[Federal Register Volume 83, Number 147 (Tuesday, July 31, 2018)]
[Proposed Rules]
[Pages 37242-37330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15823]



[[Page 37241]]

Vol. 83

Tuesday,

No. 147

July 31, 2018

Part III





 Department of Education





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34 CFR Parts 668, 674, 682, et al.





 Student Assistance General Provisions, Federal Perkins Loan Program, 
Federal Family Education Loan Program, and William D. Ford Federal 
Direct Loan Program; Proposed Rule

Federal Register / Vol. 83 , No. 147 / Tuesday, July 31, 2018 / 
Proposed Rules

[[Page 37242]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 682, and 685

RIN 1840-AD26
[Docket ID ED-2018-OPE-0027]


Student Assistance General Provisions, Federal Perkins Loan 
Program, Federal Family Education Loan Program, and William D. Ford 
Federal Direct Loan Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to create Institutional Accountability 
regulations that would amend the regulations governing the William D. 
Ford Federal Direct Loan (Direct Loan) Program to establish a Federal 
standard for evaluating and a process for adjudicating borrower 
defenses to repayment for loans first disbursed on or after July 1, 
2019, and provide for actions the Secretary may take to collect from 
schools financial losses due to successful borrower defense to 
repayment discharges. The Secretary also proposes to withdraw (i.e. 
rescind) certain amendments to the regulations already published but 
not yet effective.

DATES: We must receive your comments on or before August 30, 2018.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments submitted by fax or by email or those submitted after 
the comment period. To ensure that we do not receive duplicate copies, 
please submit your comments only once. In addition, please include the 
Docket ID at the top of your comments.
    If you are submitting comments electronically, we strongly 
encourage you to submit any comments or attachments in Microsoft Word 
format. If you must submit a comment in Adobe Portable Document Format 
(PDF), we strongly encourage you to convert the PDF to print-to-PDF 
format or to use some other commonly used searchable text format. 
Please do not submit the PDF in a scanned format. Using a print-to-PDF 
format allows the Department to electronically search and copy certain 
portions of your submissions.
    <bullet> Federal eRulemaking Portal: Go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for accessing agency documents, 
submitting comments, and viewing the docket, is available on the site 
under ``Help.''
    <bullet> Postal Mail, Commercial Delivery, or Hand Delivery: The 
Department strongly encourages commenters to submit their comments 
electronically. However, if you mail or deliver your comments about the 
proposed regulations, address them to Jean-Didier Gaina, U.S. 
Department of Education, 400 Maryland Ave. SW, Mail Stop 294-20, 
Washington, DC 20202.
    Privacy Note: The Department's policy is to make comments received 
from members of the public available for public viewing on the Federal 
eRulemaking Portal at www.regulations.gov. Therefore, commenters should 
be careful to include in their comments only information that they wish 
to make publicly available.

FOR FURTHER INFORMATION CONTACT: For further information related to 
Borrower Defenses to Repayment, Pre-dispute Arbitration Agreements, 
Internal Dispute Processes, and Guaranty Agency Fees, Barbara 
Hoblitzell at (202) 453-7583 or by email at: <a href="/cdn-cgi/l/email-protection#9ad8fbe8f8fbe8fbb4d2f5f8f6f3eee0fff6f6dafffeb4fdf5ec"><span class="__cf_email__" data-cfemail="43012231212231226d0b2c212f2a3739262f2f0326276d242c35">[email protected]</span></a> 
or Annmarie Weisman at (202) 453-6712 or by email at: 
<a href="/cdn-cgi/l/email-protection#5f1e3131323e2d363a71083a362c323e311f3a3b71383029"><span class="__cf_email__" data-cfemail="eeaf8080838f9c878bc0b98b879d838f80ae8b8ac0898198">[email protected]</span></a>. For information related to False Certification 
Loan Discharge, and Closed School Loan Discharge, Brian Smith at (202) 
453-7440 or by email at: <a href="/cdn-cgi/l/email-protection#a9ebdbc0c8c787fac4c0ddc1e9cccd87cec6df"><span class="__cf_email__" data-cfemail="5f1d2d363e31710c32362b371f3a3b71383029">[email protected]</span></a>. For information regarding 
Financial Responsibility and Institutional Accountability, John Kolotos 
at (202) 453-7646 or by email at: <a href="/cdn-cgi/l/email-protection#591336313777123635362d362a193c3d773e362f"><span class="__cf_email__" data-cfemail="d298bdbabcfc99bdbebda6bda192b7b6fcb5bda4">[email protected]</span></a>. For information 
regarding Recalculation of Subsidized Usage Periods and Interest 
Accrual, Ian Foss at (202) 377-3681 or by email at: <a href="/cdn-cgi/l/email-protection#367f5758187059454576535218515940"><span class="__cf_email__" data-cfemail="1d547c73335b726e6e5d7879337a726b">[email protected]</span></a>.
    If you use a telecommunications device for the deaf (TDD) or a text 
telephone (TTY), call the Federal Relay Service (FRS), toll free, at 
(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. Current regulations in 34 
CFR 685.206(c) governing defenses to repayment have been in effect 
since 1995 but, until recently, were rarely used. Those regulations 
specify that a borrower may assert as a defense to repayment ``any act 
or omission of the school attended by the student that would give rise 
to a cause of action against the school under applicable State law.''
    On November 1, 2016, the Department published final regulations (81 
FR 75926) (the 2016 final regulations) on the topic of borrower 
defenses to repayment. The 2016 final regulations were developed 
following negotiated rulemaking and after receiving and considering 
public comments on a notice of proposed rulemaking. Certain provisions 
of the 2016 final regulations have been delayed until July 1, 2019 (83 
FR 6458).
    These proposed regulations are designed to:
    <bullet> Provide students with a balanced, meaningful process that 
relies on a single, Federal standard rather than 50 State standards to 
ensure that borrower defense to repayment discharges are handled 
swiftly, carefully, and fairly;
    <bullet> Encourage students to seek remedies from institutions that 
have committed acts or omissions that constitute misrepresentation and 
cause harm to the student;
    <bullet> Ensure that institutions rather than taxpayers bear the 
burden of billions of dollars \1\ in losses from approvals of borrower 
defense to repayment discharges;
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    \1\ The Department estimated that borrower defense activity 
under the 2016 final regulation would have an estimated $14.9 
billion net budget impact for the 2017 to 2026 loan cohorts. 71 FR 
76055.
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    <bullet> Enable institutions to respond to borrower defense to 
repayment claims and provide evidence to support their response;
    <bullet> Discourage institutions from committing fraud or other 
acts or omissions that constitute misrepresentation or from closing 
precipitously;
    <bullet> Enable the Department to properly evaluate institutional 
financial risk in order to protect students and taxpayers;
    <bullet> Provide students with additional time to qualify for a 
closed school loan discharge;
    <bullet> Address the concerns expressed by negotiators, as well as 
in a suit filed by an association against the Department, that large 
financial liabilities resulting from the unclear borrower defense 
standard in the 2016 final regulations could cripple or force the 
closure of colleges and universities, even as they produce positive 
outcomes for students and provide students with accurate and complete 
information relating to enrollment;
    <bullet> Reduce uncertainty about the future of the Federal 
financial aid system itself due to the strain on the government of 
large numbers of borrower defense to repayment discharges; and

[[Page 37243]]

    <bullet> Most of all, to ensure that millions of American students 
and borrowers are provided with accurate information to inform their 
enrollment decisions and to ensure that students are not subjected to 
narrowed educational options as a result of unwarranted school 
closures.
    The goal of the Department is to enable students to make informed 
decisions on the front end of college enrollment, rather than to grant 
them financial remedies after-the-fact when lost time cannot be 
recouped and new educational opportunities may be sparse. Postsecondary 
students are adults who can be reasonably expected to make informed 
decisions and who must take personal accountability for the decisions 
they make. Institutions are prohibited from misleading students by 
providing false or incomplete information, and remedies should be 
provided to a student when misrepresentation on the part of an 
institution causes financial harm to that student. Regardless, students 
have a responsibility when enrolling at an institution or taking 
student loans to be sure they have explored their options carefully and 
weighed the available information to make an informed choice. The 
Department has an obligation to enforce the Master Promissory Note, 
which makes clear that students are not relieved of their repayment 
obligations if later they regret the choices they made.
    Through these proposed regulations, the Department is considering 
whether to reaffirm the Department's original interpretation of the 
statute, which persisted for 20 years and provided borrowers an 
opportunity to raise defenses to the repayment of Direct Loans only in 
response to collection actions by the Department, or to continue with 
the Department's 2015 interpretation, which allowed borrowers to raise 
defenses to repayment in affirmative claims. The Department adopted 
that interpretation in response to advocacy efforts on behalf of 
student borrowers who had attended institutions owned by Corinthian 
Colleges, Inc., but without negotiated rulemaking.
    This new interpretation to allow affirmative claims was codified in 
the Department's 2016 final regulations. The 2015 reinterpretation was 
designed to expand loan forgiveness for borrowers who had attended 
Corinthian institutions, which, following a sequence of events, closed 
precipitously after the Department placed the institutions on HCM1 
status and added a delay in title IV reimbursement that is typically 
not associated with HCM1. The Department's closed school loan discharge 
regulations provide that a student who was attending a school at the 
time of its closure, who did not complete his or her program of study 
prior to the school's closure, and who meets other criteria may receive 
a discharge of Federal student loans obtained for the student's 
enrollment at the institution. 34 CFR 674.33, 682.402, and 685.214. But 
the Department wished to extend loan forgiveness to borrowers who may 
not have qualified for this closed school loan discharge, so it created 
new policies for accepting affirmative claims.
    The Department's experience with these affirmative claims has 
informed this NPRM. That experience has led the Department to realize 
that a clear Federal standard is required in order to adjudicate 
borrower defense claims in a fair and equitable manner. The Department 
has also heard concerns during the process about the Department's 
statutory authority to adjudicate these claims in an affirmative 
posture and about whether the process for adjudicating these claims 
appropriately balances the competing interests of borrowers, 
institutions, and taxpayers.
    Among other issues enumerated throughout this document, the 
Department is concerned that a process that allows for borrowers to 
submit affirmative claims, where there are minimal consequences for 
submitting an unjustified claim, could potentially create improper 
incentives for borrowers with unsubstantiated allegations against 
schools to seek loan discharges. For example, a borrower may attempt to 
seek loan forgiveness simply because he or she is dissatisfied with the 
education received or with his or her ability to get a particular job, 
rather than as a result of a misrepresentation by the institution. This 
situation could easily increase the burden on the Department of 
identifying legitimate claims among those that do not meet the defense 
to repayment standard. And with nothing to lose by submitting a claim, 
a borrower could be tempted to submit a claim whether or not he or she 
has been harmed. The Department does not have sufficient information to 
determine the extent of this potential incentive effect. As of January 
2018, it had received 138,989 claims, of which 23 percent had been 
processed, and only 2 percent of the processed claims were associated 
with schools other than Corinthian and ITT, but that targeted rather 
than random sample is insufficiently representative to support 
conclusions on the issue at this point.
    In any case, an influx of affirmative claims could itself cause 
harm to borrowers. For example, even if the Department can accurately 
distinguish between genuine and frivolous claims, the time it takes to 
do so may prolong the time it takes to provide relief to deserving 
borrowers. And borrowers not entitled to relief may find themselves 
worse off if they receive a forbearance while the claim was being 
processed, because interest would accrue and increase the amount the 
borrower would be required to repay when the loan reenters repayment.
    In addition, the Department is concerned that several features of 
the 2016 final regulations might have put the Department in the 
untenable position of forgiving billions of dollars of Federal student 
loans based on potentially unfounded accusations. Specifically, those 
regulations would allow the Department to afford relief to borrowers 
without providing an opportunity for institutions to adequately tell 
their side of the story. And they would allow the Department to afford 
relief to entire groups of borrowers, including those who did not apply 
for relief or who were potentially not harmed by the institution.
    However, despite these concerns, the Department is considering the 
continuation of its current practice of accepting affirmative claims 
from borrowers not in a collections status. A policy that limits 
borrower defense eligibility to defensive claims may have the 
unintended effect of treating borrowers harmed by a misrepresentation 
who default on their loans better than other defrauded borrowers who 
stay out of default by responsibly enrolling in income-driven repayment 
plans and making payments on their loan.
    In addition, lessons learned from the recent mortgage crisis raise 
concerns that limiting borrower defense eligibility to defensive claims 
could lead some relief-seeking borrowers to strategically default. 
Researchers observed similar strategic behavior by homeowners in 
response to a 2008 mortgage modification program offered by a large 
financial institution to borrowers who were at least sixty days 
delinquent.\2\ The study found that the program's structure, which 
relied on the borrower's repayment status, yielded a thirteen percent 
increase in the probability of that financial institution's borrowers 
rolling over from current to delinquent status--evidence of strategic 
behavior by borrowers aiming to take advantage of mortgage 
modifications. A

[[Page 37244]]

similar behavioral response from relief-seeking borrowers choosing to 
enter default could result in a range of troubling unintended 
consequences, including damage to borrower credit scores, increased 
default collection costs for taxpayers, and increases to institutional 
cohort default rates.
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    \2\ http://www.nber.org/papers/w17065.pdf.
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    The Department is trying very carefully to balance relief for 
borrowers who have been harmed by acts of institutional wrongdoing, 
with its obligation to the taxpayer to provide reliable stewardship of 
Federal dollars. With more than a trillion dollars in outstanding 
student loans, the Department must uphold its fiduciary 
responsibilities and exercise caution in forgiving student loans to 
ensure that it does not create an existential threat to a program that 
lacks typical credit and underwriting standards.
    With so much at stake for all parties, it seems reasonable that 
consumer complaints should continue to be adjudicated through existing 
legal channels that put experienced judges or arbitrators in the 
position of weighing the evidence and rendering an impartial decision. 
Significant reputational damage could be done to an institution from an 
affirmative borrower defense claim long before an institution is given 
an opportunity to contest that claim in a recoupment proceeding. Such 
damage could weaken or even force institutions to close, regardless of 
the truth, extent, or other circumstances surrounding the unverified 
claims. And if the institution prevails in a recoupment proceeding, it 
is the taxpayer who is left responsible for the claims the Department 
approved in error.
    These concerns have led the Department to reconsider and seek 
public comment on whether it should reaffirm the Department's original 
interpretation of the statute, which provided borrowers an opportunity 
to raise defenses to the repayment of Direct Loans only in response to 
collection actions by the Department. The Department is interested in 
comments about its statutory authority to consider defenses to the 
repayment of Direct Loans in an affirmative posture, and about the 
risks and benefits of doing so.
    However, the Department is also considering continuing to accept 
affirmative claims from borrowers not in a collections action. In 
either case, the Department would need to implement provisions that 
would protect institutions and taxpayers against frivolous claims. Our 
initial review of pending claims suggests that some borrowers may 
believe that the process allows for a discharge based on a borrower's 
dissatisfaction with the education he or she received or the outcomes 
he or she realized following enrollment, even in the absence of a 
misrepresentation on the part of the institution. That is not the case. 
As stated in the Master Promissory Note the borrower signs when 
initiating their first loan, the borrower is expected to repay the loan 
even if the borrower fails to complete the program or is dissatisfied 
with the institution or his or her outcomes. The Department seeks 
comments from the public regarding what types of provisions or 
requirements could be used to reduce frivolous claims while still 
ensuring a borrower a fair and meaningful opportunity to seek relief in 
the event of fraud.
    The Department is also proposing to change its approach to a 
possible group adjudication of borrower defense claims. The 2016 final 
regulations would enable the Department to initiate affirmative claims 
on behalf of entire groups of borrowers, if the Secretary determines 
that there are common facts and claims that apply to the group. 
However, in this NPRM, the Department is proposing a uniform standard 
based on a misrepresentation made with knowledge of its false, 
misleading, or deceptive nature or with a reckless disregard for the 
truth. As this proposed standard is dependent upon a fact-specific 
inquiry, the Department does not believe that the group process is 
appropriate to include in these proposed regulations. Further, a group 
discharge process could place an extraordinary burden on both the 
Department and the taxpayer, and the Department has reconsidered 
whether such a process appropriately balances the need to reduce burden 
on borrowers and the Department with the obligation to protect taxpayer 
funds. Because an institution can refuse to provide an official 
transcript for a borrower whose loan has been forgiven, group 
discharges could render some borrowers unable to verify their 
credentials or work in the field for which they trained and have 
enjoyed employment.
    Moreover, the Department believes that a review of claims on an 
individual basis is necessary to ensure that it affords appropriate 
relief to borrowers who suffered harm from an alleged 
misrepresentation. Since publication of the 2016 final regulations, the 
Department has conducted further analyses of the tens of thousands of 
defense to repayment applications for Corinthian students that the 
Department has received to date. Those analyses have demonstrated that 
students enrolled at Corinthian who submitted defense to repayment 
applications may not all have been harmed to the same extent. An 
individual process would offer all borrowers fair and equal access to 
defense to repayment relief. And these proposed regulations would not 
eliminate the opportunity for Corinthian or other students with loans 
first disbursed prior to July 1, 2019, to seek debt relief under the 
2015 interpretation of the regulation.
    The Department proposes a new Federal standard to govern claims on 
loans made after July 1, 2019 based on an alleged misrepresentation. 
Under that standard, a borrower may assert as a defense to repayment an 
eligible institution's misrepresentation--that is, a statement, act, or 
omission by the school to the borrower that is (i) false, misleading, 
or deceptive, (ii) made with knowledge of its false, misleading, or 
deceptive nature or with a reckless disregard for the truth, and (iii) 
directly and clearly related to the making of a Direct Loan for 
enrollment at the school or the provision of educational services for 
which the loan was made. To relate to the ``provision of educational 
services,'' a misrepresentation must relate to the borrower's program 
of study. Such misrepresentations can relate, for example, 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.
    The proposed standard for a borrower defense discharge differs from 
the standard selected in the 2016 final regulations, which was based on 
the Department's authority during enforcement actions. The 2016 final 
regulations adopted the misrepresentation standard at 34 CFR 668.71, 
and provided that defenses to repayment may additionally be based upon 
breaches of contract and certain types of judgments. The proposed 
standard would not provide for a defense to repayment based on such 
breaches of contract or other judgments. Instead, such breaches or 
judgments may be considered as evidence of a misrepresentation, to the 
extent they bear on an act or omission related to the educational 
services provided. The Department believes this approach will assist it 
to quickly and fairly review each and every application and provide 
equitable relief to borrowers who were harmed.
    The Department's proposed standard also does not distinguish 
between the types of institutions that committed the misrepresentation. 
Appendix A of the 2016 final regulations, by contrast, took the 
position that a student who attended a selective, non-profit 
institution would

