: 

Authority: 20 U.S.C. 1071-1087-4, unless otherwise noted. 

Section 682.410 also issued under 20 U.S.C. 1078, 1078-1, 

1078-2, 1078-3, 1080a, 1082, 1087, 1091a, and 1099. 

11. Section 682.410 is amended by: 

a. Revising paragraph (b)(2). 

b. Removing the parenthetical authority citation. 

The revision reads as follows: 

§ 682.410 Fiscal, administrative, and enforcement 

requirements. 

* * * * * 

(b) * * * 

(2) Collection charges. 

(i) Whether or not provided for in the borrower’s 

promissory note and subject to any limitation on the amount of 

those costs in that note, the guaranty agency may charge a 

borrower an amount equal to the reasonable costs incurred by the 

agency in collecting a loan on which the agency has paid a 

default or bankruptcy claim unless, within the 60-day period 

after the guaranty agency sends the initial notice described in 

paragraph (b)(6)(ii) of this section, the borrower enters into 
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802 

an acceptable repayment agreement, including a rehabilitation 

agreement, and honors that agreement, in which case the guaranty 

agency must not charge a borrower any collection costs. 

(ii) An acceptable repayment agreement may include an 

agreement described in § 682.200(b) (Satisfactory repayment 

arrangement), § 682.405, or paragraph (b)(5)(ii)(D) of this 

section. An acceptable repayment agreement constitutes a 

repayment arrangement or agreement on repayment terms 

satisfactory to the guaranty agency, under this section. 

(iii) The costs under this paragraph (b)(2) include, but 

are not limited to, all attorneys’ fees, collection agency 

charges, and court costs. Except as provided in 

§§ 682.401(b)(18)(i) and 682.405(b)(1)(vi)(B), the amount 

charged a borrower must equal the lesser of— 

(A) The amount the same borrower would be charged for the 

cost of collection under the formula in 34 CFR 30.60; or 

(B) The amount the same borrower would be charged for the 

cost of collection if the loan was held by the U.S. Department 

of Education. 

* * * * * 
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803 

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM 

12. The authority citation for part 685 is revised to read 

as follows: 

AUTHORITY: 20 U.S.C. 1070g, 1087a, et seq., unless 

otherwise noted. 

Section 685.205 also issued under 20 U.S.C. 1087a et seq. 

Section 685.206 also issued under 20 U.S.C. 1087a et seq. 

Section 685.212 also issued under 20 U.S.C. 1087a et seq; 

28 U.S.C. 2401. 

Section 685.214 also issued under 20 U.S.C. 1087a et seq. 

Section 685.215 also issued under 20 U.S.C. 1087a et seq. 

Section 685.222 also issued under 20 U.S.C. 1087a et seq.; 

28 U.S.C. 2401; 31 U.S.C. 3702. 

Section 685.300 also issued under 20 U.S.C. 1087a et seq., 

1094. 

Section 685.304 also issued under 20 U.S.C. 1087a et seq. 

Section 685.308 also issued under 20 U.S.C. 1087a et seq. 

 § 685.205 [Amended] 

 13. Section 685.205 is amended by: 

a. In paragraph (b)(6)(i), removing the citation 

“§685.206(c)” and adding, in its place, the citation 

“§685.206(c), (d) and (e)”. 

b. Removing the parenthetical authority citation. 
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804 

14. Section 685.206 is amended by: 

a. In paragraph (c), adding the following sentence to the 

beginning of the paragraph: “Borrower defense to repayment for 

loans first disbursed prior to July 1, 2017.” 

b. Adding new paragraphs (d) through (e). 

c. Removing the parenthetical authority citation. 

The revisions and additions read as follows: 

§ 685.206 Borrower responsibilities and defenses. 

* * * * * 

(d) Borrower defense to repayment for loans first 

disbursed on or after July 1, 2017, and before July 1, 2020. 

For borrower defense to repayment for loans first disbursed on 

or after July 1, 2017, and before July 1, 2020, a borrower 

asserts and the Secretary considers a borrower defense in 

accordance with § 685.222. 

(e) Borrower defense to repayment for loans first 

disbursed on or after July 1, 2020. This paragraph (e)applies 

to borrower defense to repayment for loans first disbursed on or 

after July 1, 2020. (1) Definitions. For the purposes of this 

paragraph (e), the following definitions apply: 

(i) A “Direct Loan” means a Direct Subsidized Loan, a 

Direct Unsubsidized Loan, or a Direct PLUS Loan. 

(ii) “Borrower” means 
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805 

(A) The borrower; and 

(B) In the case of a Direct PLUS Loan, any endorsers, and 

for a Direct PLUS Loan made to a parent, the student on whose 

behalf the parent borrowed. 

(iii) A “borrower defense to repayment” includes-- 

(A) A defense to repayment of amounts owed to the 

Secretary on a Direct Loan, or a Direct Consolidation Loan that 

was used to repay a Direct Loan, FFEL Program Loan, Federal 

Perkins Loan, Health Professions Student Loan, Loan for 

Disadvantaged Students under subpart II of part A of title VII 

of the Public Health Service Act, Health Education Assistance 

Loan, or Nursing Loan made under part E of the Public Health 

Service Act; and 

(B) Any accompanying request for reimbursement of payments 

previously made to the Secretary on the Direct Loan or on a loan 

repaid by the Direct Consolidation Loan. 

(iv) The term “provision of educational services” refers 

to the educational resources provided by the institution that 

are required by an accreditation agency or a State licensing or 

authorizing agency for the completion of the student’s 

educational program. 

(v) The terms “school” and “institution” may be used 

interchangeably and include an eligible institution, one of its 
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806 

representatives, or any ineligible institution, organization, or 

person with whom the eligible institution has an agreement to 

provide educational programs, or to provide marketing, 

advertising, recruiting, or admissions services. 