[[Page 37245]]

not receive debt relief even if the institution committed an act that 
would otherwise entitle the borrower a defense to repayment because, in 
the opinion of the Department, the education received was valuable 
despite the misrepresentation. We cannot adequately support assumptions 
about the inherent quality of any institution, including a selective 
non-profit institution. The Department accordingly does not propose to 
maintain this position.
    The Department does propose to maintain the standard of evidence or 
proof required to make a successful claim that was included in the 2016 
final regulations--a preponderance of the evidence. The Department 
believes that this standard will allow claims to be asserted and 
handled in a manner that is genuinely fair to students, taxpayers, and 
institutions, especially since a borrower in collections could have 
left the institution many years prior to making a claim, which would 
make it exceedingly difficult to meet a higher evidentiary standards. 
However, if the Department chooses to continue to accept affirmative 
claims, where barriers to submitting such claims are very low and there 
are no penalties for a borrower who submits an unjustified claim, the 
Department believes that a higher evidentiary standard may be 
appropriate. The Department seeks comments from the public about 
whether or not a clear and convincing evidence standard would be 
appropriate if the Department chooses to continue to accept affirmative 
claims and, if so, whether that clear and convincing standard should 
apply solely to affirmative claims or to both affirmative and defensive 
claims.
    Finally, the Department proposes to limit the period of time during 
which the Secretary may recoup funds discharged under these 
regulations. Specifically, for loans disbursed on or after July 1, 
2019, the Secretary would have five years from the date of the final 
determination on a borrower's defense to repayment application to 
initiate a proceeding to recover from the school the amount of the 
losses incurred by the Secretary on the discharged loans.
    In addition to the changes to the borrower defense regulations 
discussed above, we seek in this NPRM to strengthen the Department's 
ability to protect the Federal taxpayer from the consequences of a 
school's precipitous closure by amending the Department's financial 
responsibility regulations. The proposed regulations identify actions 
or events that the Secretary may consider in determining whether a 
school is financially responsible, provide that the Secretary may 
accept other types of surety or financial protection in lieu of letters 
of credit, clarify that the Department may impose a limitation on a 
school by changing a school's participation status from ``fully 
certified'' to ``provisionally certified'', and update the Department's 
regulations as to initial and final decisions that may be made by a 
hearing official in a fine, limitation, suspension, or termination 
proceeding to incorporate the proposed alternate means of financial 
protection to the Department. These proposed regulations balance the 
need for consumer protection, regulatory enforcement, and fairness to 
schools. They seek to hold schools accountable, provide prospective and 
continuing students with information necessary to make informed 
choices, and mitigate actions that pose an existential threat to 
institutions. A school's precipitous closure--as opposed to a well-
planned, accreditor approved teach-out--puts students, borrowers, and 
taxpayers at unnecessary risk.
    Further, through these proposed regulations, the Department seeks 
to encourage schools that are closing to go through an orderly closure, 
which includes offering appropriate teach-outs to their students. Since 
2015, precipitous closures have led to large numbers of defense to 
repayment and closed school discharge applications. We believe that 
closing schools should be encouraged to offer accreditor-approved and, 
if applicable, State authorizer-approved teach-out plans. Such plans 
allow students the reasonable opportunity to complete their academic 
programs, either at another location after the school has closed or 
through an orderly wind-down process before the school officially 
closes.
    We also propose changes to the Department's current false 
certification regulations. The Department believes that in cases when 
the borrower is unable to obtain an official transcript or diploma from 
the high school, postsecondary institutions should be able to rely on 
an attestation from a borrower that the borrower earned a high school 
diploma since the Department relies on a similar attestation in 
processing a student's Free Application for Federal Student Aid 
(FAFSA). This policy change provides assurances to students that they 
will have a reasonable opportunity to pursue postsecondary education 
when they cannot obtain an official transcript or diploma, and to 
institutions that they will not face significant liabilities years 
later if a student's status cannot be verified. Therefore, we are 
proposing regulatory language that when a borrower provides an 
institution an attestation of his or her high school graduation status 
for purposes of admission to the institution, the borrower may not 
subsequently qualify for a false certification discharge based on not 
having a high school diploma.
    We do not propose to adopt the changes relating to pre-dispute 
arbitration agreements and class action waivers that are in the 2016 
final regulations. In those regulations, the Department took the 
position that the HEA gives the Department broad authority to impose 
conditions on schools that wish to participate in a Federal benefit 
program and that regulation of the use of pre-dispute arbitration 
agreements and class action waivers was necessary to ``protect the 
interests of the United States and promote the purposes'' of the Direct 
Loan Program under Section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6). 
We continue to recognize, as explained in the preamble to the 2016 
final regulations, that pre-dispute arbitration agreements and class 
action waivers, in some circumstances, may not be well understood by 
consumers and may not facilitate the Department's awareness of 
potential issues faced by students at a school. However, in re-weighing 
all applicable factors, including the current legal landscape, we have 
determined that the Department should take a position more in line with 
the benefits of arbitration and the strong Federal policy favoring it.
    Several potential benefits of arbitration are relevant here. 
Arbitration is often a more efficient and less adversarial means of 
dispute resolution than time-consuming and expensive litigation that 
may result in borrowers waiting years to obtain a fair hearing and any 
relief. Arbitration may also allow borrowers to obtain greater relief 
than they would in a consumer class action case where attorneys often 
benefit most. Moreover, arbitration may reduce the expense of 
litigation that a university would otherwise pass on to students in the 
form of higher tuition and fees. Arbitration also eases burdens on the 
overtaxed U.S. court system.
    For all of these reasons, the Department has decided that the 2016 
final regulations' provisions on class action waivers and pre-dispute 
arbitration should not be included in these proposed regulations. As 
stated above, we believe that borrower defense to repayment should be a 
last resort for borrowers. Arbitration is one means of dispute 
resolution through which borrowers may be able to obtain relief without 
filing a defense to repayment

[[Page 37246]]

with the Department. The Department does not propose to prevent that 
means. But because pre-dispute arbitration agreements or class-action 
waivers may limit the availability of certain alternative means of 
dispute resolution, we propose changes that would provide borrowers 
with a better understanding of the dispute resolution processes 
available to them when they enroll at a school.
    The proposed regulations also update the appendices to subpart L of 
34 CFR part 668 to account for changes in accounting standards and 
terminology.

Incorporation by Reference

    In proposed Sec.  668.175(d) with respect to the zone alternative, 
we reference the following accounting standards: FASB ASC 850, 
Accounting Standards Update (ASU) 2015-01, and ASC 225. FASB ASC 850 
addresses disclosures of transactions between related parties. These 
disclosures are considered to be related party transactions even though 
they may not be given accounting recognition. While not providing 
accounting or measurement guidance for such transactions, FASB ASC 850 
requires their disclosure nonetheless.
    Accounting Standards Update (ASU) No. 2015-01 addresses 
extraordinary and unusual items, to simplify income statement 
classification by removing the concept of extraordinary items from 
United States generally accepted accounting principles (U.S. GAAP).
    ASC 225 provides general income statement guidance. Specifically, 
it addresses the classification and resulting presentation and 
disclosure of extraordinary events and transactions. It also addresses 
the presentation and disclosure of unusual and infrequently occurring 
items that do not meet the extraordinary criteria, and speaks to 
business interruption insurance. The types of costs and losses covered 
by business interruption insurance typically include items such as 
gross margin that was lost or not earned due to the suspension of 
normal operations.
    These items are accessible to the public on the Financial 
Accounting Standards Board (FASB) website, www.fasb.org.
    Summary of the Major Provisions of This Regulatory Action:
    For the Direct Loan Program, we propose new regulations governing 
borrower defenses that would--
    <bullet> Establish a new Federal standard for borrower defenses to 
repayment submitted by borrowers with loans first disbursed on or after 
July 1, 2019;
    <bullet> Establish a process for the assertion and resolution of 
borrower defenses to repayment for loans first disbursed on or after 
July 1, 2019;
    <bullet> 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 to respond to the 
other's submitted evidence;
    <bullet> Require a borrower to sign an attestation to ensure that 
financial harm is not the result of the borrower's workplace 
performance, disqualification for a job for reasons unrelated to the 
education received, a personal decision to work less than full-time or 
not at all, or the borrower's decision to change careers.
    <bullet> Establish a 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, 2019, that are subject to a 
successful borrower defense to repayment discharge for which the school 
is liable;
    <bullet> Provide for remedial actions the Secretary may take to 
collect from the responsible school the amount of any loans subject to 
a successful borrower defense to repayment discharge for which the 
school is liable; and
    <bullet> Establish institutional responsibility and financial 
liability for losses incurred by the Secretary for repayment of loan 
amounts discharged by the Secretary on the basis of a borrower defense 
to repayment discharge.
    The proposed regulations would also revise the Student Assistance 
General Provisions regulations to--
    <bullet> Provide for 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 its website where information regarding 
admissions and tuition and fees is presented; and
    <bullet> Provide for 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.
    <bullet> Amend the financial responsibility provisions 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 accounting standards but provide a six year phase-in to 
enable the Department adequate time to update the Composite Score 
regulations accordingly through future negotiated rulemaking, and 
expand the types of financial protection acceptable to the Secretary.
    The proposed regulations would also--
    <bullet> Revise the Perkins Loan, FFEL, and Direct Loan programs' 
closed school discharge regulations to extend the window for a borrower 
to qualify for a closed school discharge to 180 days;
    <bullet> Revise the Perkins Loan, FFEL, and Direct Loan programs' 
closed school discharge regulations to specify that if a closing school 
provides an opportunity to complete the program of study approved by 
the school's accrediting agency and, if applicable, the school's State 
authorizing agency, the borrower would not qualify for a closed school 
discharge;
    <bullet> Modify the conditions under which a Direct Loan borrower 
may qualify for a false certification discharge by specifying that, in 
cases when the borrower could not reasonably provide the school an 
official transcript or diploma from the borrower's high school, but 
provided an attestation to the school 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;
    <bullet> 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;
    <bullet> Prohibit guaranty agencies from capitalizing interest on a 
loan that is sold following the completion of loan rehabilitation;
    <bullet> Reflect the Department's policy regarding the impact that 
a discharge of a Direct Subsidized Loan has on the 150 Percent Direct 
Subsidized Loan Limit; and
    <bullet> Update composite score calculations to reflect recent 
changes in FASB accounting standards and provide for a six year phase-
in process to provide the Department sufficient time to update the 
Composite Score regulations accordingly through negotiated rulemaking.
    In addition, for the reasons set forth below, we propose to 
withdraw (i.e., rescind) specified provisions of the final regulations 
we published on November 1, 2016 (81 FR 75926) (the 2016 final 
regulations) that were delayed until July 1, 2019, pertaining to 
borrower defenses to repayment and related issues.

[[Page 37247]]

    Please refer to the Summary of Proposed Changes section of this 
notice of proposed rulemaking (NPRM) for more details on the major 
provisions contained in this NPRM.
    Costs and Benefits: As further detailed in the Regulatory Impact 
Analysis, the benefits of the proposed regulations include: (1) An 
updated and clarified process and the creation of a Federal standard to 
streamline the administration of defense to repayment applications; (2) 
improved financial protections for the Federal government and taxpayers 
by requiring institutions to incur the losses associated with a 
successful defense to repayment application and reducing the likelihood 
of taxpayers incurring costs related to paying claims submitted by 
students who were not harmed; (3) additional information to help 
students, prospective students, and their families make educated 
decisions based on information about a school's mandatory arbitration 
or class action waiver requirements and to effectively use arbitration 
when necessary; (4) an extended window for a borrower to qualify for a 
closed school discharge and revisions incentivizing completion of 
educational programs; (5) revised conditions under which a Direct Loan 
borrower may qualify for a false certification discharge to ensure that 
students who are unable to obtain a high school transcript have an 
opportunity to participate in postsecondary education and that a 
student's intentional misrepresentation of his or her high school 
graduation status cannot then be used to justify a false certification 
discharge; (6) restrictions on 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, and from capitalizing interest on a loan 
that is sold following the completion of loan rehabilitation; (7) 
recalculating subsidized usage periods, as appropriate, when a borrower 
has received a loan discharge; and (8) updating the calculation of 
composite scores to reflect changes in FASB standards, but also 
providing a six-year phase in to provide time for the Department to 
update its composite score regulations through future negotiated 
rulemaking.
    Costs include the paperwork burden associated with the required 
reporting and disclosures to ensure compliance with the proposed 
regulations, the cost to affected schools of providing financial 
protection, and the cost to taxpayers of borrower defense claims that 
are not reimbursed by schools. There may also be costs to borrowers who 
may be reluctant to go into default, even if they have a claim that 
would result in loan relief or partial loan relief, and therefore do 
not benefit from that loan relief. There may also be costs to borrowers 
who use the legal system to seek damages from an institution rather 
than relying on the government to adjudicate consumer complaints.
    Invitation to Comment: We invite you to submit comments regarding 
these proposed regulations.
    To ensure that your comments have maximum effect in developing the 
final regulations, we urge you to identify clearly the specific section 
or sections of the proposed regulations that each of your comments 
addresses, and provide relevant information and data whenever possible, 
even when there is no specific solicitation of data and other 
supporting materials in the request for comment. We also urge you to 
arrange your comments in the same order as the proposed regulations. 
Please do not submit comments that are outside the scope of the 
specific proposals in this NPRM, as we are not required to respond to 
such comments.
    We invite you to assist us in complying with the specific 
requirements of Executive Orders 12866 and 13563 and their overall 
requirement of reducing regulatory burden that might result from these 
proposed regulations. Please let us know of any further ways we could 
reduce potential costs or increase potential benefits while preserving 
the effective and efficient administration of the Department's programs 
and activities.
    During and after the comment period, you may inspect all public 
comments about the proposed regulations by accessing Regulations.gov. 
You may also inspect the comments in person at 400 Maryland Ave. SW, 
Washington, DC, between 8:30 a.m. and 4:00 p.m., Eastern Time, Monday 
through Friday of each week except Federal holidays. To schedule a time 
to inspect comments, please contact one of the persons listed under FOR 
FURTHER INFORMATION CONTACT.
    Assistance to Individuals with Disabilities in Reviewing the 
Rulemaking Record: On request, we will provide an appropriate 
accommodation or auxiliary aid to an individual with a disability who 
needs assistance to review the comments or other documents in the 
public rulemaking record for the proposed regulations. To schedule an 
appointment for this type of accommodation or auxiliary aid, please 
contact one of the persons listed under FOR FURTHER INFORMATION 
CONTACT.

Background

    The Secretary proposes to amend parts 668, 674, 682, and 685 of 
title 34 of the Code of Federal Regulations (CFR). The regulations in 
34 CFR part 668 pertain to Student Assistance General Provisions. The 
regulations in 34 CFR part 674 pertain to the Perkins Loan Program. The 
regulations in 34 CFR part 682 pertain to the FFEL Program. The 
regulations in 34 CFR part 685 pertain to the Direct Loan Program.
    We are proposing these amendments to: (1) Specify that the standard 
used to identify an act or omission of a school that provides the basis 
for a borrower defense to repayment discharge will depend on when the 
Direct Loan was first disbursed; (2) establish a new Federal standard 
that the Department will use to determine whether a school's act or 
omission constitutes a basis for a borrower defense to repayment 
discharge for loans disbursed on or after July 1, 2019; (3) provide an 
opportunity for an institution to know that a defense to repayment 
application has been lodged against it and to respond to claims made in 
that application; (4) establish the procedures to be used by a borrower 
to initiate a borrower defense to repayment application for loans first 
disbursed on or after July 1, 2019; (5) establish a time limit for the 
Secretary to initiate action to collect from the responsible school the 
amount of any loans first disbursed on or after July 1, 2019 that are 
subject to an approved borrower defense to repayment discharge; (6) 
establish the procedures that the Department would use to determine the 
liability of a school for the amount of any loan discharges and 
reimbursement of loan payments resulting from successful borrower 
defenses to repayment; (7) establish the conditions or events upon 
which an institution is or may be required to provide to the Department 
financial protection, such as a letter of credit, to help protect the 
Federal government and taxpayers, against potential institutional 
liabilities; (8) institute requirements to ensure borrowers are 
informed and educated about pre-dispute arbitration agreements and 
class action waivers that students are required to sign by the school 
as a condition of enrollment; (9) revise the closed school discharge 
regulations to extend the window for a borrower to qualify for a closed 
school discharge and specify that if a closing school provides 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

[[Page 37248]]

authorizing agency, the borrower would not qualify for a closed school 
discharge; (10) amend the eligibility criteria for the false 
certification loan discharge by specifying 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; (11) 
clarify the conditions under which FFEL Program loan holders may 
capitalize the interest due on a loan to be consistent with the 
Department's practice for loans it holds; (12) reflect the conditions 
under which the discharge of a Direct Subsidized Loan will lead to the 
elimination or recalculation of a Subsidized Usage Period under the 150 
Percent Direct Subsidized Loan Limit or the restoration of interest 
subsidy; and (13) prohibit guaranty agencies from charging collection 
costs if a borrower enters into a repayment agreement within 60 days of 
the default notice.