(2) Federal standard for loans first disbursed on or after 

July 1, 2020. For a Direct Loan or Direct Consolidation Loan 

first disbursed on or after July 1, 2020, a borrower may assert 

a defense to repayment under this paragraph (e),if the borrower 

establishes by a preponderance of the evidence that-- 

(i) The institution at which the borrower enrolled made a 

misrepresentation, as defined in 685.206(e)(3), of material fact 

upon which the borrower reasonably relied in deciding to obtain 

a Direct Loan, or a loan repaid by a Direct Consolidation Loan, 

and that directly and clearly relates to: 

(A) Enrollment or continuing enrollment at the institution 

or 

(B) The provision of educational services for which the 

loan was made; and 

(ii) The borrower was financially harmed by the 

misrepresentation. 

(3) Misrepresentation. A “misrepresentation,” for 

purposes of this paragraph (e), is a statement, act, or omission 

by an eligible school to a borrower that is false, misleading, 
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807 

or deceptive; that was made with knowledge of its false, 

misleading, or deceptive nature or with a reckless disregard for 

the truth; and that directly and clearly relates to 1) 

enrollment or continuing enrollment at the institution or 2) 

the provision of educational services for which the loan was 

made. Evidence that a misrepresentation defined in this 

paragraph (e) may have occurred includes, but is not limited to: 

(i) Actual licensure passage rates materially different 

from those included in the institution’s marketing materials, 

website, or other communications made to the student; 

(ii) Actual employment rates materially different from 

those included in the institution’s marketing materials, 

website, or other communications made to the student; 

(iii) Actual institutional selectivity rates or rankings, 

student admission profiles, or institutional rankings that are 

materially different from those included in the institution’s 

marketing materials, website, or other communications made to 

the student or provided by the institution to national ranking 

organizations; 

(iv) 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 
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808 

failure to remove within a reasonable period of time such 

certifications or approvals from marketing materials, website, 

or other communication when revoked or withdrawn; 

(v) 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; 

(vi) 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 or without citing appropriate national, State, or 

regional data for earnings in the same field as provided by an 

appropriate Federal agency that provides such data. (In the 

event that national data are used, institutions should include a 

written, plain language disclaimer that national averages may 

not accurately reflect the earnings of workers in particular 

parts of the country and may include earners at all stages of 
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809 

their career and not just entry level wages for recent 

graduates.); 

(vii) 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 materially different in 

availability, amount, or nature from the actual financial 

assistance available to the borrower from the institution or any 

other entity to pay the costs of attendance at the institution 

after enrollment; 

(viii) A representation regarding the amount, method, or 

timing of payment 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; 

(ix) 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, 

governmental officials, Federal or State agencies, the United 

States Armed Forces, or other individuals or entities when the 

institution has no permission or is not otherwise authorized to 

make or use such an endorsement; 
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(x) A representation regarding the educational resources 

provided by the institution that are required for the completion 

of the student’s educational program that are materially 

different from the institution’s actual circumstances at the 

time the representation is made, such as representations 

regarding the institution’s size; location; facilities; training 

equipment; or the number, availability, or qualifications of its 

personnel; and 

(xi) A representation regarding the nature or extent of 

prerequisites for enrollment in a course or program offered by 

the institution that are materially different from the 

institution’s actual circumstances at the time the 

representation is made, or that the institution knows will be 

materially different during the student’s anticipated enrollment 

at the institution. 

(4) Financial harm. Financial harm is the amount of 

monetary loss that a borrower incurs as a consequence of a 

misrepresentation, as defined in § 685.206(e)(3). Financial 

harm does not include damages for nonmonetary loss, such as 

personal injury, inconvenience, aggravation, emotional distress, 

pain and suffering, punitive damages, or opportunity costs. The 

Department does not consider the act of taking out a Direct Loan 

or a loan repaid by a Direct Consolidation Loan, alone, as 
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811 

evidence of financial harm to the borrower. 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 or provided to 

the Secretary by the borrower or the school. Financial harm 

cannot arise from the borrower’s voluntary decision to pursue 

less than full-time work or not to work or result from a 

voluntary change in occupation. Evidence of financial harm may 

include, but is not limited to, the following circumstances: 

(i) Periods of unemployment upon graduating from the 

school’s programs that are unrelated to national or local 

economic recessions; 

(ii) A significant difference between the amount or nature 

of the tuition and fees that the institution represented to the 

borrower that the institution would charge or was charging and 

the actual amount or nature of the tuition and fees charged by 

the institution for which the Direct Loan was disbursed or for 

which a loan repaid by the Direct Consolidation Loan was 

disbursed; 

(iii) The borrower’s inability to secure employment in the 

field of study for which the institution expressly guaranteed 

employment; and 
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(iv) 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 and 

the institution did not provide for an acceptable alternative 

requirement to enable completion of the program. 

(5) Exclusions. The Secretary will not accept the 

following as a basis for a borrower defense to repayment— 

(i) A violation by the institution of a requirement of the 

Act or the Department’s regulations for a borrower defense to 

repayment under paragraph (c) or (d) of this section or under § 

685.222, unless the violation would otherwise constitute the 

basis for a successful borrower defense to repayment under this 

paragraph (e); or 

(ii) A claim that does not directly and clearly relate to 

enrollment or continuing enrollment at the institution or the 

provision of educational services for which the loan was made, 

including, but not limited to— 

(A) Personal injury; 

(B) Sexual harassment; 

(C) A violation of civil rights; 

(D) Slander or defamation; 

(E) Property damage; 
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(F) The general quality of the student’s education or the 

reasonableness of an educator’s conduct in providing educational 

services; 

(G) Informal communication from other students; 

(H) Academic disputes and disciplinary matters; and 

(I) Breach of contract, unless the school’s act or omission 

would otherwise constitute the basis for a successful defense to 

repayment under this paragraph (e). 