Public Participation

    On June 16, 2017, we published a notification in the Federal 
Register (82 FR 27640) announcing our intent to establish a negotiated 
rulemaking committee under section 492 of the HEA to revise the 
regulations on borrower defenses to repayment of Federal student loans 
and other matters, and on the authority of guaranty agencies in the 
FFEL Program to charge collection costs to defaulted borrowers under 34 
CFR 682.410(b)(6). We also announced two public hearings at which 
interested parties could comment on the topics suggested by the 
Department and suggest additional topics for consideration for action 
by the negotiated rulemaking committee. The hearings were held on--

    July 10, 2017, in Washington, DC; and
    July 12, 2017, in Dallas, TX.

    Transcripts from the public hearings are available at www2.ed.gov/policy/highered/reg/hearulemaking/2017/index.html.
    We also invited parties unable to attend a public hearing to submit 
written comments on the proposed topics and to submit other topics for 
consideration. Written comments submitted in response to the June 16, 
2017, Federal Register notification may be viewed through the Federal 
eRulemaking Portal at www.regulations.gov, within docket ID ED-2017-
OPE-0076. Instructions for finding comments are also available on the 
site under ``How to Use Regulations.gov'' in the Help section.
    On August 30, 2017, we published a notification in the Federal 
Register (82 FR 41194) requesting nominations for negotiators to serve 
on the negotiated rulemaking committee and setting a schedule for 
committee meetings.

Negotiated Rulemaking

    Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to 
obtain public involvement in the development of proposed regulations 
affecting programs authorized by title IV of the HEA. After obtaining 
extensive input and recommendations from the public, including 
individuals and representatives of groups involved in the title IV, HEA 
programs, the Secretary in most cases must subject the proposed 
regulations to a negotiated rulemaking process. If negotiators reach 
consensus on the proposed regulations, the Department agrees to publish 
without alteration a defined group of regulations on which the 
negotiators reached consensus unless the Secretary reopens the process 
or provides a written explanation to the participants stating why the 
Secretary has decided to depart from the agreement reached during 
negotiations. Further information on the negotiated rulemaking process 
can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html.
    On August 30, 2017, the Department published a notification in the 
Federal Register (82 FR 41194) announcing its intention to establish 
two negotiated rulemaking committees and a subcommittee to prepare 
proposed regulations governing the Federal Student Aid programs 
authorized under title IV of the HEA. One negotiated rulemaking 
committee was established to propose regulations relating to gainful 
employment and the other to propose regulations pertaining to borrower 
defenses to repayment of Federal student loans, the definition of 
misrepresentation as it pertains to borrower defense, the program 
participation agreement for schools participating in the title IV 
programs, closed school and false certification loan discharges, 
financial responsibility and administrative capability, arbitration and 
class action lawsuits, revisions to regulations that will address 
whether and to what extent guaranty agencies may charge collection 
costs under 34 CFR 682.410(b)(6) to a defaulted borrower who enters 
into a loan rehabilitation or other repayment agreement within 60 days 
of being informed that the guaranty agency has paid a claim on the 
loan.
    A subcommittee, which was composed of individuals with expertise in 
the applicable financial accounting and reporting standards set by the 
Financial Accounting Standards Board (FASB), was established to discuss 
whether and how the (FASB's) recent changes to the accounting standards 
for financial reporting affected financial reporting requirements for 
schools and to recommend appropriate regulatory changes to the 
negotiated rulemaking committee.
    The notification set forth a schedule for the committee meetings 
and requested nominations for individual negotiators to serve on the 
negotiating committee and the subcommittee. The Department sought 
negotiators to represent the following groups: Students and former 
students; consumer advocacy organizations; legal assistance 
organizations that represent students and former students; groups 
representing U.S. military service members or veteran Federal student 
loan borrowers; financial aid administrators at postsecondary schools; 
general counsels/attorneys and compliance officers at postsecondary 
schools; chief financial officers (CFOs) and experienced business 
officers at postsecondary schools; State attorneys general and other 
appropriate State officials; State higher education executive officers; 
institutions of higher education eligible to receive Federal assistance 
under title III, parts A, B, and F, and title V of the HEA, which 
include Historically Black Colleges and Universities, Hispanic-Serving 
Institutions, American Indian Tribally Controlled Colleges and 
Universities, Alaska Native and Native Hawaiian-Serving Institutions, 
Predominantly Black Institutions, and other institutions with a 
substantial enrollment of needy students as defined in title III of the 
HEA; two-year public institutions of higher education; four-year public 
institutions of higher education; private, nonprofit institutions of 
higher education; private, proprietary institutions of higher 
education; FFEL Program lenders and loan servicers; FFEL Program 
guaranty agencies and guaranty agency servicers (including collection 
agencies); and accrediting agencies. The Department sought subcommittee 
members to represent the following constituencies who also have 
expertise in the applicable financial accounting and reporting 
standards set by the Financial Accounting Standards Board (FASB): 
Private, nonprofit institutions of higher education, with knowledge of 
the accounting standards and title IV financial responsibility

[[Page 37249]]

requirements for the private, nonprofit sector; private, proprietary 
institutions of higher education, with knowledge of the accounting 
standards and title IV financial responsibility requirements for the 
proprietary sector; accrediting agencies; chief financial officers (to 
include experienced business officers and bursars) at postsecondary 
institutions; associations or organizations that provide accounting 
guidance to auditors and institutions; certified public accountants or 
firms who conduct financial statement audits of title IV participating 
institutions; and FASB. The Department considered the nominations 
submitted by the public and chose negotiators who would represent the 
various constituencies.
    The negotiating committee included the following members: Joseline 
Garcia, United States Students Association, and Stevaughn Bush, 
(alternate) Student, Howard University School of Law, representing 
students and former students.
    Ashley Harrington, Center for Responsible Lending, and Suzanne 
Martindale (alternate), Consumers Union, representing consumer advocacy 
organizations.
    Abby Shafroth, National Consumer Law Center, and Juliana Fredman, 
(alternate) Bay Area Legal Aid, representing legal assistance 
organizations that represent students.
    Will Hubbard, Student Veterans of America, and Walter Ochinko 
(alternate), Veterans Education Success, representing U.S. military 
service members or veterans.
    Valerie Sharp, Evangel University, and Kimberly Brown (alternate), 
Des Moines University, representing financial aid administrators.
    Aaron Lacey, Partner, Thomas Coburn LLP, and Bryan Black, 
(alternate), Attorney, representing General Counsels/attorneys and 
compliance officers.
    Kelli Hudson Perry, Rensselaer Polytechnic Institute, and Dawnelle 
Robinson (alternate), Roanoke Chowan Community College, representing 
CFOs and business officers.
    John Ellis, State of Texas Office of the Attorney General, and Evan 
Daniels (alternate), Office of the Arizona Attorney General, 
representing State attorneys general and other appropriate State 
officials.
    Robert Flanigan, Jr., Spelman College, and Lodriguez Murray 
(alternate), United Negro College Fund, representing minority serving 
institutions.
    Dan Madzelan, American Council on Education, and Barmak Nassirian 
(alternate), American Association of State Colleges and Universities, 
representing two-year public institutions.
    Alyssa Dobson, Slippery Rock University, and Kay Lewis (alternate), 
University of Washington, representing four-year public institutions.
    Ashley Ann Reich, Liberty University, and Gregory Jones 
(alternate), Compass Rose Foundation, representing private, non-profit 
institutions.
    Mike Busada, Ayers Career College, and Chris DeLuca (alternate), 
DeLuca Law LLC, representing private, proprietary institutions with 
enrollment of 450 students or fewer.
    Michael Bottrill, SAE Institute North America, and Linda Rawles, 
(alternate) Rawles Law, representing private, proprietary institutions 
with enrollment of 451 students or more.
    Wanda Hall, Edfinancial Services, and Colleen Slattery (alternate), 
MOHELA, representing FFEL Program lenders and loan servicers.
    Jaye O'Connell, Vermont Student Assistance Corporation, and Sheldon 
Repp (alternate), National Council of Higher Education Resources, 
representing FFEL Program guaranty agencies and guaranty agency 
servicers.
    Dr. Michale McComis, Accrediting Commission of Career Schools and 
Colleges, and Karen Peterson Solinski, (alternate), Higher Learning 
Commission, representing accreditors.
    Annmarie Weisman, U.S. Department of Education, representing the 
Department.
    The subcommittee included the following members:
    John Palmucci, Maryland University of Integrative Health, 
representing private, non-profit institutions.
    Jonathan Tarnow, Drinker Biddle & Reath LLP, representing private, 
proprietary institutions.
    Dr. Julianne Marie Malveaux, Economic Education, and formerly of 
Bennett College, representing minority serving institutions.
    Dale Larson, Dallas Theological Seminary, representing Accrediting 
agencies.
    Dawnelle Robinson, Shaw University, representing CFOs, business 
officers, and bursars.
    Susan M. Menditto, National Association of College and University 
Business Officers, representing organizations that provide accounting 
guidance to auditors and institutions.
    Ronald E. Salluzzo, Attain, representing Certified public 
accountants or firms who conduct compliance audits and/or prepare 
financial statements of participating Title IV institutions.
    Jeffrey Mechanick, the Financial Accounting Standards Board (FASB), 
representing FASB.
    The negotiated rulemaking committee met to develop proposed 
regulations on November 13-15, 2017, January 8-11, 2018, and February 
12-15, 2018. The subcommittee met in person on November 16-17, 2017, 
January 4-5, 2018, and by telephone on January 30, 2018.
    At its first meeting, the negotiating committee reached agreement 
on its protocols and proposed agenda. The protocols provided, among 
other things, that the committee would operate by consensus. Consensus 
means that there must be no dissent by any member in order for the 
committee to have reached agreement. Under the protocols, if the 
committee reached a final consensus on all issues, the Department would 
use the consensus-based language in its proposed regulations. 
Furthermore, the Department would not alter the consensus-based 
language of its proposed regulations unless the Department reopened the 
negotiated rulemaking process or provided a written explanation to the 
committee members regarding why it decided to depart from that 
language.
    During the first meeting, the negotiating committee agreed to 
negotiate an agenda of eight issues related to student financial aid. 
These eight issues were: Borrower defense to repayment standard; the 
process for applying for and considering borrower defense claims; 
financial responsibility and administrative capability; pre-dispute 
arbitration agreements, class action waivers, and internal dispute 
processes; closed school discharges; false certification discharges; 
guaranty agency collection fees; and subsidized usage period 
recalculations.
    During committee meetings, the negotiators reviewed and discussed 
the Department's drafts of regulatory language and the committee 
members' alternative language and suggestions. At the final meeting on 
February 15, 2018, the committee did not reach consensus on the 
Department's proposed regulations. For that reason, and according to 
the committee's protocols, all parties who participated in or who were 
represented in the negotiated rulemaking, in addition to all members of 
the public, may comment freely on the proposed regulations. For more 
information on the negotiated rulemaking sessions, please visit: 
www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html. Transcripts and audio recordings of the 
negotiated rulemaking session are also available at:

[[Page 37250]]

www2.ed.gov/policy/highered/reg/hearulemaking/2017/borrowerdefense.html.
    While transcripts have been made available by the Department to aid 
public understanding of the negotiated rulemaking proceedings, the 
transcripts have not been vetted or reviewed for accuracy or 
completeness and should not be considered as the Department's official 
transcription of the negotiated rulemaking proceedings.

Summary of Proposed Changes

    The proposed regulations would--
    <bullet> Rescind specified provisions of the 2016 final 
regulations, which have not yet become effective.
    <bullet> Amend Sec.  668.41 to require schools that require 
students to accept pre-dispute arbitration agreements or class action 
waivers as a condition of enrollment to disclose that information to 
students, prospective students, and the public in an easily accessible 
format;
    <bullet> Amend Sec.  668.91 to provide that the Secretary may 
accept other types of surety or financial protection in addition to 
letters of credit and that a hearing official must uphold the amount of 
financial protection required by the Secretary unless certain 
conditions are met;
    <bullet> Amend Sec.  668.94 to provide that a limitation on an 
institution's participation in the Title IV programs may include 
changing the institution's status from fully certified to provisionally 
certified;
    <bullet> Amend Sec.  668.171 to establish the actions or events 
that have or may have an adverse material effect on an institution's 
financial condition and revise appendices A and B of the financial 
responsibility regulations to conform with changes in accounting 
standards;
    <bullet> Amend Sec.  668.172 to address changes to the accounting 
standards regarding leases;
    <bullet> Amend Sec.  668.175 to expand the types of financial 
protection acceptable to the Secretary;
    <bullet> Amend Sec. Sec.  674.33, 682.402 and 685.214 to extend the 
window for a borrower to qualify for a closed school discharge and to 
specify that if a closing school provided a borrower the reasonable 
opportunity to complete his or her academic program through an orderly 
school closure or a teach-out plan and that is 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;
    <bullet> Amend Sec. Sec.  682.202, 682.405, and 682.410 to prohibit 
guaranty agencies and FFEL Program lenders from capitalizing the 
outstanding interest on a FFEL loan when the borrower rehabilitates a 
defaulted FFEL loan;
    <bullet> Amend Sec.  682.405 to prohibit guaranty agencies and FFEL 
Program lenders from charging collections costs when a borrower enters 
into a repayment agreement within 60 days of the notice of default;
    <bullet> Amend Sec.  685.200 to specify that a loan discharge based 
on school closure, false certification, an unpaid refund, or a defense 
to repayment will lead to the elimination of or recalculation of the 
subsidized usage period that is associated with the loan or loans 
discharged;
    <bullet> Amend Sec.  685.206 to clarify that existing regulations 
with regard to borrower defenses to repayment apply to loans first 
disbursed prior to July 1, 2019; to establish a Federal standard for 
deciding borrower defenses to repayment pertaining to a loan first 
disbursed on or after July 1, 2019; to establish the procedures that 
the Department would use to determine the liability of a school for the 
amount of any loan discharges resulting from borrower defense claims 
pertaining to loans first disbursed on or after July 1, 2019; and to 
provide that the Secretary may initiate a proceeding to recover from an 
institution the amount of any loan discharged by the Secretary based on 
a defense to repayment within five years of the date of the final 
decision to discharge the loan.
    <bullet> Amend Sec.  685.212 to add borrower defense to repayment 
discharges to the discharge provisions listed in this section.
    <bullet> Amend Sec.  685.215 to provide that in cases when a Direct 
Loan borrower could not obtain an official transcript or diploma from 
high school and instead provided an attestation to the institution that 
the borrower was a high school graduate, the borrower will not qualify 
for a false certification discharge based on not having a high school 
diploma.
    <bullet> Amend Sec.  685.300 to 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.
    <bullet> Amend Sec.  685.304 to require institutions that use pre-
dispute arbitration agreements or class action waivers to provide 
written, plain language descriptions of those agreements and to provide 
the student borrower with written information on how to use the 
school's internal dispute resolution process.
    <bullet> Amend Sec.  685.308 to 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 a successful claim for which the 
Secretary discharged a loan, in whole or in part, pursuant to 
Sec. Sec.  685.206, 685.214, and 685.216.