(6) Limitations period and tolling of the limitations 

period for arbitration proceedings. (i) A borrower must assert 

a defense to repayment under this paragraph (e) within three 

years from the date the student is no longer enrolled at the 

institution. A borrower may only assert a defense to repayment 

under this paragraph (e) within the timeframes set forth in 

§ 685.206(e)(6)(i), (e)(6)(ii), and (e)(7). 

(ii) For pre-dispute arbitration agreements, as defined in 

§ 668.41(h)(2)(iii), the limitations period will be tolled for 

the time period beginning on the date that a written request for 

arbitration is filed, by either the student or the institution, 

and concluding on the date the arbitrator submits, in writing, a 

final decision, final award, or other final determination, to 

the parties. 
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(7) Extension of limitation periods and reopening of 

applications. For loans first disbursed on or after July 1, 

2020, the Secretary may extend the time period when a borrower 

may assert a defense to repayment under § 685.206(e)(6) or may 

reopen a borrower’s defense to repayment application to consider 

evidence that was not previously considered only if there is (i) 

a final, non-default judgment on the merits by a State or 

Federal Court that has not been appealed or that is not subject 

to further appeal and that establishes the institution made a 

misrepresentation, as defined in § 685.206(e)(3), or (ii) a 

final decision by a duly appointed arbitrator or arbitration 

panel that establishes that the institution made a 

misrepresentation, as defined in § 685.206(e)(3). 

(8) Application and Forbearance. To assert a defense to 

repayment under this paragraph (e), a borrower must submit an 

application under penalty of perjury on a form approved by the 

Secretary and sign a waiver permitting the institution to 

provide the Department with items from the borrower’s education 

record relevant to the defense to repayment claim. The form 

will note that pursuant to 34 CFR § 685.205(b)(6)(i), if the 

borrower is not in default on the loan for which a borrower 

defense has been asserted, the Secretary will grant forbearance 
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815 

and notify the borrower of the option to decline forbearance. 

The application requires the borrower to-- 

(i) Certify that the borrower received the proceeds of a 

loan, in whole or in part, to attend the named institution; 

(ii) Provide evidence that supports the borrower defense 

to repayment application; 

(iii) State whether the borrower has made a claim with any 

other third party, such as the holder of a performance bond, a 

public fund, or a tuition recovery program, based on the same 

act or omission of the institution on which the borrower defense 

to repayment is based; 

(iv) State the amount of any payment received by the 

borrower or credited to the borrower's loan obligation through 

the third party, in connection with a borrower defense to 

repayment described in paragraph (e)(2) of this section; 

(v) State the financial harm, as defined in paragraph 

(e)(4), that the borrower alleges to have been caused and 

provide any information relevant to assessing whether the 

borrower incurred financial harm, including providing 

documentation that the borrower actively pursued employment in 

the field for which the borrower’s education prepared the 

borrower if the borrower is a recent graduate (failure to 

provide such information results in a presumption that the 
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816 

borrower failed to actively pursue employment in the field); 

whether the borrower was terminated or removed for performance 

reasons from a position in the field for which the borrower’s 

education prepared the borrower, or in a related field; and 

whether the borrower failed to meet other requirements of or 

qualifications for employment in such field for reasons 

unrelated to the school’s misrepresentation underlying the 

borrower defense to repayment, such as the borrower’s ability to 

pass a drug test, satisfy driving record requirements, and meet 

any health qualifications; and 

(vi) State that the borrower understands that in the event 

that the borrower receives a 100 percent discharge of the 

balance of the loan for which the defense to repayment 

application has been submitted, the institution may, if allowed 

or not prohibited by other applicable law, refuse to verify or 

to provide an official transcript that verifies the borrower’s 

completion of credits or a credential associated with the 

discharged loan. 

(9) Consideration of order of objections and of evidence 

in possession of the Secretary. 

(i) If the borrower asserts both a borrower defense to 

repayment and any other objection to an action of the Secretary 

with regard to a Direct Loan or a loan repaid by a Direct 
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817 

Consolidation Loan, the order in which the Secretary will 

consider objections, including a borrower defense to repayment, 

will be determined as appropriate under the circumstances. 

(ii) With respect to the borrower defense to repayment 

application submitted under this paragraph (e), the Secretary 

may consider evidence otherwise in the possession of the 

Secretary, including from the Department’s internal records or 

other relevant evidence obtained by the Secretary, as 

practicable, provided that the Secretary permits the institution 

and the borrower to review and respond to this evidence and to 

submit additional evidence. 

(10) School response and borrower reply. (i) Upon 

receipt of a borrower defense to repayment application under 

this paragraph (e), the Department will notify the school of the 

pending application and provide a copy of the borrower’s request 

and any supporting documents, a copy of any evidence otherwise 

in the possession of the Secretary, and a waiver signed by the 

student permitting the institution to provide the Department 

with items from the student’s education record relevant to the 

defense to repayment claim to the school, and invite the school 

to respond and to submit evidence, within the specified 

timeframe included in the notice, which shall be no less than 60 

days. 
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818 

(ii) Upon receipt of the school’s response, the Department 

will provide the borrower a copy of the school’s submission as 

well as any evidence otherwise in possession of the Secretary, 

which was provided to the school, and will give the borrower an 

opportunity to submit a reply within a specified timeframe, 

which shall be no less than 60 days. The borrower’s reply must 

be limited to issues and evidence raised in the school’s 

submission and any evidence otherwise in the possession of the 

Secretary. 

(iii) The Department will provide the school a copy of the 

borrower’s reply. 

(iv) There will be no other submissions by the borrower or 

the school to the Secretary, unless the Secretary requests 

further clarifying information. 

(11) Written decision. (i) After considering the 

borrower’s application and all applicable evidence, the 

Secretary issues a written decision-- 

(A) Notifying the borrower and the school of the decision 

on the borrower defense to repayment; 

(B) Providing the reasons for the decision; and 

(C) Informing the borrower and the school of the relief, if 

any, that the borrower will receive, consistent with paragraph 
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819 

(e)(12) of this section, and specifying the relief 

determination. 

(ii) If the Department receives a borrower defense to 

repayment application that is incomplete and is within the 

limitations period in 685.206(e)(6) or (e)(7), the Department 

will not issue a written decision on the application and instead 

will notify the borrower in writing that the application is 

incomplete and will return the application to the borrower. 

(12) Borrower defense to repayment relief. (i) If the 

Secretary grants the borrower’s request for relief based on a 

borrower defense to repayment under this paragraph (e), the 

Secretary notifies the borrower and the school that the borrower 

is relieved of the obligation to repay all or part of the loan 

and associated costs and fees that the borrower would otherwise 

be obligated to pay or will be reimbursed for amounts paid 

toward the loan voluntarily or through enforced collection. The 

amount of relief that a borrower receives may exceed the amount 

of financial harm, as defined in § 685.206(e)(4), that the 

borrower alleges in the application pursuant to § 

685.206(e)(8)(v). The Secretary determines the amount of relief 

and awards relief limited to the monetary loss that a borrower 

incurred as a consequence of a misrepresentation, as defined in 

§ 685.206(e)(3). The amount of relief cannot exceed the amount 
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820 

of the loan and any associated costs and fees and will be 

reduced by the amount of refund, reimbursement, indemnification, 

restitution, compensatory damages, settlement, debt forgiveness, 

discharge, cancellation, compromise, or any other financial 

benefit received by, or on behalf of, the borrower that was 

related to the borrower defense to repayment. In awarding relief, 

the Secretary considers the borrower’s application, as described 

in § 685.206(e)(8), which includes information about any 

payments received by the borrower and the financial harm alleged 

by the borrower. In awarding relief, the Secretary also 

considers the school’s response, the borrower’s reply, and any 

evidence otherwise in the possession of the Secretary, which was 

previously provided to the borrower and the school, as described 

in §685.206(e)(10) . The Secretary also updates reports to 

consumer reporting agencies to which the Secretary previously 

made adverse credit reports with regard to the borrower's Direct 

Loan or loans repaid by the borrower’s Direct Consolidation 

Loan. 

(ii) The Secretary affords the borrower such further 

relief as the Secretary determines is appropriate under the 

circumstances. Further relief may include one or both of the 

following, if applicable: 
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821 

(A) Determining that the borrower is not in default on the 

loan and is eligible to receive assistance under title IV of the 

Act and 

(B) Eliminating or recalculating the subsidized usage 

period that is associated with the loan or loans discharged 

pursuant to § 685.200(f)(4)(iii). 

(13) Finality of borrower defense to repayment decisions. 

The determination of a borrower’s defense to repayment by the 

Department included in the written decision referenced in 

paragraph (e)(11) of this section is the final decision of the 

Department and is not subject to appeal within the Department. 

(14) Cooperation by the borrower. The Secretary may 

revoke any relief granted to a borrower under this section who 

refuses to cooperate with the Secretary in any proceeding under 

paragraph (e) of this section or under 34 CFR part 668, subpart 

G. Such cooperation includes, but is not limited to-- 

(i) Providing testimony regarding any representation made 

by the borrower to support a successful borrower defense to 

repayment; and 

(ii) Producing, within timeframes established by the 

Secretary, any documentation reasonably available to the 

borrower with respect to those representations and any sworn 
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822 

statement required by the Secretary with respect to those 

representations and documents. 

(15) Transfer to the Secretary of the borrower's right of 

recovery against third parties. (i) Upon the grant of any relief 

under paragraph (e) of this section, the borrower is deemed to 

have assigned to, and relinquished in favor of, the Secretary 

any right to a loan refund (up to the amount discharged) that 

the borrower may have by contract or applicable law with respect 

to the loan or the provision of educational services for which 

the loan was received, against the school, its principals, its 

affiliates and their successors, or its sureties, and any 

private fund, including the portion of a public fund that 

represents funds received from a private party. If the borrower 

asserts a claim to, and recovers from, a public fund, the 

Secretary may reinstate the borrower's obligation to repay on 

the loan an amount based on the amount recovered from the public 

fund, if the Secretary determines that the borrower's recovery 

from the public fund was based on the same borrower defense to 

repayment and for the same loan for which the discharge was 

granted under this section. 

(ii) The provisions of this paragraph (e)(15) apply 

notwithstanding any provision of State law that would otherwise 

restrict transfer of those rights by the borrower, limit or 
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823 

prevent a transferee from exercising those rights, or establish 

procedures or a scheme of distribution that would prejudice the 

Secretary's ability to recover on those rights. 

(iii) Nothing in this paragraph (e)(15) limits or 

forecloses the borrower’s right to pursue legal and equitable 

relief arising under applicable law against a party described in 

this paragraph (e)(15) for recovery of any portion of a claim 

exceeding that assigned to the Secretary or any other claims 

arising from matters unrelated to the claim on which the loan is 

discharged. 

(16) Recovery from the school. (i) The Secretary may 

initiate an appropriate proceeding to require the school whose 

misrepresentation resulted in the borrower's successful borrower 

defense to repayment under this paragraph (e) to pay to the 

Secretary the amount of the loan to which the defense applies in 

accordance with 34 CFR part 668, subpart G. This paragraph 

(e)(16) would also be applicable for provisionally certified 

institutions. 

(ii) The Secretary will not initiate such a proceeding 

more than five years after the date of the final determination 

included in the written decision referenced in paragraph (e)(11) 

of this section. The Department will notify the school of the 
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824 

borrower defense to repayment application within 60 days of the 

date of the Department’s receipt of the borrower’s application. 