Significant Proposed Regulations

    We discuss substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.
    In 2016, the Department conducted negotiated rulemaking and 
published the 2016 final regulations on the topic of borrower defenses 
to repayment and related issues, but those regulations have not yet 
gone into effect. On June 16, 2017, the Department published in the 
Federal Register a notification of the partial delay of effective dates 
under section 705 of the Administrative Procedure Act (5 U.S.C. 705) 
(82 FR 27621) (705 Notification), for certain provisions of the final 
regulations until a legal challenge by the California Association of 
Private Postsecondary Schools is resolved. See Complaint and Prayer for 
Declaratory and Injunctive Relief, California Association of Private 
Postsecondary Schools v. DeVos, Civil Action No. 1:17-cv-00999 (D.D.C. 
May 24, 2017). Subsequently, we published an interim final rule (82 FR 
49114), which gave notice that after the 705 notification delayed 
implementation past July 1, 2017, pursuant to the Department's 
interpretation of the master calendar requirement, the earliest the 
regulation could go into effect was July 1, 2018. Then, on February 14, 
2018, following a notice of proposed rulemaking, the Department 
published a final rule establishing July 1, 2019, as the effective date 
of the 2016 final regulations (83 FR 6458).
    We now propose rescission of the 2016 final regulations that we 
delayed through previous notification. In this preamble, we describe 
the proposed changes to the regulations based on the currently 
effective regulations and not the delayed provisions of the 2016 final 
regulations. In light of the withdrawal (i.e. rescission) of the 
delayed provisions of the 2016 final regulations, this approach is 
required under 1 CFR part 21, which provides that each agency that 
drafts regulations must do so as an amendment to the Code of Federal 
Regulations. The currently effective regulations, not the delayed 
provisions of the 2016 final regulations, are the provisions codified 
in the Code of Federal Regulations. Thus, we are

[[Page 37251]]

amending the currently effective regulations, not the delayed 
provisions of the 2016 final regulations, in this NPRM. Throughout the 
``Significant Proposed Regulations'' section of this NPRM, we describe 
our reasoning for the proposed rescissions in the context of the topics 
to which they pertain. For purposes of determining the budget impact of 
the regulation, we utilize the 2019 President's Budget Request, which 
assumed the implementation of the 2016 regulation.
    Please note that the following two issues in the 2016 final 
regulations are being addressed through a separate rulemaking process 
focused on the Gainful Employment regulations process: The requirement 
that proprietary schools at which the median borrower has not repaid in 
full, or paid down by at least one dollar the outstanding balance of, 
the borrower's loans to provide a Department-issued plain language 
warning in promotional materials and advertisements; and the 
requirement for a school to disclose on its website and to prospective 
and enrolled students if it is required to provide financial 
protection, such as a letter of credit, to the Department. The 
Department felt that the Gainful Employment rulemaking was the 
appropriate place to propose and discuss eliminating these disclosures 
because the Gainful Employment negotiated rulemaking committee 
addressed other regulations on disclosures.
    Thus, in this NPRM, we propose rescinding the revisions to or 
additions to the following regulations:
    Section 668.14(b)(30), (31), and (32) Program participation 
agreement.
    Section 668.41(h) and (i) Reporting and disclosure of information.
    Section 668.71(c) Scope and special definitions.
    Section 668.90(a)(3) Initial and final decisions.
    Section 668.93(h), (i) and (j) Limitation.
    Section 668.171 General.
    Section 668.175(c), (d), (f), and (h) Alternative standards and 
requirements.
    Part 668, subpart L, appendix C.
    Section 674.33(g)(3) and (8) Repayment.
    Section 682.202(b)(1) Permissible charges by lenders to borrowers.
    Section 682.211(i)(7) Forbearance.
    Section 682.402(d)(3), (d)(6)(ii)(B)(1) and (2), (d)(6)(ii)(F) 
introductory text, (d)(6)(ii)(F)(5), (d)(6)(ii)(G), (d)(6)(ii)(H) 
through (K), (d)(7)(ii) and (iii), (d)(8), and (e)(6)(iii) Death, 
disability, closed school, false certification, unpaid refunds, and 
bankruptcy payments.
    Section 682.405(b)(4)(ii) Loan rehabilitation agreement.
    Section 682.410(b)(4) and (b)(6)(viii) Fiscal, administrative, and 
enforcement requirements.
    Section 685.200(f)(3)(v) and (f)(4)(iii) Borrower eligibility.
    Section 685.205(b)(6) Forbearance.
    Section 685.206(c) Borrower responsibilities and defenses.
    Section 685.212(k) Discharge of a loan obligation.
    Section 685.214(c)(2), (f)(4) through (7) Closed school discharge.
    Section 685.215(a)(1), (c) introductory text, (c)(1) through (8), 
and (d) Discharge for false certification of student eligibility or 
unauthorized payment.
    Section 685.222 Borrower defenses.
    Part 685 subpart B, appendix A Examples of borrower relief.
    Section 685.300(b)(11) and (12) and (d) through (i) Agreements 
between an eligible school and the Secretary for participation in the 
Direct Loan Program.
    Section 685.308(a) Remedial actions.
    Note: Section 668.90 has been redesignated as Sec.  668.91 and 
Sec.  668.93 has been redesignated as Sec.  668.94 pursuant to the 
borrower defense procedural rule, published January 19, 2017 at 82 FR 
6253 (the borrower defense procedural rule).

Borrower Defenses--General (Sec.  685.206)

    Background: Section 455(h) of the HEA authorizes the Secretary to 
specify which acts or omissions of an institution of higher education a 
borrower may assert as a defense to the repayment of a Direct Loan. 20 
U.S.C. 1087e(h). Under the Department's current regulations at Sec.  
685.206(c), a borrower may assert as a defense against repayment of a 
loan in response to a proceeding by the Department to collect on a 
Direct Loan, any act or omission of the school attended by the student 
directly and clearly related to the making of a Direct Loan for 
enrollment at the institution or the provision of educational services 
for which the loan was made that would give rise to a cause of action 
against the school under applicable State law (referred to in this 
document as the ``State law standard'').
    The Department first promulgated the Direct Loan Program's borrower 
defense to repayment regulation December 1, 1994 (59 FR 61664, 61696), 
which became effective on July 1, 1995. The Department's intent was for 
this rule to be effective for the 1995-1996 academic year and then to 
develop a more extensive rule for both the Direct Loan and FFEL Loan 
programs through a negotiated rulemaking process. However, based on the 
recommendation of the non-Federal negotiators on a negotiated 
rulemaking committee convened in the spring of 1995 (60 FR 37768), the 
Secretary decided not to develop further regulations or to revise Sec.  
685.206(c).
    Though the regulation has been in effect since 1995, it was rarely 
used prior to 2015, when the Department received applications from 
borrowers for loan relief in response to the Department's announcement 
(see www.ed.gov/news/press-releases/fact-sheet-protecting-students-abusive-career-colleges and https://studentaid.ed.gov/sa/about/announcements/corinthian) that it would consider affirmative borrower 
defense claims.
    The current regulation does not set forth the process a borrower 
may use to assert an affirmative borrower defense claim. Therefore, the 
Department appointed a Special Master in June 2015 to create and 
oversee a process to provide debt relief for borrowers who sought 
Federal student loan discharges based on claims against the borrower's 
institution. Later, the Department's Federal Student Aid (FSA) office 
assumed responsibility for resolving these claims, and it continues to 
do so. This FSA process has proven to be burdensome to borrowers, given 
the time it takes to adjudicate each claim, and costly to taxpayers.
    The Department is considering whether to allow only defensive 
claims or to continue the approach taken in its 2015 interpretation 
that allowed it to accept both defensive and affirmative claims. One 
regulatory alternative, specified in the proposed amendatory language, 
continues to provide a remedy to borrowers in a collections proceeding, 
as has been the case since the borrower defense to repayment regulation 
was promulgated in 1994, by permitting borrowers to assert defense to 
repayment during a proceeding by the Department to collect on a Direct 
Loan including, but not limited to, tax refund offset proceedings under 
34 CFR 30.33, wage garnishment proceedings under section 488A of the 
HEA, salary offset proceedings for Federal employees under 34 CFR part 
31, and consumer reporting proceedings under 31 U.S.C. 3711(f).
    The other regulatory alternative, specified in the proposed 
amendatory language, would allow for both affirmative claims from 
borrowers not in a collections action and defensive claims. If we do 
accept affirmative claims, we would need to develop appropriate 
deterrents to frivolous claims. At a minimum, the Department

[[Page 37252]]

would revise the affirmative claim review process to provide 
institutions with a reasonable opportunity to see and respond to 
borrower claims and would require the borrower to sign a waiver that 
allows the institutions to provide the Department with any information 
from the borrower's education record that is relevant to the claim. The 
Department could also limit the period of time after a borrower leaves 
an institution during which a borrower could make an affirmative claim. 
Given the Department's long-standing requirement that institutions 
retain certain documents for only three years, the Department could 
limit claims to the three-year period following the borrower's 
departure from the institution to ensure that the institution would 
have access to records that could be relevant to their defense. The 
Department seeks public comment on ways to balance the need to serve 
borrowers with the need to limit unsubstantiated claims and provide an 
opportunity for the institution to provide evidence in its own defense.

Borrower Defense to Repayment--Assertion of Defenses to Repayment in 
Collection Proceedings and Federal Standard for Asserting a Borrower 
Defense to Repayment

    Statute: 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.
    Current Regulations: Section 685.206(c) establishes the conditions 
under which a Direct Loan borrower may assert a defense to repayment, 
the relief afforded by the Secretary in the event the defense is 
successful, and the Secretary's authority to recover from the school 
any loss that results from a defense to repayment discharge granted by 
the Department. Specifically, Sec.  685.206(c)(1) provides that a 
borrower may assert a defense to repayment based upon any act or 
omission of the school that would give rise to a cause of action 
against the school under applicable State law. The borrower may raise 
such defense to repayment during a proceeding by the Department to 
collect on a Direct Loan, including, but not limited to, tax refund 
offset proceedings under 34 CFR 30.33, wage garnishment proceedings 
under section 488A of the HEA, salary offset proceedings for Federal 
employees under 34 CFR part 31, and consumer reporting proceedings 
under 31 U.S.C. 3711(f). Under the current regulations, since 2015, the 
Department has accepted affirmative claims, i.e., those not in 
collection proceedings. Under 34 CFR 685.206(c)(2), if a borrower 
defense to repayment discharge is approved, the borrower is relieved of 
the obligation to pay all or part of the loan and associated costs and 
fees, and may be afforded such further relief as the Secretary 
determines is appropriate, including, among other things, reimbursement 
of amounts previously paid toward the loan.
    Proposed Regulations: Proposed Sec.  685.206(c) would specify that, 
with respect to Direct Loans disbursed prior to July 1, 2019, the State 
law standard would continue to apply. Proposed paragraph (c) maintains 
that a borrower defense to repayment of these loans may be asserted in 
proceedings including, but not limited to, tax refund offset 
proceedings, wage garnishment proceedings, salary offset proceedings 
for Federal employees, and consumer reporting agency reporting 
proceedings, but includes clarifications as to statutory and regulatory 
authorities for those specified proceedings.
    Proposed Sec.  685.206(d) would establish a new uniform standard 
not based upon applicable State law, also referred to here as the 
``Federal standard'' for a borrower's defense to repayment discharge on 
a Direct Loan first disbursed on or after July 1, 2019. First, Sec.  
685.206(d)(1) would define terms applicable to the Federal standard, 
including the term ``borrower defense to repayment.'' Consistent with 
the Department's current interpretation that it is not appropriate for 
the taxpayer to face potential loss based on action by schools in 
matters unrelated to the Department's loan programs, this definition 
would provide that a borrower defense to repayment discharge must 
directly and clearly relate to the making of the Direct Loan, or the 
making of a loan that was repaid by a Direct Consolidation Loan, for 
enrollment at a school or the provision of educational services for 
which the loan was obtained. In addition, we clarify that for the 
purposes of this paragraph, ``borrower'' includes the student who 
attended the institution for whom Direct Loans (Parent PLUS) were 
obtained by a parent. Further, under this proposed definition, a 
``borrower defense to repayment'' would be considered to include both a 
defense to repayment of amounts owed to the Secretary on a Direct Loan 
and reimbursement of payments previously made to the Secretary on the 
Direct Loan. Proposed Sec.  685.206(d)(1) also would define the terms 
``provision of educational services'' and ``school'' and 
``institution.''
    Parallel to the current regulation, the proposed regulations 
provide that for loans first disbursed on or after July 1, 2019, a 
borrower may assert a defense to repayment ``defensive'' claim as part 
of a proceeding related to certain actions by the Department to collect 
on a Direct Loan, including tax refund offset proceedings under 26 
U.S.C. 6402(d), 31 U.S.C. 3716 and 3720A; wage garnishment proceedings 
under section 488A of the Act or under 31 U.S.C. 3720D and 34 CFR part 
34; salary offset proceedings for Federal employees under 34 CFR part 
31, 5 U.S.C. 5514, and 31 U.S.C. 3716; and consumer reporting agency 
reporting proceedings under 31 U.S.C. 3711(e). This language is 
reflected in proposed Sec.  685.206(d)(2)--Alternative A.
    The Department is also considering accepting ``affirmative'' claims 
from borrowers not in a collections action. Proposed regulatory 
language for this approach is set forth in Sec.  685.206(d)(2)--
Alternative B. Like Alternative A, Alternative B proposes to consider 
both affirmative and defensive claims under a preponderance of the 
evidence standard. But the Department seeks comment on whether claims 
under this regulatory alternative should have to be supported by clear 
and convincing evidence, rather than a preponderance of the evidence. 
Such a standard might be appropriate, as it is the standard used in 
most States for adjudicating fraud litigation and could deter some 
frivolous affirmative claims. 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.'')
    The Department is interested in comments regarding the benefits or 
risks of these proposals. The Department also seeks public comments 
regarding other mechanisms that could be utilized to discourage the 
submission of frivolous claims, which are costly for the Department and 
institutions to adjudicate. Such mechanisms could include limiting the 
period of time after a borrower leaves an institution during which a 
defense to repayment claim can be submitted (such as imposing a 3 year 
limit on borrower defense to repayment claims to align with the 
Department's 3 year record retention requirement).
    Under this proposed regulation, the Department would develop a 
claim review process for either (or both) defensive or affirmative 
claims that would provide institutions with a reasonable opportunity to 
see and

[[Page 37253]]

respond to borrower claims. The Department proposes, for example, to 
require the borrower to sign a waiver that allows the institution to 
provide the Department with any information from the borrower's 
education records that is relevant to the claim. The Department also 
proposes to require borrowers to submit information about whether, for 
reasons other than the education received, the borrower has been 
removed from a job due to on-the-job-performance, disqualified from 
work in the field for which the borrower trained, or worked less than 
full-time in the chosen field. Such circumstances would not disqualify 
a borrower from a successful defense to repayment, but might be 
relevant to determining whether the asserted financial harm was in fact 
caused by an alleged misrepresentation.
    The proposed regulations also would remind borrowers submitting 
affirmative or defensive claims that if the borrower receives a 100 
percent discharge for the loan, the institution has the right to 
withhold an official transcript for the borrower, as has always been 
the case in instances in which the borrower has been awarded student 
loan discharge through false certification, closed school or defense to 
repayment discharge.
    The Department also welcomes comments regarding the process the 
Department might use to collect evidence from borrowers and schools, to 
evaluate the merits of a borrower's defense to repayment claim, and to 
render decisions on claims that are submitted affirmatively.
    Under proposed Sec.  685.206(d)(4), a borrower defense to repayment 
related to a loan that was repaid by a Direct Consolidation Loan 
disbursed on or after July 1, 2019, would be evaluated under the 
proposed Federal standard. Although this approach may result in 
different treatment of some borrowers who took out loans before this 
NPRM, such differences in treatment would arise only if the borrower 
chose to take out a new Direct Consolidation Loan after July 1, 2019. 
This is consistent with the longstanding treatment of consolidation 
loans as new loans. The Department is interested in comments as to 
whether this structure would likely lead borrowers to engage in, or 
borrower advocates to encourage, strategic default for the sole purpose 
of asserting a defense to repayment. Proposed Sec.  685.206(d)(5) 
includes two alternatives relating to affirmative and defensive claims.
    Section 685.206(d)(5)(i) and (ii)--Alternative A provides that the 
Secretary will approve the borrower's defense to repayment claim if a 
preponderance of the evidence establishes that the school at which the 
borrower was enrolled made a misrepresentation, upon which the borrower 
reasonably relied under the circumstances in deciding to obtain a 
Direct Loan (or a loan repaid by a Direct Consolidation Loan) for the 
student to enroll in a program at the school which resulted in 
financial harm to the borrower. The proposed regulations in Sec.  
685.206(d)(5) would define misrepresentation as a statement, act, or 
omission by the eligible institution to the borrower that is (i) false, 
misleading, or deceptive, (ii) made with knowledge of its false, 
misleading, or deceptive nature or with a reckless disregard for the 
truth, and (iii) directly and clearly related to the making of a Direct 
Loan for enrollment at the school or to the provision of educational 
services for which the loan was made. Proposed section 685.206(d)(5)(i) 
and (ii)--Alternative B contains the same language with respect to 
defensive claims and extends the proposed standard to affirmative 
claims.
    Proposed Sec.  685.206(d)(5)(iii) sets forth that the Secretary may 
consider additional information when evaluating a claim. Proposed Sec.  
685.206(d)(5)(iv) would provide additional information about what may 
constitute a preponderance of the evidence of a misrepresentation and 
evidence of financial harm. The Department is interested in comments as 
to whether it should require clear and convincing evidence of 
misrepresentation and financial harm (as opposed to a preponderance of 
the evidence of misrepresentation and financial harm) in the event it 
continues to consider affirmative claims.
    Proposed Sec.  685.206(d)(6) would clarify that a school's 
violation of an eligibility or compliance requirement in the HEA or the 
Department's implementing regulations is not a basis for a borrower 
defense to repayment unless that conduct would, by itself, establish a 
basis for a defense to repayment. Proposed Sec.  685.206(d)(6) also 
lists other circumstances that would not suffice to establish a defense 
to repayment under the proposed Federal standard.
    Reasons: During the public hearings and negotiated rulemaking 
sessions, the Department heard from representatives from a broad range 
of constituencies on what they thought was an appropriate basis for a 
borrower defense to repayment. At the negotiated rulemaking sessions, 
negotiators expressed a shared desire to develop a regulation that 
would provide for fair treatment of borrowers who had been harmed by an 
act or omission of a school, but differed widely in their views of how 
this might be achieved. The Department began negotiations by asking 
whether we should establish a Federal standard for evaluating future 
borrower defense to repayment applications.