15. Section 685.212 is amended by: 

a. Revising paragraph (k). 

b. Removing the parenthetical authority citation. 

The revision reads as follows: 

§685.212 Discharge of a loan obligation. 

* * * * * 

(k) Borrower defenses. (1) If a borrower defense is approved 

under § 685.206(c) or under § 685.206(d) and § 685.222— 

(i) The Secretary discharges the obligation of the borrower 

in whole or in part in accordance with the procedures in §§ 

685.206(c) and 685.222, respectively; and 

(ii) The Secretary returns to the borrower payments made by 

the borrower or otherwise recovered on the loan that exceed the 

amount owed on that portion of the loan not discharged, if the 

borrower asserted the claim not later than— 

(A) For a claim subject to § 685.206(c), the limitation 

period under applicable law to the claim on which relief was 

granted; or 

(B) For a claim subject to §685.222, the limitation period in 

§ 685.222(b), (c), or (d), as applicable. 
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825 

(2) In the case of a Direct Consolidation Loan, a borrower 

may assert a borrower defense under § 685.206(c) or § 685.222 

with respect to a Direct Loan, FFEL Program Loan, Federal 

Perkins Loan, Health Professions Student Loan, Loan for 

Disadvantaged Students under subpart II of part A of title VII 

of the Public Health Service Act, Health Education Assistance 

Loan, or Nursing Loan made under part E of the Public Health 

Service Act that was repaid by the Direct Consolidation Loan. 

(i) The Secretary considers a borrower defense claim 

asserted on a Direct Consolidation Loan by determining— 

(A) Whether the act or omission of the school with regard to 

the loan described in paragraph (k)(2) of this section, other 

than a Direct Subsidized, Unsubsidized, or PLUS Loan, 

constitutes a borrower defense under §685.206(c), for a Direct 

Consolidation Loan made before July 1, 2017, or under §685.222, 

for a Direct Consolidation Loan made on or after July 1, 2017, 

and before July 1, 2020; or 

(B) Whether the act or omission of the school with regard to 

a Direct Subsidized, Unsubsidized, or PLUS Loan made on after 

July 1, 2017, and before July 1, 2020, that was paid off by the 

Direct Consolidation Loan, constitutes a borrower defense under 

§685.222. 
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826 

(ii) If the borrower defense is approved, the Secretary 

discharges the appropriate portion of the Direct Consolidation 

Loan. 

(iii) The Secretary returns to the borrower payments made by 

the borrower or otherwise recovered on the Direct Consolidation 

Loan that exceed the amount owed on that portion of the Direct 

Consolidation Loan not discharged, if the borrower asserted the 

claim not later than— 

(A) For a claim asserted under §685.206(c), the limitation 

period under the law applicable to the claim on which relief was 

granted; or 

(B) For a claim asserted under §685.222, the limitation 

period in § 685.222(b), (c), or (d), as applicable. 

(iv) The Secretary returns to the borrower a payment made by 

the borrower or otherwise recovered on the loan described in 

paragraph (k)(2) of this section only if— 

(A) The payment was made directly to the Secretary on the 

loan; and 

(B) The borrower proves that the loan to which the payment 

was credited was not legally enforceable under applicable law in 

the amount for which that payment was applied. 

(3) If a borrower’s application for a discharge of a loan 

based on a borrower defense is approved under § 685.206(e), the 
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827 

Secretary discharges the obligation of the borrower, in whole or 

in part, in accordance with the procedures described in 

§ 685.206(e). 

* * * * * 

16. Section 685.214 is amended by: 

a. In paragraph (c)(1), removing the word “In” at the 

beginning of the paragraph and adding, in its place, the words 

and punctuation “For loans first disbursed before July 1, 2020, 

in”. 

b. Redesignating paragraph (c)(2) as paragraph (c)(3). 

c. Adding new paragraph (c)(2). 

d. In redesignated paragraph (c)(3)(ii), adding the words 

“and before July 1, 2020” after the words “on or after November 

1, 2013.” 

e. Adding introductory text to paragraph (f). 

f. Adding a new paragraph (g). 

g. Removing the parenthetical authority citation. 

The additions read as follows: 

§ 685.214 Closed school discharge. 

* * * * * 

(c)(2) For loans first disbursed on or after July 1, 2020, 

in order to qualify for discharge of a loan under this section, 

a borrower must submit to the Secretary a completed application, 
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828 

and the factual assertions in the application must be true and 

made by the borrower under penalty of perjury. The application 

explains the procedures and eligibility criteria for obtaining a 

discharge and requires the borrower to-- 

(i) Certify that the borrower (or the student on whose 

behalf a parent borrowed)-- 

(A) Received the proceeds of a loan, in whole or in part, 

on or after July 1, 2020 to attend a school; 

(B) Did not complete the program of study at that school 

because the school closed on the date that the student was 

enrolled, or the student withdrew from the school not more than 

180 calendar days before the date that the school closed. The 

Secretary may extend the 180-day period if the Secretary 

determines that exceptional circumstances related to a school’s 

closing justify an extension. Exceptional circumstances for 

this purpose may include, but are not limited to: the revocation 

or withdrawal by an accrediting agency of the school’s 

institutional accreditation; revocation or withdrawal by the 

State authorization or licensing authority to operate or to 

award academic credentials in the State; the termination by the 

Department of the school’s participation in a title IV, HEA 

program; the teach-out of the student’s educational program 

exceeds the 180-day look-back period for a closed school loan 
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829 

discharge; or the school responsible for the teach-out of the 

student’s educational program fails to perform the material 

terms of the teach-out plan or agreement, such that the student 

does not have a reasonable opportunity to complete his or her 

program of study or a comparable program; and 

(C) Did not complete the program of study or a comparable 

program through a teach-out at another school or by transferring 

academic credits or hours earned at the closed school to another 

school; 

(ii) Certify that the borrower (or the student on whose 

behalf the parent borrowed) has not accepted the opportunity to 

complete, or is not continuing in, the program of study or a 

comparable program through either an institutional teach-out 

plan performed by the school or a teach-out agreement at another 

school, approved by the school’s accrediting agency and, if 

applicable, the school’s State authorizing agency.