Defense to Repayment--Assertion of Borrower Defenses

    As part of the discussions of a Federal standard, negotiators 
debated whether borrowers should be allowed to assert defenses to 
repayment affirmatively--in other words, at any point of time 
regardless of whether the borrower's loan is in default and the subject 
of Department collection proceedings--or only defensively, during such 
collection proceedings. Many negotiators were in favor of permitting 
borrowers to pursue affirmative claims to allow borrowers an 
opportunity to rectify the harm stemming from an act or omission of a 
school. One negotiator noted that the current regulation implies that a 
borrower raises a defense to repayment in response to collection 
activities and asked what, if any, discretion the Department might have 
to interpret the regulation more broadly. Another negotiator asserted 
that she understood that the Department did not interpret the current 
regulation to limit claims to borrowers who are in default and that it 
had allowed affirmative applications to be submitted by borrowers.
    From 1994 to 2015, the Department's regulation--as per earlier 
negotiated rulemaking--provided defense to repayment loan discharge 
opportunities only to borrowers who were in a collection proceedings. 
As a matter of practice, starting in 2015 and later codified in the 
2016 regulations, the Department has (primarily in response to the 
closure of Corinthian Colleges, Inc.) accepted borrower defenses to 
repayment requests asserted affirmatively outside of the collection 
proceedings specifically listed in the existing regulation.
    We are now considering that for loans first disbursed on or after 
July 1, 2019, the Department return to the pre-2015 interpretation such 
that borrowers may only submit applications in connection with one of 
the specific collection proceedings listed in current Sec.  685.206(c). 
The language of both the statute and existing regulations on borrower 
defenses is consistent with this approach, and the Department believes 
it may better balance the competing interests of borrowers and 
taxpayers. Under this approach, the Department would view the assertion 
of

[[Page 37254]]

defenses to repayment as a last resort for borrowers, with disputes 
between borrowers and schools primarily resolved by those parties in 
the first instance. The proposal to allow borrowers to assert defenses 
to repayment during the enumerated Department collection proceedings, 
and not as affirmative claims at any point in time, aligns with the 
Department's 20 year prior practice and protects taxpayers from 
liabilities that should be leveraged first against the institutions 
that committed acts or omissions covered by the defense to repayment 
provision.
    Section 455(h) of the HEA provides that ``a borrower may assert . . 
. a defense to repayment of a loan made under [the Direct Loan 
Program],'' on the basis of an act or omission of a school, as 
specified by the Secretary. 20 U.S.C. 1087e(h) (emphasis added). The 
current regulations implementing the statutory provision reflect the 
Department's understanding at the time of the rule's promulgation in 
1994 that the statute directs the Department to provide borrowers with 
a defense to repayment, as part of certain Department collection 
actions. See 34 CFR 685.206(c)(1) (``In any proceeding to collect on a 
Direct Loan, the borrower may assert [ ] a defense to repayment . . . 
These proceedings include, but are not limited to, the following . . 
.'' (emphasis added)). The proceedings referenced in the regulation 
only occur after a borrower defaults on a loan.
    The Department processed a small number of defense to repayment 
claims from borrowers in a collections proceeding under the existing 
regulation from 1994 through 2015. In response to the closure of 
Corinthian Colleges, Inc. (CCI) in 2015, however, the Department 
changed its position and began to accept borrowers' requests for the 
type of relief (loan discharges and certain further relief) provided 
under 34 CFR 685.206(c), even before the borrower defaulted on a loan--
or, in other words, the Department allowed borrowers to affirmatively 
assert borrower defense claims. As a result, the Department was flooded 
with tens of thousands of borrower defense claims before it had 
promulgated new regulations that officially notified the public of this 
new interpretation or established a mechanism or structure under which 
to adjudicate the large volume of claims.
    After further consideration of the history and regulatory 
provisions governing borrower defenses, the Department believes that it 
may be appropriate to provide in the proposed regulations that, for 
loans first disbursed after the proposed rules' anticipated effective 
date of July 1, 2019, borrowers may request a loan discharge and 
related relief under the proposed Federal misrepresentation standard 
for such requests only by asserting such defense in a proceeding to 
collect on the loan by the Department (i.e., a tax refund offset 
proceeding, a wage garnishment proceeding, a salary offset proceeding 
for a Federal employee, or a consumer reporting agency reporting 
proceeding).
    As noted above, this proposal is squarely within the Department's 
authority under section 455(h) of the HEA to ``specify in regulations 
which acts or omissions of an institution of higher education a 
borrower may assert as a defense to repayment'' of a Direct Loan. 20 
U.S.C. 1087e(h) (emphasis added). It is also consistent with the 
Department's direction that students should use processes already in 
place at schools, as well as at accrediting agencies and State 
authorizing agencies, to resolve issues relating to the services 
provided by the institution as quickly as possible following any 
incident, rather than delaying corrective action and shifting the 
financial burden to the taxpayer.
    This differs from the approach taken in the 2016 final regulations. 
In those regulations, the Department took the approach it had adopted 
in 2015 to allow affirmative defense to repayment claims and 
accordingly would have removed language referencing the Department's 
collection proceedings as the forum for a borrower's assertion of a 
defense to repayment. The Department continues to consider whether to 
accept affirmative claims from borrowers, as opposed to only accepting 
defensive claims from borrowers during a specified collection 
proceeding. However, the Department believes that if it were to allow 
affirmative claims, it would need to also consider appropriate 
deterrents to frivolous claims.
    The Department is concerned that in the event of affirmative 
claims, it is relatively easy for a borrower to submit an application 
for loan relief, even if the borrower has suffered no harm, on the 
chance that perhaps some amount of loan forgiveness will be awarded. 
Although the barriers to submitting a claim are low for borrowers, the 
collective burden of numerous unjustified claims could be significant 
for both the Department and institutions. This could delay our efforts 
to review and provide loan relief to borrowers who have been genuinely 
harmed. The Department seeks comment on how it could continue to accept 
and review affirmative claims, but at the same time discourage 
borrowers from submitting unjustified claims. One idea is to increase 
the evidentiary standard to ``clear and convincing'' for affirmative 
claims. The Department seeks comment on whether or not this evidentiary 
standard would be appropriate to balance the need to serve borrowers 
who have been harmed and the need to reduce the number of unjustified 
claims students might otherwise submit. If such a standard is 
warranted, the Department also seeks comment about whether it should 
continue to evaluate defensive claims under the preponderance of the 
evidence standard and on the rationale for having two different 
evidentiary standards.
    The Department believes that, even if it continues to accept 
affirmative claims, it must also accept defensive claims so both 
students in repayment and students in collections have access to 
remedies for instances of fraud.

Defense to Repayment--Federal Standard (Provision of Educational 
Services and Relationship With the Loan)

    The language we propose in this NPRM clarifies that the 
misrepresentation of a school forming the basis of a borrower defense 
to repayment discharge must directly and clearly relate to the making 
of a Direct Loan for enrollment at the school or the provision of 
educational services for which the loan was made. This language 
reflects the Department's consistent position, as explained in a Notice 
of Interpretation issued in 1995 (60 FR 37769) and adopted in the 2016 
final regulations (81 FR 76080 (revised 34 CFR 685.206(c)(1)), 76083 
(new 34 CFR 685.222(a)(5))), that the Department will acknowledge a 
borrower defense to repayment only if it directly relates to the loan 
or to the school's provision of educational services for which the loan 
was provided.
    Some non-Federal negotiators requested that the regulation define 
the term ``provision of educational services'' and include a reference 
to educational resources. Another non-Federal negotiator noted that the 
Department has made its understanding of this term ``provision of 
educational services'' clear in the regulatory history for the borrower 
defense regulation and that there are well-developed bodies of State 
law that explain this term.
    The Department agrees that the term ``provision of educational 
services'' is open to interpretation and, in proposed Sec.  685.206(d), 
we define that term as ``the educational resources provided by the 
institution that are required by an accreditation agency or a state 
licensing

[[Page 37255]]

or authorizing agency for the completion of the student's educational 
program.'' We thus intend for a misrepresentation relating to the 
``provision of educational services'' to be clearly and directly 
related to the borrower's program of study. We also intend 
misrepresentation to include items such as the nature of the school's 
educational program or related resources required by an accreditor or 
licensing authority, the nature of the school's financial charges, the 
advertised outcomes (including job placement rates, licensure pass 
rates, and graduation rates) of prior graduates of the school's 
educational program, an institution's published rankings or selectivity 
statistics, the eligibility of graduates of the educational program for 
licensure or certification, the State agency authorization or approval 
of the school or educational program, or an accreditor approval of the 
school or educational program.

Defense to Repayment--Consolidation Loans

    The Department proposes that for a Direct Consolidation Loan first 
issued on or after the anticipated effective date of these regulations, 
a borrower may assert a defense to repayment under the proposed Federal 
standard (discussed below). Under the Department's existing regulation 
at 34 CFR 685.220, a borrower may consolidate certain specified loans 
into a Direct Consolidation Loan. Generally, the Department views a 
consolidation loan as a new loan, distinct from the underlying loans 
that were paid in full by the proceeds of the Direct Consolidation 
Loan. The Department's borrower defense authority is part of the Direct 
Loan Program, see 20 U.S.C. 1087e(h) (``[A] borrower may assert . . . a 
defense to repayment of a loan made under this part [as to the Direct 
Loan Program]'') and Direct Consolidation Loans are made under the 
Direct Loan Program. As a result, the Department's existing practice is 
to provide relief under the Direct Loan authority if the underlying 
loans have been consolidated under the Direct Loan Program into a 
Direct Consolidation Loan. Or, if consolidation is being considered 
depending on the outcome of any preliminary analysis of whether relief 
might be available under 34 CFR 685.206(c), relief is not actually 
provided until the borrower's loans have been consolidated into a 
Direct Consolidation Loan.
    The Department's proposal clarifies the Department's position and 
the standard that it proposes to use to evaluate a Direct Consolidation 
Loan borrower's defense to repayment claim. The Department will 
consider a misrepresentation that the borrower reasonably relied upon 
under the circumstances in deciding to obtain the underlying loan 
repaid by the Direct Consolidation Loan, for the student to enroll or 
continue enrollment in a program at an institution.
    The Department's standard is designed to provide borrowers with 
relief for the misrepresentations made with either knowledge of their 
false, misleading, or deceptive nature, or with a reckless disregard 
for the truth. Where misconduct of such nature has been demonstrated, 
the Department believes it is appropriate to provide borrowers with 
relief, regardless of whether the underlying loan is a Direct Loan. 
However, given that the Department's borrower defense authority is part 
of the Direct Loan Program, see 20 U.S.C. 1087e(h) (``[A] borrower may 
assert . . . a defense to repayment of a loan made under this part [as 
to the Direct Loan Program]''), the Department will only consider 
providing such relief if the underlying loans were themselves Direct 
Loans or have been consolidated under the Direct Loan Program, into a 
Direct Consolidation Loan. If a defense to repayment was approved on a 
Direct Consolidation Loan, borrowers would receive a discharge of the 
remaining balance on their Direct Consolidation Loan in an amount 
proportionate to the amount of the underlying loan at issue and would 
receive proportionate reimbursements of any payments made to the 
Secretary on the underlying loan or the Direct Consolidation Loan. See 
Hiatt v. Indiana State Student Assistance Comm. (In re Hiatt), 36 F.3d. 
21, 24 (7th Cir., 1994) and In re McBurney, 357 B.R. 536, 538 (9th Cir 
BAP, 2006), supporting the consideration of consolidation loans as new 
loans.
    Under the Department's proposal, the standard that would be applied 
to determine if a defense to repayment has been established is the 
Federal standard for Direct Consolidation Loans first disbursed after 
July 1, 2019. The 2016 final regulations would have similarly applied a 
Federal standard to some underlying loans that were not Direct Loans, 
but it would have done so based upon the underlying loans' date of 
first disbursement. Thus, under the 2016 final regulations, the same 
claim might have required the application of different standards to 
different underlying loans, if the borrower had both underlying Direct 
Loans and loans that are not Direct Loans. The Department believes that 
the language it proposes in this NPRM is more consistent with the 
Department's longstanding policy regarding the treatment of 
consolidated loans, would be more easily understood, would create less 
confusion for schools and borrowers, and would be easier to administer 
for the Department. Further, as a consolidation loan is a new loan, the 
Department believes it is appropriate to apply the date of first 
disbursement of that loan to determine what standard would apply. 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 proposed standard and associated time limits. But the 
Department believes that this concern is outweighed by the benefits of 
this standard. In all events, as under the existing regulations, a 
borrower would be able to choose consolidation if he or she determines 
it is the right option for the borrower. The Department invites comment 
on this approach.

Defense to Repayment--Federal Standard (Misrepresentation)

    In this rulemaking, the Department is proposing an exclusively 
Federal standard not based in State law for loans disbursed after July 
1, 2019, for ease of administration and to provide fair, equitable 
treatment for all borrowers regardless of the State in which the school 
is located or the student was in residence while enrolled or while in 
repayment. That Federal standard differs somewhat from the 
``substantial misrepresentation'' standard adopted in the 2016 final 
regulations and drawn from more general enforcement contexts. 81 FR 
75939-75940. It also differs somewhat from the proposal that the 
Department offered during negotiations, in that it relies solely on 
misrepresentation as the basis for discharge, rather than also allowing 
final judgments to serve as a basis for discharge. As discussed in more 
detail below, the Department believes that the standard it proposes 
will provide more equitable treatment for borrowers and ease of 
administration for the Department.
    During discussions relating to the Federal standard for borrower 
defense to repayment applications, negotiators disagreed about whether 
to establish a Federal standard at all. Some negotiators expressed 
opposition, arguing that protecting consumers and ensuring the 
educational quality of schools licensed to operate by the State are the 
responsibilities of the States. Other negotiators noted that a Federal 
standard not based in State law could disadvantage borrowers. Many 
States'

[[Page 37256]]

consumer protection laws might be more favorable to borrowers than the 
Federal standard proposed by the Department (discussed immediately 
below). These negotiators also noted that the proposed Departmental 
process to adjudicate claims under a Federal standard would not provide 
borrowers with the benefit of a discovery process like the one that 
exists in judicial proceedings. Still, many negotiators supported 
establishing a Federal standard, arguing that doing so would provide 
clarity, uniformity of borrower treatment, and ease of administration. 
Some negotiators stated that the Department should adopt a structure 
under which a Federal standard would serve as a minimum standard, but 
with the Department also evaluating whether a borrower defense claim 
would receive more favorable treatment under applicable State law and 
then applying the more favorable standard to the borrower defense 
claim.
    The Department is persuaded that an exclusively Federal standard 
for borrower defense to repayment applications is appropriate. The 
Department's primary reason for proposing a Federal standard for 
borrower defenses to repayment is that Direct Loans are Federal assets 
and the benefits of such loans should be established by Federal law. In 
addition, the Department believes that using a Federal standard will 
reduce the burden on borrowers and the Department. Applying a State 
law-based standard means that borrowers have to determine which State 
law applies to their claim and the Department has to review that 
determination. Moreover, borrowers in some States may have access to 
more favorable law than borrowers in other States for the same Federal 
defense to repayment. In contrast, applying a Federal standard will 
eliminate the issue of what law applies and ensure that all borrowers' 
claims are evaluated under the same rules.
    The Department's proposed Federal standard is a modified version of 
the proposal it offered at the negotiated rulemaking sessions. The 
Department's proposal during negotiations would have included two 
different bases for a borrower to assert a defense to repayment for 
loans first disbursed on or after July 1, 2019: (1) A final, definitive 
judgment by a State or Federal court of competent jurisdiction, 
rendered in a contested proceeding, where the borrower was awarded 
monetary damages against the institution relating to the student's 
enrollment at the subject institution or the provision of educational 
services for which the loan was obtained, and (2) generally, a 
misrepresentation by the school made with intent to deceive, knowledge 
of the falsity of the misrepresentation, or a reckless disregard for 
the truth, and that resulted in financial harm to the borrower. In this 
NPRM, the Department now proposes a modified version of the second 
basis for relief--a misrepresentation standard, as discussed in depth 
below.
    With regard to the misrepresentation standard, negotiators 
disagreed on the appropriate definition of ``misrepresentation'' and 
whether the borrower should be required to prove the school's intent, 
knowledge of falsity, or reckless disregard for the truth. Some 
negotiators argued that it would be difficult for a borrower to prove 
that a school had acted with the requisite intent or had knowledge of 
the falsity of the misrepresentation, and that it would also be 
difficult for a borrower to demonstrate that the school had engaged in 
a level of misconduct that would amount to a ``reckless disregard for 
the truth.'' These negotiators argued in favor of a standard that would 
enable borrowers to avail themselves of the full range of States' 
consumer protection laws that prohibit certain unfair and deceptive 
conduct (commonly known as ``unfair and deceptive trade acts and 
practices'' or ``UDAP'' laws). Some negotiators argued the Department 
should not approve borrower defenses and also hold a school liable for 
losses from approvals of misrepresentation-based defenses to repayment, 
if the school had committed an inadvertent mistake or if the 
misrepresentation had been made by an employee acting without the 
school's knowledge or against the school's direction.
    The 2016 final regulations provided that a borrower may assert a 
borrower defense for a ``substantial misrepresentation'' as defined in 
the Department's regulation at 34 CFR 668.71, if the school, any of its 
representatives, or any institution, organization, or person with whom 
the school has an agreement for specified services made such a 
substantial misrepresentation that the borrower reasonably relied on to 
the borrower's detriment in deciding to attend, or continue attending, 
the school or in deciding to take out a Direct Loan. See 81 FR 76083 
(text for 34 CFR 685.222(d)). The 2016 final regulations also included 
a non-exclusive list of circumstances for a Department official to 
consider in determining whether the borrower's reliance was reasonable. 
Under those regulations, a borrower would be able to assert such a 
borrower defense to recover funds previously collected by the Secretary 
not later than six years after the borrower discovered, or reasonably 
could have discovered, the substantial misrepresentation. The borrower 
would also be able to assert a defense to any outstanding amounts owed 
on the loan at any time.
    The ``substantial misrepresentation'' definition was drawn from 
Sec.  668.71, which permits the Department to bring an enforcement 
action for a substantial misrepresentation in the form of a suspension, 
limitation, termination, or fine action. The section generally defines 
a misrepresentation as any false, erroneous, or misleading statement 
made by a school, and it defines a misleading statement to include any 
orally or visually made statement, or one that is made in writing or by 
other means, that has the likelihood or tendency to deceive. It then 
defines a ``substantial misrepresentation'' as any misrepresentation on 
which the person to whom it was made could reasonably be expected to 
rely, or has relied, to that person's detriment. The 2016 final 
regulations amended the language of Sec.  668.71 to explicitly note 
that an omission of information can amount to a misrepresentation. 81 
FR 76072 (text of language added to 34 CFR 668.71). As stated above, 
while a substantial misrepresentation under current Sec.  668.71 
includes misrepresentations that a person had relied upon or could 
reasonably have been expected to rely upon, for the purposes of 
borrower defense to repayment under the 2016 final regulations, a 
substantial misrepresentation would have been found only if the person 
had, indeed, reasonably relied upon the misrepresentation to his or her 
detriment.
    In this NPRM, the Department proposes a different Federal standard 
for defenses to repayment based upon misrepresentations by an 
institution to the borrower. Under the proposed standard, a 
misrepresentation is a statement, act, or omission by an eligible 
institution to a borrower upon which the borrower reasonably relies 
that is false, misleading, deceptive, and made with knowledge of its 
false, misleading, or deceptive nature or with reckless disregard for 
the truth and directly and clearly related 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. The vast majority of the borrower defense claims filed 
since 2015 have alleged that the school at issue made statements to the 
borrower that amount to misrepresentations under State law. As

[[Page 37257]]

a result, we believe it is appropriate to base the Federal standard 
upon a school's misrepresentations. We have removed breach of contract 
or State law judgment as a standard for borrower defense relief since 
breach of contract or a State law judgment may be for actions or events 
not directly related to the educational services provided by the 
institution, and therefore do not qualify for relief under borrower 
defense to repayment. That said, a State law judgment could serve as 
evidence provided by a borrower in filing a borrower defense to 
repayment application.
    Nothing in this proposed regulation attempts to prevent a borrower 
from taking action against an institution of higher education based on 
State law. However, for the purpose of evaluating a borrower's defense 
to repayment claim, only the new Federal standard will be considered.
    The proposed standard takes the same position as in the 2016 final 
regulations that certain persons and institutions affiliated with a 
school may make misrepresentations leading to a borrower defense to 
repayment under circumstances generally understood to render those 
misrepresentations attributable to the school.
    In the 2016 final regulations, the Department declined to include a 
requirement that the borrower prove that the school had acted with 
intent in making the misrepresentation. In the preamble to those 
regulations, the Department also specifically declined to include any 
requirement that the Department find that the school had knowledge of 
the misrepresentation. 81 FR 75947. The Department reasoned, in 2016, 
that it is more reasonable and fair to have an institution be 
responsible for the harm caused to borrowers as a result of a 
misrepresentation, even if such a misrepresentation is the result of 
innocent or inadvertent mistakes. Id. at 75947-75948.
    As was the case in the 2016 final regulations, the Department does 
not propose that a defense to repayment be approved only when a school 
can be shown to have made a misrepresentation with the intent to induce 
the reliance of the borrower on the misrepresentation. The Department 
agrees with negotiators that it is unlikely that a borrower would have 
evidence to demonstrate that an institution had acted with intent to 
deceive. But given its responsibility to the Federal taxpayer, the 
Department believes that defense to repayment should be granted only 
where a preponderance of the evidence shows that a school has made a 
misrepresentation with either knowledge of its falsity or with a 
reckless disregard of the truth. The Department's proposal includes a 
non-exhaustive list of evidence that may indicate that such a 
misrepresentation took place. The Department believes that this 
standard strikes a balance between protecting borrowers by establishing 
a standard of evidence that is reasonable for a borrower to meet and 
protecting the Federal taxpayer by requiring a level of evidence that 
ensures misrepresentation actually took place and the student relied 
upon that misrepresentation and suffered harm.
    Like the 2016 final regulations, the Department's proposed 
misrepresentation standard also 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. As it did in the 2016 final 
regulations, the Department recognizes that the reasonableness of a 
borrower's reliance on the misrepresentation may depend upon the 
circumstances, and its proposed rule thus states that the Department 
will look at whether a borrower reasonably relied upon the 
misrepresentation ``under the circumstances.''
    Under the proposed alternative regulations, which would return to 
the practice of allowing borrower defense to repayment applications 
only in response to Department collection proceedings, the proposed 
standard differs from the time limitations imposed under the 2016 final 
regulations. Those regulations imposed a six-year limitation period on 
a borrower's ability to raise a defense to repayment claim for amounts 
previously collected. Under the proposed standard, a borrower may be 
able to assert a defense to repayment at any time during the repayment 
period, once the loan is in collections, regardless of whether the 
collection proceeding is one year or many years after a borrower's 
discovery of the misrepresentation. The proposal does not impose a 
limit on the borrower's ability to recover amounts previously collected 
by the Department.
    The Department considered an alternative approach in which the 
borrower would have only three years following the end of enrollment at 
the institution to assert a defense to repayment claim. This three-year 
limit corresponds to the three-year record retention policy imposed by 
the Department. It is unlikely that it would take a borrower more than 
three years to realize that he or she was harmed by misrepresentations 
upon which the borrower relied to make an enrollment decision. However, 
since collection proceedings can be initiated at any time during the 
repayment period, the current proposal similarly provides borrowers 
with the opportunity to assert a defense to repayment during a 
collection proceeding, regardless of how many years after enrollment 
that proceeding is commenced. In the event that the Department is 
persuaded by public comments provided in response to this NPRM to 
continue accepting affirmative claims, the Department proposes to 
implement a three-year limit on filing claims after the end of the 
borrower's enrollment at the institution accused of misrepresentation.
    The proposed standard also differs from the 2016 final regulations 
in that it does not include breach of contract or a State law judgment 
as a standard for defense to repayment. Although those standards are 
utilized by the Department in enforcement actions, and breach of 
contract or a State law judgment could be used as evidence to 
substantiate a borrower defense claim, breach of contract or a State 
law judgment, alone, does not automatically qualify a borrower for 
borrower defense to repayment relief since these may pertain to actions 
or activities other than the institution's provision of educational 
services.
    Some negotiators noted that consumer protection laws governing 
misrepresentations are generally the province of the States, but the 
Department's proposed Federal standard would not invade that province. 
The proposed Federal standard would not prevent a borrower from 
pursuing a claim against a school based on a violation of State law. It 
simply would not provide for that claim to be the basis of a borrower 
defense to repayment claim. Thus, it would leave such State law claims 
to be pursued through arbitration, State courts, or other 
administrative bodies responsible for adjudicating them.
    Other negotiators expressed concern that changes to a financial aid 
award letter not be construed as misrepresentations, and the Department 
agrees that such changes ordinarily would not qualify as 
misrepresentations. For example, if a financial aid award letter 
changes as a result of a change in the borrower's financial 
circumstances, the Department would not consider the change to form the 
basis of a borrower defense to repayment claim under our proposed 
regulations.

[[Page 37258]]

Borrower Defense--Judgments and Breach of Contract

    During the negotiations, the Department discussed using a non-
default, contested Federal or State court judgment issued by a court of 
competent jurisdiction, as a possible basis for borrower defense 
claims. Negotiators expressed support generally for a judgment-based 
standard as one basis for a claim, but some negotiators expressed 
concern that lawsuits based on the acts or omissions of a school have 
often been concluded by default judgments that did not result from a 
contested proceeding or by settlement. Some negotiators also expressed 
the concern that borrowers may not have the resources to bring such 
lawsuits or that the schools may require borrowers to execute 
agreements that would prevent such lawsuits. They urged that the 
Department accept judgments obtained by government entities, such as 
State Attorneys General. However, since Direct Loans are Federal 
assets, only the Federal government has the authority to relieve a 
borrower of his or her repayment obligation. Therefore, although a 
State law judgment could serve as evidence to support a borrower 
defense to repayment claim, the judgment alone would not be sufficient 
to grant automatic relief.
    The Department had included non-default, favorable contested 
judgments as a basis for a borrower defense claim for loans first 
disbursed after the anticipated effective date of the 2016 final 
regulations. In the preamble to those regulations, the Department 
stated that while it does not anticipate such judgments to be common, 
such a standard would allow the Department to continue to recognize 
State law causes of action, without putting the burden on the 
Department to interpret and apply States' laws. 81 FR 75941-75942. 
However, this does not alleviate the inequities that can result if, as 
a result of differences in State laws, two borrowers who have suffered 
equal harm as the result of the same misrepresentation receive 
different treatment. Therefore, in this regulation we propose a single 
Federal standard that would ensure equal treatment of borrowers 
regardless of where they live or their school is located.
    The Department acknowledges negotiators' concerns that some court 
cases do not result in contested, non-default judgments, such as where 
the institution chooses to settle pending litigation or an arbitration 
proceeding and satisfies the claim pursuant to a settlement agreement 
or consent judgment, or where an insurer for the institution satisfies 
the claim. But the Department believes this concern is less pressing 
for these regulations, which do not propose a judgment-based standard 
for a defense to repayment claims. The Department also acknowledges 
that private parties often settle disputes among themselves without 
court action. The Department believes that it is preferable for a 
school (or its insurer, if such coverage exists) to satisfy a student 
borrower's meritorious claims of misrepresentation against it and to 
provide appropriate relief directly to the student borrower for the 
school's own actions where it is merited. A borrower who receives a 
favorable decision in such a dispute but believes he or she still has 
not received the relief to which he or she is entitled may submit the 
record of that dispute process and decision as evidence in support of 
the defense to repayment claim with the Department. As part of its 
adjudication of a defense to repayment, and if the evidence is directly 
and clearly related to the loan or to the school's provision of 
education services for which the loan was provided, the Department may 
also consider as evidence findings of fact by a court of competent 
jurisdiction or arbitrator, admissions of fact by the school made in a 
court of competent jurisdiction or arbitration, and court orders.
    During the negotiated rulemaking sessions, one negotiator proposed 
including breaches of contract as a basis for borrower defense claims. 
In 2016, the Department included breach of contract as a basis for 
borrower defense in recognition of lawsuits borrowers have brought 
alleging breaches of contract. 81 FR 39341. But the majority of the 
defense to repayment applications before the Secretary do not allege 
breaches of contract, and the Department believes it is appropriate in 
these proposed regulations to tailor the standard to the types of 
claims being alleged by borrowers. Moreover, breach of contract, as 
described in the 2016 regulations, would cover conduct beyond the scope 
of defense to repayment since breach of contract is not limited to the 
provision of education services. If the conduct underlying a breach of 
contract would satisfy the proposed requirements for a 
misrepresentation, a borrower may assert a defense to repayment for 
that misrepresentation during a collection proceeding. Or, prior to 
those proceedings, a borrower may pursue more expedient relief through 
a school's internal dispute process, arbitration, or other legal 
proceeding.
    While the Department is proposing a new Federal standard based in 
misrepresentation for loans first disbursed on or after the anticipated 
effective date of the proposed regulations, July 1, 2019, we are not 
proposing any changes to the existing State law standard (or, as noted 
above, the context in which a defense to repayment may be requested) 
for loans first disbursed before the anticipated effective date of 
these regulations. Rather, for loans made on or before July 1, 2019, 
the Department proposes to keep the State law-based standard in the 
currently effective regulations. In the event that a borrower enters 
into a consolidation loan, the date on which the loan was consolidated 
(prior to or after July 1, 2019) determines whether the Department will 
review a defense to repayment claim based on a State law standard or 
the proposed Federal standard.

Borrower Defense--Evidentiary Standard for Asserting a Borrower Defense

    During the negotiated rulemaking sessions, negotiators were divided 
on the evidentiary standard that should be applied to borrower defense 
to repayment claims adjudicated by the Department under a Federal 
standard. There were extensive discussions regarding the meaning of, 
and differences between, the terms ``clear and convincing evidence'' 
and ``preponderance of the evidence.'' Some negotiators argued that the 
evidentiary standard should use terms that are consistent with legal 
terminology and precedent. Other negotiators advocated using an 
evidentiary standard that is not based on legal terminology and might 
be clearer to individual borrowers. In addition, several negotiators 
argued in favor of an evidentiary standard based on ``clear and 
convincing evidence;'' others argued that a ``preponderance of the 
evidence'' standard would be fairer to borrowers, since it would not 
require a high level of evidence that borrowers would be unlikely to be 
able to provide. One negotiator noted that preponderance of the 
evidence is the typical standard that applies in civil cases. 
Negotiators representing consumer advocates asserted that the 
Department's proposal to apply a preponderance of the evidence standard 
that requires corroboration of the borrower's attestation would be 
harder to satisfy than a simpler preponderance of the evidence 
standard.
    We preliminarily agree with negotiators that, given the types of 
evidence borrowers are likely to have in their possession, a 
preponderance of the evidence standard is appropriate. The Department 
is accordingly proposing an

[[Page 37259]]

evidentiary standard that requires the borrower to establish by a 
preponderance of the evidence that the school at which the borrower 
enrolled made a statement, act, or omission directly and clearly 
related to enrollment at the school or the provision of educational 
services upon which the borrower reasonably relied under the 
circumstances in deciding to obtain a Direct Loan to enroll or continue 
enrollment in a program at the school that resulted in financial harm 
to the borrower.
    As we noted in the 2016 final regulations, the Department uses a 
preponderance of the evidence standard in other proceedings regarding 
borrower debt issues. See 34 CFR 34.14(b), (c) (administrative wage 
garnishment); 34 CFR 31.7(e) (Federal salary offset). We believe that 
this evidentiary standard strikes a balance between ensuring that 
borrowers who have been harmed are not subject to an overly burdensome 
evidentiary standard and protecting the Federal government, taxpayers, 
and institutions from unsubstantiated claims.
    Proposed Sec.  685.206(d)(5)(ii)--Alternative A would provide that 
the Secretary will find that the preponderance of the evidence supports 
the approval of a borrower defense to repayment discharge when the 
borrower's attestation is supported by sufficient evidence provided by 
the borrower or otherwise in the possession of the Secretary. The 
Secretary will permit the institution to review and respond to this 
evidence and will consider the school's response. Alternative B for 
this section would extend this standard to affirmative claims as well.

Borrower Defense--Financial Harm

    Consistent with its proposal during the negotiated rulemaking 
sessions, the Department proposes that a misrepresentation may serve as 
a basis for a borrower defense to repayment only if the 
misrepresentation resulted in financial harm to the borrower. During 
discussions of this issue, some negotiators argued that the act of 
taking a Federal student loan should be sufficient evidence of 
financial harm to the borrower. These negotiators suggested that, 
absent the misrepresentation, the borrower may have opted to not take a 
Federal student loan.
    The Department does not agree that taking a Federal student loan, 
by itself, is sufficient evidence of financial harm to the borrower in 
the context of a borrower defense to repayment. Borrowers consider a 
variety of factors in choosing a school or program, including not just 
cost, but also other attributes of the school, such as its facilities, 
convenience, and the opportunity for the student to enroll in his or 
her program of choice (which may be unavailable to the student at other 
institutions). The borrower has the opportunity to compare schools' and 
programs' relative costs and other factors before committing to borrow 
and repay a Federal student loan, and the borrower has the opportunity 
to leave an institution should it not provide educational opportunities 
or experiences commensurate with the borrower's expectations. 
Therefore, even in the event of misrepresentation, the borrower may not 
be successful in receiving loan relief under the defense to repayment 
regulation if that misrepresentation was not the basis for the 
borrower's enrollment decision or it did not cause subsequent financial 
harm.
    Moreover, the Master Promissory Note signed by the borrower 
describes the borrower's obligation to repay the full amount of the 
loan even if the student borrower (or the student for whom a PLUS loan 
was obtained) does not complete the program, does not complete the 
program within the regular time for program completion, is unable to 
obtain employment upon completion, or is otherwise dissatisfied with or 
does not receive the educational or other services that the student 
borrower purchased from the school. The foregoing information is 
provided to borrowers again during entrance counseling.
    As discussed earlier, some negotiators were concerned that a 
borrower might allege misrepresentation on the part of the school based 
solely on a change in the borrower's financial aid award due to changes 
in financial circumstances or the availability of outside aid, such as 
vocational rehabilitation funding. The Department does not view such 
changes to necessarily be evidence of a misrepresentation on the part 
of the school. Instead, the proposed regulations specify that financial 
harm may be established if, for example, there were a significant 
difference between the actual amount or nature of the tuition and fees 
charged by the school for which the Direct Loan was obtained and the 
amount or nature of the tuition and fees that the school represented to 
the borrower the school would charge or was charging. Similarly, 
financial harm might be established if an institution awarded sizeable 
grants or scholarships to attract a student to an institution, but then 
failed to continue such support throughout the program (except in cases 
in which the student failed to meet the requirements of the scholarship 
or grant), because the student could have made the decision to enroll 
based on the reasonable belief that scholarship or grant support would 
continue. Such misrepresentation could potentially form the basis of a 
defense to repayment claim.
    Some negotiators advocated including opportunity costs or the 
quality of education as evidence of financial harm. However, the 
Department believes these assertions of financial harm are too 
difficult to quantify to be used for that purpose.
    Under the 2016 final regulations, a borrower was required to show 
that he or she had reasonably relied upon the misrepresentation to his 
or her detriment. 81 FR 76083 (text of 34 CFR 685.222(d)(1)). The use 
of the word ``detriment'' echoed the definition for substantial 
misrepresentation under the Department's regulation for its enforcement 
activities for a school's misrepresentation under 34 CFR 668.71, which 
was expressly cross-referenced by the 2016 final regulations' borrower 
defense to repayment standard. While the 2016 final regulations did not 
include a definition for ``detriment,'' in the preamble, the Department 
noted that generally the term refers to any loss, harm, or injury 
suffered by a person or property. 81 FR 75951. Further, the Department 
stated that there was no quantum or minimum amount of detriment 
required for borrower defense under the substantial misrepresentation 
standard and a school's failure to provide some element or quality of a 
program that had been promised may be such a detriment. Id.
    Under the proposed Federal standard, a borrower would be required 
to demonstrate that the borrower had suffered financial harm as a 
result of the misrepresentation by the school, and does not use the 
word ``detriment.'' As the Department is not proposing to align the 
Department's enforcement regulation at 34 CFR 668.71 for 
misrepresentation to the borrower defense to repayment standard, we do 
not believe it is necessary to use the same term in the proposed 
regulation. Further, in light of the Department's interest in balancing 
the need to protect both borrowers and Federal taxpayers, the 
Department believes it is appropriate to require that financial harm, 
in the form of a monetary loss as a result of the misrepresentation, be 
present for a borrower defense to repayment to be approved. As with the 
2016 final regulations, however, the Department does not believe it is 
necessary for a borrower to demonstrate

[[Page 37260]]

a specific level of financial harm, other than the presence of such 
harm, to be eligible for relief under the proposed standard.