* * * 

(f) Discharge procedures. The discharge procedures in § 

685.214(f) apply to loans first disbursed before July 1, 2020. 

(1) * * * 

* * * 

(g) Discharge procedures. The discharge procedures in 

685.214(g) apply to loans first disbursed on or after July 1, 
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830 

2020. (1) After confirming the date of a school's closure, the 

Secretary identifies any Direct Loan borrower (or student on 

whose behalf a parent borrowed) who appears to have been 

enrolled at the school on the school closure date or to have 

withdrawn not more than 180 days prior to the closure date. 

(2) If the borrower's current address is known, the 

Secretary mails the borrower a discharge application and an 

explanation of the qualifications and procedures for obtaining a 

discharge. The Secretary also promptly suspends any efforts to 

collect from the borrower on any affected loan. The Secretary 

may continue to receive borrower payments. 

(3) If the borrower's current address is unknown, the 

Secretary attempts to locate the borrower and determines the 

borrower's potential eligibility for a discharge under this 

section by consulting with representatives of the closed school, 

the school's licensing agency, the school's accrediting agency, 

and other appropriate parties. If the Secretary learns the new 

address of a borrower, the Secretary mails to the borrower a 

discharge application and explanation and suspends collection, 

as described in paragraph (g)(2) of this section. 

(4) If a borrower fails to submit the application described 

in paragraph (c) of this section within 60 days of the 

Secretary's providing the discharge application, the Secretary 
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831 

resumes collection and grants forbearance of principal and 

interest for the period in which collection activity was 

suspended. The Secretary may capitalize any interest accrued 

and not paid during that period. 

(5) If the Secretary determines that a borrower who requests 

a discharge meets the qualifications for a discharge, the 

Secretary notifies the borrower in writing of that 

determination. 

(6) If the Secretary determines that a borrower who requests 

a discharge does not meet the qualifications for a discharge, 

the Secretary notifies that borrower in writing of that 

determination and the reasons for the determination, and resumes 

collection. 

* * * * * 

17. Section 685.215 is amended by: 

a. In paragraph (a)(1), removing the word “The” at the 

beginning of the paragraph and adding, in its place, the words 

and punctuation “For loans first disbursed before July 1, 2020, 

the”. 

b. In paragraph (a)(1)(ii), removing the word “Certified” 

and adding, in its place, the words and punctuation “For loans 

first disbursed before July 1, 2020, certified”. 
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832 

c. In paragraph (a)(1)(iv), removing the word “or” at the 

end of the paragraph. 

d. Removing punctuation “.” at the end of paragraph (a)(v) 

and adding, in its place, the punctuation and word “; or”. 

e. Adding paragraph (a)(1)(vi). 

f. Revising the introductory text of paragraph (c). 

g. Adding introductory text to paragraph (d). 

h. Adding paragraphs (e) and (f). 

i. Removing the parenthetical authority citation. 

The revisions and additions read as follows: 

§685.215 Discharge for false certification of student 

eligibility or unauthorized payment. 

(a) * * * 

(1) * * * 

* * * 

(vi) For loans first disbursed on or after July 1, 2020, 

certified eligibility for a Direct Loan for a student who did 

not have a high school diploma or its recognized equivalent and 

did not meet the alternative eligibility requirements described 

in 34 CFR part 668 and section 484(d) of the Act applicable at 

the time of disbursement. 

* * * * * 
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833 

(c) Borrower qualification for discharge. This paragraph 

(c) applies to loans first disbursed before July 1, 2020. To 

qualify for discharge under this paragraph, the borrower must 

submit to the Secretary an application for discharge on a form 

approved by the Secretary. The application need not be notarized 

but must be made by the borrower under penalty of perjury; and 

in the application, the borrower's responses must demonstrate to 

the satisfaction of the Secretary that the requirements in 

paragraph (c)(1) through (7) of this section have been met. If 

the Secretary determines the application does not meet the 

requirements, the Secretary notifies the applicant and explains 

why the application does not meet the requirements. 

* * * 

(d) Discharge procedures. This paragraph (d) applies to 

loans first disbursed before July 1, 2020. (1) * * * 

* * * * * 

(e) Borrower qualification for discharge. This paragraph 

(e) applies to loans first disbursed on or after July 1, 2020. 

In order to qualify for discharge under this paragraph, the 

borrower must submit to the Secretary an application for 

discharge on a form approved by the Secretary, and the factual 

assertions in the application must be true and made under 

penalty of perjury. In the application, the borrower must 
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834 

demonstrate to the satisfaction of the Secretary that the 

requirements in paragraphs (e)(1) through (6) of this section 

have been met. 

(1) High School diploma or equivalent. (i) In the case of a 

borrower requesting a discharge based on not having had a high 

school diploma and not having met the alternative eligibility 

requirements, the borrower must certify that the borrower (or 

the student on whose behalf a parent borrowed)— 

(A) Received a disbursement of a loan, in whole or in part, 

on or after January 1, 1986, to attend a school; and 

(B) Received a Direct Loan at that school and did not have a 

high school diploma or its recognized equivalent and did not 

meet the alternative to graduation from high school eligibility 

requirements described in 34 CFR part 668 and section 484(d) of 

the Act applicable at the time of disbursement. 