Borrower Defense--Filing Deadline for Asserting a Borrower Defense 
Claim

    During the negotiated rulemaking sessions, negotiators discussed 
whether to impose time limits on a borrower's ability to assert a 
borrower defense to repayment and possible time periods for such 
limits. Some negotiators expressed concern that the imposition of a 
limitation period would bar otherwise valid borrower defenses to 
repayment, even when the loan(s) in question remained collectible under 
Federal law.
    The proposed regulations do not impose a statute of limitations on 
the filing of a borrower defense to repayment claim. However, a 
borrower must comply with the filing deadlines established for the 
different proceedings in which a borrower defense claim may be raised. 
For example, when the Department intends to garnish a borrower's wages, 
the borrower is sent a notice of the Department's intention to initiate 
wage garnishment and is provided 30 days to request a hearing to 
dispute that action. A borrower could raise a defense to repayment 
claim during that 30-day timeframe, but would not be able to raise a 
claim after that period has elapsed.
    With our regulatory proposal to accept defense to repayment claims 
during the enumerated collection proceedings, as opposed to the 
regulatory proposal to accept both defensive and affirmative claims, we 
do not propose to incorporate the timeframes for submission of borrower 
defense to repayment claims that were included in the 2016 final 
regulations. As discussed previously, the 2016 final regulations 
established time limits for borrowers' claims regarding recovery of 
amounts previously collected, but allowed defenses of repayment for 
amounts owed to be brought at any time. This NPRM instead enables 
borrowers to assert claims during collection proceedings, which can 
occur at any time during the repayment period. Borrowers can 
accordingly raise their defenses whenever such proceedings are 
instituted, but must comply with the existing filing deadlines for 
raising defenses in those collections proceedings. The Department 
proposes adopting the existing filing deadlines for defensive claims 
both because amending those deadlines was beyond the scope of the 
negotiated rulemaking and because harmony of deadlines will reduce 
confusion for borrowers.
    The filing deadlines for the various proceedings in which a 
defensive borrower defense claim may be raised are reflected in the 
chart below:
---------------------------------------------------------------------------

    \3\ The days listed may vary depending on the particular 
circumstances of each borrower's situation.

------------------------------------------------------------------------
                                                          Number of days
                                                              \3\ for
                    Collection action                        borrower
                                                             response
------------------------------------------------------------------------
Tax Refund Offset proceedings...........................              65
under 34 CFR 30.33......................................
Salary Offset proceedings for Federal employees under 34              65
 CFR part 31............................................
Wage Garnishment proceedings............................              30
under section 488A of the HEA...........................
Consumer Reporting proceedings..........................              30
under 31 U.S.C. 3711(f).................................
------------------------------------------------------------------------

    Similar to our approach to timeframes in this NPRM, for suspension 
of collections, we follow the existing processes in the applicable 
collection proceeding. For example, with regard to wage garnishment 
proceedings under section 488A of the HEA, the accompanying regulations 
at 34 CFR 32.10 state that the wage deductions do not begin until a 
written decision has been issued, if the borrower has requested a pre-
offset hearing to review the existence of amount of the debt. Thus, if 
a borrower defense claim has been raised in the context of a wage 
garnishment proceeding, collections would be suspended until a written 
decision on the wage garnishment has been issued. The 2016 final 
regulations also included suspension of collection for defaulted loans 
during a pending borrower defense claim.
    If the Department were to accept affirmative claims as well as 
defensive claims, the Department proposes to impose a three-year time 
limit on borrowers to file such claims based on regulations that 
require institutions to retain administrative records for three years, 
while allowing defensive claims to be asserted at any time in response 
to collection proceedings. The Department welcomes comments on other 
approaches to set up a window for submitting affirmative claims. Since 
institutions would likely need access to records to defend themselves 
against inaccurate claims, it would make sense to require that 
affirmative borrower defense claims must be made within the first three 
years after a student leaves an institution. We recognize that in the 
case of defensive claims, it is likely that the institution would no 
longer have access to certain records, but the Department must balance 
that concern with the need to provide borrowers an opportunity to make 
a defense to repayment claim during already established opportunities 
for the borrower to challenge collection of the loan.

Borrower Defense--Exclusions

    As discussed above, the Department's consistent position since 1995 
has been that the Department will acknowledge a borrower defense to 
repayment only if it directly relates to the loan or to the school's 
provision of educational services for which the loan was provided. 60 
FR 37769. As a result, the Department has not considered personal 
injury tort claims or allegations of sexual or racial harassment to be 
grounds for alleging a defense to repayment. In these regulations, the 
Department proposes making this limit explicit and provides a non-
exhaustive list of circumstances that would not constitute, in and of 
themselves, borrower defenses to repayment that are directly related to 
the borrower's loan or the provision of educational services. This list 
also includes slander or defamation, property damage, and allegations 
about the general quality of the student's education or the 
reasonableness of an educator's conduct in providing educational 
services. The Department believes such a list will provide clarity and 
guidance for borrowers and schools in applying the proposed defense to 
repayment regulation.
    The proposed regulations further state that a violation of the HEA 
does not by itself establish a defense to repayment, unless the 
underlying conduct also meets the Federal standard under the 
regulations. This has been the Department's consistent position since 
1995. See 60 FR 37769; 81 FR 76053 (text of 34 CFR 685.222(a)(3) 
(defense to repayment regulation does not provide a private right of 
action for a borrower nor create any new Federal right)).
    For all of these reasons, we are proposing to adopt the regulations 
described above and to rescind the Federal standard provisions of the 
2016 final regulations.

Borrower Defense Adjudication Process (Sec. Sec.  685.206, 685.212)

    Statute: Section 455(h) of the HEA authorizes the Secretary to 
specify in regulation which acts or omissions of a school a borrower 
may assert as a defense to repayment of a Direct Loan.
    Current Regulations: Section 685.206(c) provides that borrowers may

[[Page 37261]]

assert a borrower defense to repayment during proceedings which are 
available to the borrower when the Department initiates certain 
collection actions on a Direct Loan.
    Section 685.212 establishes the conditions under which the 
Department discharges a borrower's obligation to repay a loan, or a 
portion of a loan, under various discharge or forgiveness provisions of 
the HEA, including closed school discharges, false certification 
discharges, and public service loan forgiveness.
    Proposed Regulations: Proposed Sec.  685.206(d)(2) and (3) 
describes the process by which a borrower would file a borrower defense 
to repayment application for a loan disbursed on or after July 1, 2019. 
Proposed Sec.  685.206(d)(2) would specify that a borrower may assert a 
borrower defense to repayment in any of the enumerated proceedings to 
collect on a Direct Loan. Proposed Sec.  685.206(d)(3) would specify 
that the borrower must raise a defense to repayment within the 
specified timeframe included in the notification to the borrower of the 
Department's action to collect on a defaulted student loan. The 
borrower would submit a completed borrower defense to repayment 
application to the Department on a form approved by the Secretary and 
signed under penalty of perjury. The borrower must also submit any 
evidence supporting the defense to repayment within the specified 
timeframe included in the Department's directions to the borrower.
    Proposed Sec.  685.206(d)(7) provides that the school against which 
the borrower alleges misrepresentation in a defense to repayment will 
be notified of the pending application and allowed to submit a response 
and evidence within the specified timeframe included in the notice.
    Proposed Sec.  685.206(d)(8) provides the items the Secretary may 
consider in resolving a borrower defense to repayment claim and that, 
following such consideration, the Secretary will issue a written 
decision informing both the borrower and the school of the relief, if 
any, that the borrower will receive.
    Proposed Sec.  685.206(d)(9) would provide that the Secretary would 
decide the amount of financial relief provided to the borrower upon the 
determination of successful borrower defense to repayment. This section 
also would provide that the amount of relief awarded to a borrower 
during the borrower defense process would be reduced by any amounts 
that the borrower obtained from the school or other sources for claims 
related to the justification of the defense to repayment, as reported 
pursuant to proposed Sec.  685.206(d)(3).
    Proposed Sec.  685.206(d)(10) provides that the determination of a 
borrower defense by the Department is final and not subject to appeal.
    Proposed Sec.  685.212(k)(1) would add borrower defense discharges 
to the discharge provisions listed in Sec.  685.212.
    Reasons: During negotiated rulemaking, some negotiators were in 
favor of the Department providing borrowers with a non-adversarial 
process through which to seek resolution, with others asserting that in 
such a process, the Department should rely primarily on the borrower's 
attestation, submitted under penalty of perjury, and that corroborating 
evidence could come from the Department's own records. Other 
negotiators advocated for a more extensive process for resolving 
borrower defenses to repayment, and asserted that an unsubstantiated 
assertion of wrongdoing by a borrower should not be sufficient to 
justify the discharge of a borrower's Federal student loans or to 
impose a financial liability upon the school for the relief provided to 
the borrower.
    The 2016 final regulations established separate adjudication 
processes for borrower defense to repayment applications submitted by 
individuals and those to be considered as a group. Generally, for the 
individual application process, the 2016 final regulations established 
that a borrower would submit an application on a form approved by the 
Secretary and provide any supporting evidence or other information or 
documentation reasonably requested by the Secretary. A Department 
official would then take appropriate action to put the borrower in loan 
forbearance, if not declined by the borrower, or, in the case of a 
defaulted loan, in stopped collection status. Next, the Department 
official would conduct a fact-finding process, during which the 
Department would notify the school of the defense to repayment 
application and consider the application and any supporting evidence 
provided by the borrower. According to the 2016 regulations, the 
Department official would consider any additional information found in 
the Department's records, or obtained by the Department. If requested 
by the borrower, the Department would identify relevant records to the 
borrower and provide such records upon reasonable request. At the end 
of the process, the Department official would issue a written decision. 
Although the written decision would be the final decision of the 
Department, the borrower could request reconsideration, upon the 
identification of ``new evidence,'' or relevant evidence not previously 
provided by the borrower or identified in the written decision. 81 FR 
76083-76084 (text of 34 CFR 685.222(e)).
    The process proposed by the Secretary in this NPRM would require 
that the borrower submit an application to the Department along with 
any supporting evidence. Whereas the 2016 final regulations did not 
explicitly provide an opportunity for schools to submit evidence and 
information in response to the borrower defense claim, this NPRM 
proposes to provide schools with an opportunity to provide a response 
and supporting evidence. Given the fact-specific nature of 
misrepresentation claims, the Department believes that it is 
appropriate to obtain as much evidence as possible from all sources, 
including from the school alleged to have made the misrepresentation. 
The Department would not, however, rely upon Department records or 
other information obtained by the Secretary, unless the school had an 
opportunity to review and respond to such evidence. The Department 
believes that the proposed process will assist it in making fair and 
accurate decisions, while providing borrowers and schools with due 
process protections.
    As discussed in the section titled ``Defense to Repayment--Federal 
Standard for Asserting a Defense to Repayment,'' the Department is 
proposing that borrowers who have defaulted on a Direct Loan may raise 
a defense to repayment of loans first disbursed on or after July 1, 
2019, on the basis of the proposed Federal misrepresentation standard, 
in response to a notice of the Department's intent to engage in certain 
collection actions. The Department's existing regulations as to those 
collection actions provide certain processes and protections for 
borrowers, which the Department is not proposing to change and would 
apply to borrower defense to repayment applications made during the 
course of those proceedings.
    As is the case for defense to repayment claims under the existing 
regulation and the 2016 final regulations, the Department proposes that 
a decision made in the adjudication process be final as to the merits 
of the defense to repayment and any relief to be provided as a result. 
In this way, borrowers will not be subject to the additional wait that 
an appeal period may cause and will receive more expedient relief. We 
address the issue of reconsideration later in this section.

[[Page 37262]]

    In the 2016 final regulations, the Department established a process 
for evaluating defense to repayment applications, regardless of the 
substantive standard that would be applied to the defense to repayment. 
Because the Department is now proposing that, for loans first disbursed 
on or after the anticipated effective date of these regulations (July 
1, 2019), defenses to repayment applications be made only during the 
specified collection proceedings. The Department will continue to apply 
the State law standard for loans made prior to July 1, 2019. The 
Department proposes only clarifying updates to the statutory and 
regulatory cross-references for the collection proceedings listed for 
defenses to repayment for pre-effective date loans, and otherwise 
retains the existing language of current 34 CFR 685.206(c) as to such 
defenses to repayment applications. We also propose to rescind the 
process for adjudication of borrower defense to repayment portions of 
the 2016 final regulations.
    The Department seeks public comment regarding potential processes 
that could be used to adjudicate affirmative claims, should the 
Department accept affirmative claims for some period after a borrower 
ends enrollment at an institution. The Department preliminarily 
believes that such a process must include an opportunity for the 
institution to receive a copy of the borrower's claim and a signed 
waiver allowing the institution to share relevant portions of the 
borrower's education record with the Department, and provide sufficient 
time for the institution to provide a response and any supporting 
evidence of its own to the Secretary. In order to assist the 
Department's assessment of the harm a potential misrepresentation 
caused a borrower, the borrower, in submitting a defense to repayment 
claim, might also be required to submit information about whether, for 
reasons other than the education received, the borrower has been 
removed from a job due to on-the-job-performance, disqualified from 
work in the field for which the borrower trained, or working less than 
full-time in the chosen field. In addition, the Secretary proposes to 
include a provision emphasizing to borrowers submitting affirmative or 
defensive claims that if the borrower receives a 100 percent discharge 
for the loan, the institution has the right to withhold an official 
transcript for the borrower, to avoid any confusion or surprise that 
would result from such withholding. Finally, the regulations make clear 
that the Secretary will also review both the borrower's claim and the 
institution's response in making a defense to repayment decision.

Additional Borrower Defense to Repayment Application Process Proposals

    At the negotiated rulemaking sessions, the Department proposed that 
the regulations could allow borrowers to ask the Secretary to 
reconsider a denial of a defense to repayment, if the reconsideration 
claim was supported by newly discovered evidence. The negotiating 
committee discussed variations on this reconsideration process idea, in 
which either the school or the borrower could submit additional 
evidence to the Department. Negotiators also proposed that the 
regulations include an early dispute resolution process, whereby the 
Department or another party would mediate borrower defense disputes 
between a borrower and the school, to attempt to resolve the dispute 
without the need for the parties to go through the Department's full 
borrower defense adjudication process.
    Under our proposed process for adjudicating defenses to repayment, 
a defense to repayment would be submitted in response to the 
Department's collection actions on a defaulted loan on a form approved 
by Secretary, and the Department's Federal Student Aid office will make 
a decision on the defense to repayment based on the submissions from 
the borrower and the school, if any. The borrower and the school will 
each be afforded the opportunity to see and respond to evidence 
provided by the other.
    The reconsideration process proposed by some members of the 
negotiated rulemaking committee would involve either the borrower or 
the school submitting additional, newly discovered, evidence to the 
Department. Under the process and standard included in these proposed 
regulations, the Department expects to receive and consider all 
relevant evidence from the borrower and the institution during its 
consideration of the borrower's defense. Therefore, we do not believe 
that an appeal process or a process for reconsideration will be needed, 
nor is one included in these proposed regulations.
    With regard to the proposed early dispute resolution process, the 
Department does not believe such a process is appropriate within the 
proposed regulations governing borrower defense. A borrower and a 
school may pursue voluntary resolution of a claim by the borrower at 
any time, without the involvement of the Department. A borrower may 
also pursue relief through his or her state consumer protection agency.

Group Process

    A group of negotiators proposed that the Department establish a 
process for considering groups of borrower defenses to repayment 
claims. They argued that groups of borrowers who were all subject to 
the same act or omission by a school should have their defenses 
considered together as a group. These negotiators also asserted that a 
group process in these cases would be more efficient and would result 
in more equitable treatment of similarly situated borrowers.
    The 2016 final regulations provided for a group process. 
Specifically, the Secretary could initiate, upon consideration of 
factors including, but not limited to, common facts and claims, fiscal 
impact, and the promotion of compliance by the school or other title 
IV, HEA program participant, a process to determine whether a group of 
borrowers has a legitimate borrower defense claim. Those regulations 
provided for the Secretary to identify groups comprised of borrowers 
who individually filed applications, as well as borrowers who did not 
file applications, should those borrowers have common facts and claims. 
81 FR 76084. The Department further differentiated the processes based 
upon whether the subject school was open or closed. 81 FR 76085.
    The Department does not include a group process, whether the school 
in question is open or closed, in these proposed regulations. Because 
relief through a borrower's defense to repayment claim is based not 
just on evidence of misrepresentation, but also evidence that the 
borrower reasonably relied on the misrepresentation in deciding to 
enroll or continue enrollment in the institution, and was harmed by the 
misrepresentation, the Department must consider each borrower's claim 
independently. The Department recognizes that a group of borrowers with 
defaulted loans who are each subject to a proceeding to collect on a 
Direct loan may assert misrepresentation on the part of the same school 
based on the same facts and circumstances, such as when the student 
borrowers were enrolled in a program that the school advertised to the 
public as being fully accredited by a specific programmatic accrediting 
agency when, in fact, it was not so accredited. The Department may, at 
its discretion, determine it is more efficient to establish facts 
regarding claims of misrepresentation put forth by a group

[[Page 37263]]

of borrowers. However, in approving an individual defense, the 
Secretary would still need to determine that the borrower made a 
decision based on the misrepresentation, that the borrower was harmed 
by the misrepresentation, and to what, if any, amount of or type of 
relief the borrower is entitled. To make that determination, it will be 
necessary to have a completed application from each individual 
borrower, and to examine the facts and circumstances of each borrower's 
individual situation. In addition, it would be inappropriate to subject 
borrowers who did not individually submit defense to repayment claims 
to the possible collateral consequences of debt relief, including 
potentially having their transcript withheld.