(ii) A borrower does not qualify for a false certification 

discharge under § 685.215(e)(1) if— 

(A) The borrower was unable to provide the school with an 

official transcript or an official copy of the borrower’s high 

school diploma or the borrower was home schooled and has no 

official transcript or high school diploma; and 

(B) As an alternative to an official transcript or official 

copy of the borrower’s high school diploma, the borrower 
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835 

submitted to the school a written attestation, under penalty of 

perjury, that the borrower had a high school diploma. 

(2) Unauthorized loan. In the case of a borrower requesting 

a discharge because the school signed the borrower's name on the 

loan application or promissory note without the borrower's 

authorization, the borrower must— 

(i) State that he or she did not sign the document in 

question or authorize the school to do so; and 

(ii) Provide five different specimens of his or her 

signature, two of which must be within one year before or after 

the date of the contested signature. 

(3) Unauthorized payment. In the case of a borrower 

requesting a discharge because the school, without the 

borrower's authorization, endorsed the borrower's loan check or 

signed the borrower's authorization for electronic funds 

transfer, the borrower must— 

(i) State that he or she did not endorse the loan check or 

sign the authorization for electronic funds transfer or 

authorize the school to do so; 

(ii) Provide five different specimens of his or her 

signature, two of which must be within one year before or after 

the date of the contested signature; and 
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836 

(iii) State that the proceeds of the contested disbursement 

were not delivered to the student or applied to charges owed by 

the student to the school. 

(4) Identity theft. (i) In the case of an individual whose 

eligibility to borrow was falsely certified because he or she 

was a victim of the crime of identity theft and is requesting a 

discharge, the individual must— 

(A) Certify that the individual did not sign the promissory 

note, or that any other means of identification used to obtain 

the loan was used without the authorization of the individual 

claiming relief; 

(B) Certify that the individual did not receive or benefit 

from the proceeds of the loan with knowledge that the loan had 

been made without the authorization of the individual; 

(C) Provide a copy of a local, State, or Federal court 

verdict or judgment that conclusively determines that the 

individual who is named as the borrower of the loan was the 

victim of a crime of identity theft; and 

(D) If the judicial determination of the crime does not 

expressly state that the loan was obtained as a result of the 

crime of identity theft, provide— 

(1) Authentic specimens of the signature of the individual, 

as provided in paragraph (e)(2)(ii) of this section, or of other 
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837 

means of identification of the individual, as applicable, 

corresponding to the means of identification falsely used to 

obtain the loan; and 

(2) A statement of facts that demonstrate, to the 

satisfaction of the Secretary, that eligibility for the loan in 

question was falsely certified as a result of the crime of 

identity theft committed against that individual. 

(ii)(A) For purposes of this section, identity theft is 

defined as the unauthorized use of the identifying information 

of another individual that is punishable under 18 U.S.C. 1028, 

1028A, 1029, or 1030, or substantially comparable State or local 

law. 

(B) Identifying information includes, but is not limited to— 

(1) Name, Social Security number, date of birth, official 

State or government issued driver's license or identification 

number, alien registration number, government passport number, 

and employer or taxpayer identification number; 

(2) Unique biometric data, such as fingerprints, voiceprint, 

retina or iris image, or unique physical representation; 

(3) Unique electronic identification number, address, or 

routing code; or 

(4) Telecommunication identifying information or access 

device (as defined in 18 U.S.C. 1029(e)). 
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838 

(5) Claim to third party. The borrower must state whether 

the borrower (or student) has made a claim with respect to the 

school's false certification or unauthorized payment with any 

third party, such as the holder of a performance bond or a 

tuition recovery program, and, if so, the amount of any payment 

received by the borrower (or student) or credited to the 

borrower's loan obligation. 

(6) Cooperation with Secretary. The borrower must state 

that the borrower (or student)-- 

(i) Agrees to provide to the Secretary upon request other 

documentation reasonably available to the borrower that 

demonstrates that the borrower meets the qualifications for 

discharge under this section; and 

(ii) Agrees to cooperate with the Secretary in enforcement 

actions as described in §685.214(d) and to transfer any right to 

recovery against a third party to the Secretary as described in 

§ 685.214(e). 

(7) Discharge without an application. The Secretary 

discharges all or part of a loan as appropriate under this 

section without an application from the borrower if the 

Secretary determines, based on information in the Secretary's 

possession, that the borrower qualifies for a discharge. 
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(f) Discharge procedures. This paragraph (f) applies to 

loans first disbursed on or after July 1, 2020. (1) If the 

Secretary determines that a borrower’s Direct Loan may be 

eligible for a discharge under this section, the Secretary 

provides the borrower the application described in paragraph (e) 

of this section, which explains the qualifications and 

procedures for obtaining a discharge. The Secretary also 

promptly suspends any efforts to collect from the borrower on 

any affected loan. The Secretary may continue to receive 

borrower payments. 

(2) If the borrower fails to submit a completed 

application within 60 days of the date the Secretary suspended 

collection efforts, the Secretary resumes collection and grants 

forbearance of principal and interest for the period in which 

collection activity was suspended. The Secretary may capitalize 

any interest accrued and not paid during that period. 

(3) If the borrower submits a completed application, the 

Secretary determines whether to grant a request for discharge 

under this section by reviewing the application in light of 

information available from the Secretary’s records and from 

other sources, including, but not limited to, the school, 

guaranty agencies, State authorities, and relevant accrediting 

associations. 
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840 

(4) If the Secretary determines that the borrower meets the 

applicable requirements for a discharge under paragraph (c) of 

this section, the Secretary notifies the borrower in writing of 

that determination. 

(5) If the Secretary determines that the borrower does not 

qualify for a discharge, the Secretary notifies the borrower in 

writing of that determination and the reasons for the 

determination, and resumes collection. 

* * * * * 

18. Section 685.222 is amended by: 

a. In the section heading, adding the words “and 

procedures for loans first disbursed on or after July 1, 2017 

and before July 1, 2020, and procedures for loans first 

disbursed prior to July 1, 2017” after the words “Borrower 

defenses”. 

b. In paragraph (a)(2), adding the words “and before July 

1, 2020” after the words “after July 1, 2017”. 

c. In paragraph (b), adding the words “under this section” 

after the words “The borrower has a borrower defense”. 

d. In paragraph (c), adding the words “under this section” 

after the words “The borrower has a borrower defense”. 

e. In paragraph (d), adding the words “under this section” 

after the words “A borrower has a borrower defense”. 
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841 

f. In the introductory text of paragraph (e)(2), adding 

the words “under this section” after the words “Upon receipt of 

a borrower’s application”. 

g. In paragraph (e)(3), adding the words “submitted under 

this section” after the words “review the borrower’s 

application”. 

h. In paragraph (e)(3)(ii), removing the word “Upon” and 

adding, in its place, the words, “For borrower defense 

applications under this section, upon”. 

i. In the introductory text of paragraph (e)(4), adding 

the words “under this section” after the words “fact-finding 

process”. 

j. In the introductory text of paragraph (e)(5), adding 

the words “under this section” after the words “Department 

official”. 

k. In paragraph (f)(1), adding the words “under this 

section” after the words “has a borrower defense”. 

l. In paragraph (g), adding the words “under this section” 

after the words “for which the borrower defense”. 

m. In paragraph (h), adding the words “under this section” 

after the words “for which the borrower defense”. 

n. Removing the parenthetical authority citation. 

Appendix A to Subpart B of Part 685 [Amended] 
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842 

14. Appendix A to Subpart B of Part 685 is amended by 

removing the word “The” at the beginning of the introductory 

text and adding, in its place, the words “As provided in 34 CFR 

685.222(i)(4), the”. 

19. Section 685.300 is amended by: 

a. Revising paragraph (b)(8). 

b. Removing paragraph (b)(11). 

c. Deleting “and” after “any benefits associated with 

such a loan;” from paragraph (b)(10). 

d. Redesignating paragraph (b)(12) as paragraph (b)(11) 

and adding “; and” after “the purposes of Part D of the Act”. 

e. Adding a new paragraph (b)(12). 

f. Removing paragraphs (d) through (i). 

g. Removing the parenthetical authority citation. 

The revision and addition read as follows: 

§ 685.300 Agreements between an eligible school and the 

Secretary for participation in the Direct Loan Program. 

* * * * * 

(b) * * * 

(8) Accept responsibility and financial liability stemming 

from its failure to perform its functions pursuant to the 

agreement; 

* * * 
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843 

(12) 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, 685.215, 685.216, and 685.222. 

* * * * * 

20. Section 685.304 is amended by: 

a. In paragraph (a)(3)(iii), adding new paragraphs (A), 

(B), (B)(1), and (B)(2). 

b. Revising paragraph (a)(5). 

c. Deleting the word “and” after the words “conditions of 

the loan;” in paragraph (a)(6)(xii). 

d. In paragraph (a)(6), redesignating paragraph 

(a)(6)(xiii) as paragraph (a)(6)(xvi) and adding new paragraphs 

(xiii),(xiv), and (xv). 

e. Removing the parenthetical authority citation. 

The revisions and additions read as follows: 

§ 685.304 Counseling borrowers. 

(a) Entrance counseling. 

* * * 

(3) * * * 

(iii)(A) Online or by interactive electronic means, with 

the borrower acknowledging receipt of the information. 
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(B) If a standardized interactive electronic tool is used 

to provide entrance counseling to the borrower, the school must 

provide to the borrower any elements of the required information 

that are not addressed through the electronic tool: 

(1) In person; or 

(2) On a separate written or electronic document provided 

to the borrower. 

* * * * * 

 (5) A school must ensure that an individual with expertise 

in the title IV programs is reasonably available shortly after 

the counseling to answer the student borrower’s questions. As an 

alternative, in the case of a student borrower enrolled in a 

correspondence, distance education, or study-abroad program 

approved for credit at the home institution, the student 

borrower may be provided with written counseling materials 

before the loan proceeds are disbursed. 

 (6) * * * 

 (xiii) For loans first disbursed on or after July 1, 2020, 

if, as a condition of enrollment, the school requires borrowers 

to enter into a pre-dispute arbitration agreement, as defined in 

§ 668.41(h)(2)(iii) of this chapter, or to sign a class action 

waiver, as defined in § 668.41(h)(2)(i) and (ii) of this 

chapter, the school must provide a written description of the 
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845 

school’s dispute resolution process that the borrower has agreed 

to pursue, including the name and contact information for the 

individual or office at the school that the borrower may contact 

if the borrower has a dispute relating to the borrower’s loans 

or to the provision of educational services for which the loans 

were provided; 

 (xiv) For loans first disbursed on or after July 1, 2020, 

if, as a condition of enrollment, the school requires borrowers 

to enter into a pre-dispute arbitration agreement, as defined in 

§ 668.41(h)(2)(iii) of this chapter, the school must provide a 

written description of how and when the agreement applies, how 

the borrower enters into the arbitration process, and who to 

contact if the borrower has any questions; 

 (xv) For loans first disbursed on or after July 1, 2020, 

if, as a condition of enrollment, the school requires borrowers 

to sign a class-action waiver, as defined in §668.41(h)(2)(i) 

and (ii) of this chapter, the school must explain how and when 

the waiver applies, alternative processes the borrower may 

pursue to seek redress, and who to contact if the borrower has 

any questions; and 

* * * * * 

21. Section 685.308 is amended by: 

a. Revising paragraph (a). 
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846 

b. Removing the parenthetical authority citation. 

The revision reads as follows: 

§ 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-- 

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

regulation; 

(2) The school's negligent or willful false certification 

under § 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 §§ 685.206, 685.214, 685.216, or 685.222. 

* * * * *