Relief

    Proposed Sec.  685.206(d)(9) would provide that the Secretary would 
decide the amount of financial relief provided to the borrower upon the 
determination of an approved defense to repayment discharge. As part of 
this determination, 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. The rule would prevent a 
double recovery for the same injury at the expense of the Federal 
taxpayer.
    As noted in the preamble to the 2016 final regulations, the 
Department has a responsibility to protect the interests of Federal 
taxpayers as well as borrowers. As a result, we continue to believe 
that establishing a legal presumption of full relief would not be 
appropriate. See, e.g., 81 FR 75973-75974. While the Department's other 
loan discharge processes for closed school discharges, 34 CFR 685.214; 
false certification, 34 CFR 685.215; and unpaid refunds, 34 CFR 
685.216, do provide for full loan discharges and recovery of funds paid 
on subject loans, the factual premises for such discharges are clearly 
established in statute and are relatively straightforward. In contrast, 
we anticipate that determinations for borrower defense claims will 
involve more complicated issues of law and fact since students may have 
been told different things by different representatives of an 
institution or may have heard the same statements differently. In many 
instances, borrower defense claims assert that an admissions 
representative made certain claims or promises, and yet without a 
recording of the actual conversation, it is hard to know precisely what 
was said, the degree to which the borrower relied on that information 
to make an enrollment decision, and the harm that came from the 
decision.
    In the NPRM for the 2016 final regulations, the Department proposed 
certain methodologies for calculating relief, 81 FR 39420, but 
ultimately did not include those in light of their confusing nature, 81 
FR 75976. Instead, the Department stated that it would consider factors 
such as the value of the education provided by the school and the 
student's cost of attendance, as well as conceptual, non-binding 
examples for substantial misrepresentation claims. See 81 FR 76086-
76087. The Department proposes to allow for partial relief, based on 
the degree of harm suffered by the borrower. Given the complexity of 
such determinations, however, the Department invites comments on this 
proposal and on methods for calculating partial relief in connection 
with defenses to repayment. We also propose to rescind the application 
provisions of the 2016 final regulations.

Recovery From The School (Sec. Sec.  685.206 and 685.308)

    Statute: 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.
    Current Regulations: Section 685.206(c)(3) states that the 
Department may initiate an appropriate proceeding to require a school 
whose act or omission resulted in a successful borrower defense to 
repayment to require the school to pay the Department the amount of the 
loan to which the defense applies. It specifies that this proceeding 
may not be initiated after the period of record retention required in 
Sec.  685.309(c), unless the school received notice of the borrower's 
defense during that period.
    Proposed Regulations: Proposed Sec.  685.206(d)(13) would clarify 
that, for borrower defense to repayment discharges granted under the 
new Federal standard, the Secretary may initiate, within five years of 
the date of the final determination of the borrower's defense to 
repayment application, an appropriate proceeding to require a school 
whose misrepresentation resulted in an approved borrower defense to 
repayment discharge to pay the Department the amount of the discharged 
loan. The recovery proceeding would be conducted in accordance with 34 
CFR part 668 subpart G.
    Proposed Sec.  685.206(d)(11) would require that a borrower who has 
received a defense to repayment loan discharge reasonably to cooperate 
with the Secretary in any proceeding to recover funds from the school. 
The Secretary may revoke relief granted to a borrower who does not 
fulfill this obligation. Proposed Sec.  685.206(d)(12) would require a 
borrower whose defense to repayment is successful to transfer to the 
Secretary any right to recovery against third parties of any amounts 
discharged by the Department, based on the borrower's defense to 
repayment.
    Conforming changes would be made by proposed Sec. Sec.  685.300 and 
685.308 related to the agreements signed by schools to participate in 
the Direct Loan Program and to remedial actions that the Department may 
take to require repayment of funds from schools in various 
circumstances, respectively.
    Reasons: Proposed Sec.  685.206(d)(13) would establish that the 
Secretary may initiate a recovery proceeding to require the school 
whose act or omission resulted in the borrower's successful defense to 
repayment discharge of a Direct Loan to pay to the Secretary the amount 
discharged. The Department proposes the subpart G hearing as a 
mechanism for recovery of funds from schools resulting from a borrower 
defense to repayment discharge. These proceedings are well established 
in regulation and familiar to schools. The subpart G hearing offers due 
process to schools, with an opportunity for a preconference hearing via 
telephone, an informal meeting, or a paper process; submission of 
evidence; and a hearing. The burden of proof rests with the Department, 
and the school has an opportunity to appeal the decision of the hearing 
official to the Secretary.
    Proposed Sec.  685.206(d)(11) would help to ensure that the 
Department receives the borrower's cooperation, if needed, in any 
proceeding against the school. It is similar to the requirements 
applicable to other loan cancellation provisions. Cooperation includes 
providing testimony regarding any representation made by the borrower 
to support a successful borrower defense to repayment, and producing, 
within timeframes established by the Secretary, any documentation 
reasonably available to the borrower with respect to those 
representations and any sworn statement required by the Secretary with 
respect to those representations and documents.
    In the preamble to the 2016 final regulations, 81 FR 75929-75932, 
the Department explained that it has the legal authority to recover 
liabilities from

[[Page 37264]]

schools related to approved borrower defenses to repayment. The 
Department continues to maintain that it has this authority under its 
statutory and existing regulatory framework as part of its 
responsibility to administer the Direct Loan Program for the reasons 
stated in the preamble to those regulations. We note that this has been 
the Department's consistent position on borrower defenses to repayment, 
as is reflected in the existing borrower defense to repayment 
regulation at 34 CFR 685.206(c)(3).
    Consistent with the Department's longstanding view, we propose in 
these regulations to add language to 34 CFR 685.300 regarding Program 
Participation Agreements schools must sign to participate in the Direct 
Loan Program. This language would clarify that schools are responsible 
to the Department for the amounts of the loans underlying approved 
borrower defense claims, as well as those for other Direct Loan 
discharges (closed school discharges, false certification discharges, 
and unpaid refund discharges) approved under the Department's other 
regulations. The Department also proposes to amend 34 CFR 685.308 to 
make corresponding changes clarifying that the Department may take 
remedial actions to recover such losses. The Department also proposes 
to rescind the recovery from schools provisions of the 2016 final 
regulations.

Statute of Limitations for Recovering Funds From Schools (Sec. Sec.  
685.206 and 685.308)

    The negotiators discussed whether to impose a time limit on the 
Department's ability to recover losses for the amount of an approved 
borrower defense to repayment from a school. Negotiators noted that 
current Sec.  685.206(c)(3) imposes a three-year limit on the 
Secretary's ability to initiate an action based on the period for the 
retention of records described in Sec.  685.309(c). This three-year 
limit is derived from Sec. Sec.  668.24 and 685.309(c), which describe 
the requirement to retain ``program records''--records of the 
determination of eligibility for Federal student financial assistance 
and the management of Federal funds provided to the school. Section 
668.24(e)(2) provides that the school must keep records of borrower 
eligibility and other records of its ``participation'' in the Direct 
Loan Program for three years after the last award year in which the 
student attended the school. In these proposed regulations, we maintain 
this time limit for recovery actions on approved borrower defense to 
repayment claims for loans first disbursed before July 1, 2019.
    We propose to extend that time limit to five years from the date of 
the Department's final determination on the borrower's defense to 
repayment for loans first disbursed after July 1, 2019. Although, as 
explained above, the Department does not view liabilities from borrower 
defense to repayment as fines, penalties, or forfeitures, a five-year 
limitation period is used in other contexts by the Federal government, 
such as in enforcement actions. See 28 U.S.C. 2462. Further, given that 
the Department does not have a basis for recovery against a school 
until a borrower defense to repayment has been approved, we believe 
that the five years should run from the final determination of a 
borrower's defense to repayment claim, instead of from the last award 
year the borrower attended school. Therefore, we propose in these 
regulations that for loans first disbursed on or after July 1, 2019, 
the Secretary will provide notice to the school of the defense to 
repayment application and will not initiate such a proceeding more than 
five years after the date of the final determination of the borrower's 
defense to repayment. We also propose to rescind the statute of 
limitations provisions of the 2016 final regulations.

Pre-Dispute Arbitration Agreements and Internal Dispute Processes 
(Sec. Sec.  668.41 and 685.304)

    Statute: Section 485(a) of the HEA identifies information that 
participating schools must provide to prospective and enrolled 
students. Sections 485(b) and (l) of the HEA establish counseling 
requirements for borrowers of Federal student loans. Section 454(a) of 
the HEA authorizes the Secretary to specify in regulation the 
requirements for school participation in the Direct Loan program.
    Current Regulations: Section 668.41 describes the information a 
school must report and disclose to prospective and enrolled students. 
Section 668.41(a) defines terms used in the regulation. Section 685.304 
describes the required entrance counseling that schools must provide to 
Federal Direct Loan borrowers prior to making the first disbursement of 
a Federal Direct student loan.
    Proposed Regulations: We propose a new Sec.  668.41(h), which would 
require schools that use pre-dispute arbitration agreements or class 
action waivers as a condition of enrollment to disclose that 
information in writing in an easily accessible format to students, 
prospective students, and the public. We propose to add definitions to 
paragraph (h)(2) for the terms ``class action,'' ``class action 
waiver,'' and ``pre-dispute arbitration agreement.'' We propose to 
define ``class action'' to mean 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. We propose to define ``class action 
waiver'' as any agreement or part of an agreement between a school and 
a student that relates to 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. We propose to define ``pre-dispute arbitration agreement'' as 
any agreement or part of an agreement between 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.
    We also propose to make other revisions to Sec.  668.41: revising 
paragraph (a) to amend the definition of ``undergraduate students'' to 
specify that such students are those enrolled in a program ``at or'' 
below the baccalaureate ``level,'' and revising paragraph (c) to add 
cross-references to new Sec.  668.41(h).
    Proposed revisions to Sec.  685.304 would require schools that 
require borrowers to accept pre-dispute arbitration agreements or class 
action waivers as a condition of enrollment to (1) clearly, and in 
plain language, provide written explanation to the borrower of the 
nature and application of the pre-dispute arbitration agreement and/or 
class action waiver, and (2) provide to the borrower written 
information on the availability of the school's internal dispute 
resolution process.
    Reasons: Current regulations do not address the use of pre-dispute 
arbitration agreements or class action waivers in enrollment agreements 
between schools and students or in other documents that must be signed 
by the student as a condition of enrollment.
    In 2016, the Department issued regulations that prohibited a school 
participating in the Direct Loan Program from enforcing class action 
waivers or pre-dispute arbitration agreements against borrowers with 
Direct Loans for claims that may form the basis of a borrower defense 
to repayment claim. The 2016 final regulations required participating 
schools to ``forgo reliance on any pre-dispute agreement with a student 
that waives the student's right

[[Page 37265]]

to participate in a class action against the school related to a 
borrower defense claim.'' 81 FR at 75927, 76088. However, the 2016 
regulations did permit a borrower to enter into a voluntary post-
dispute arbitration agreement with a school to arbitrate a borrower 
defense claim. For these voluntary post-dispute arbitrations, the 
Department required institutions to submit copies of the arbitral 
filings, responses, awards, and certain other documents to the 
Secretary within 60 days of the filing or receipt by the school, as 
applicable. The Department also required schools to submit certain 
judicial records of lawsuits filed as to claims related to borrower 
defense to repayment.
    Since issuance of the 2016 final regulations and subsequent delay 
of their effective date, schools have been allowed to continue 
enforcing pre-dispute arbitration agreements, and the Department has 
heard from students, advocates representing students, and the public 
about this practice. Many of these groups told the Department that the 
implications of class-action waivers or pre-dispute arbitration 
agreements can be unclear to students when they enroll at a school. 
These groups urged the Department to take steps to provide increased 
protection for student loan borrowers. Other negotiators argued that 
students are and can be well-served by the arbitration process, which 
they contend can be a more efficient, timely, and cost-effective option 
for dispute resolution.
    The Department is aware of court decisions holding that 
prohibitions on pre-dispute arbitration agreements and class action 
waivers violate the Federal Arbitration Act (FAA). The FAA 
``establishes a liberal federal policy favoring arbitration 
agreements'' that applies ``unless the FAA's mandate has been 
overridden by a contrary congressional command.'' CompuCredit Corp. v. 
Greenwood, 565 U.S. 95, 98 (2012). This policy protects the right of 
parties to set dispute resolution procedures by contract.
    In the 2016 regulations, the Department took the position that the 
HEA gives the Department broad authority to impose conditions on 
schools that wish to participate in a Federal benefit program and that 
regulation of the use of pre-dispute arbitration agreements and class 
action waivers was necessary to ``protect the interests of the United 
States and promote the purposes'' of the Direct Loan Program under 
section 454(a)(6) of the HEA, 20 U.S.C. 1087d(a)(6). We recognize, as 
explained in the preamble to the 2016 final regulations, that pre-
dispute arbitration agreements and class action waivers may, in some 
circumstances, not be well understood by consumers or facilitate the 
Department's awareness of potential issues faced by students at a 
school. However, our reweighing of the issue and subsequent legal 
developments have led us to believe that the Department should take a 
position more in line with the strong Federal policy favoring 
arbitration.
    We believe that arbitration offers a number of potential advantages 
in this context. Arbitration may, for example, 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. It 
may also allow an institution to more quickly identify and stop bad 
practices to ensure that other students are not harmed. It may also 
allow borrowers to obtain greater relief than they would in a consumer 
class action case where attorneys often benefit most. And it may reduce 
the expense of litigation that a university would otherwise pass on to 
students in the form of higher tuition and fees. Arbitration also eases 
burdens on the overtaxed U.S. court system.
    Our reexamination of the legal landscape also weighs in favor of 
the Department's proposal not to disrupt pre-dispute arbitration 
agreements or class-action waivers. In particular, the U.S. Supreme 
Court recently held that the FAA governs, unless Congress ``manifests a 
clear intention'' to displace it, and that arbitration agreements 
``must be enforced as written.'' Epic Systems Corp. v. Lewis, 584 
U.S.--, 2018 WL 2292444 at 17 (May 21, 2018). Thus, in Epic Systems 
Corp v. Lewis, the Court declined to afford deference to the National 
Labor Relations Board's reading of the National Labor Relations Act 
(NRLA) to trump FAA policy--even though an agency's interpretation of 
its own statute normally receives deference. Id. Nothing in the NLRA 
manifested Congress's clear intention to displace the FAA, and the FAA 
accordingly controlled.
    Epic Systems is consistent with the Supreme Court's earlier 
decision holding that a prohibition on class arbitration waivers in 
consumer contracts violates the FAA, AT&T Mobility LLC v. Concepcion, 
563 U.S. 333, 347-51 (2011). We believe that the Supreme Court's recent 
reaffirmation of the Federal policy in favor of arbitration may warrant 
a different approach to these regulations.
    That belief is further supported by recent congressional action. 
Specifically, Congress passed, and the President signed, a joint 
resolution disapproving a final rule published by the Bureau of 
Consumer Financial Protection (BCFP) that would have regulated pre-
dispute arbitration agreements in contracts for specified consumer 
financial products and services. That proposed rule was informed by the 
same extensive study conducted by the BCFP on the impact of such 
agreements that the Department relied on in its rationale for the pre-
dispute arbitration and class action waiver provisions in the 2016 
final regulations. In light of Congress' clear action, the Department 
believes a change in its position to align with the strong Federal 
policy in favor of arbitration is appropriate.
    The Department thus proposes to revise its treatment of pre-dispute 
arbitration agreements and class action waivers. It is not currently 
proposing to ban such agreements or waivers. And given the burden to 
the Department of reviewing such records, the Department is also not 
proposing that institutions be required to report information about 
arbitration awards or judicial proceedings to the Secretary. However, 
the Department acknowledges negotiators' concerns that borrowers and 
students may not understand the implications of arbitration agreements 
and class action waivers that may be included in their agreements with 
the school.
    The Department agrees that it is important that students understand 
what a pre-dispute arbitration agreement or class action waiver means, 
so that students can elect to enroll at an institution that does not 
include such provisions if the student so desires. Also, it is 
important for a student who attends an institution that requires 
arbitration to know how to access and utilize arbitration, thus the 
requirement that schools relying upon mandatory arbitration provide 
plain language instruction on both the meaning of this restriction and 
the ways a student can access it. Thus, the Department is proposing 
regulatory changes to promote greater transparency by schools that 
require students to enter into such agreements as a condition of 
enrollment, to allow borrowers the opportunity to make an informed 
choice as to whether to enroll in such schools.
    During the negotiated rulemaking sessions, the Department proposed 
including in the regulations a requirement that schools including pre-
dispute arbitration agreements or class action waivers in their 
enrollment agreements clearly disclose that information to prospective 
and continuing students, and educate borrowers during loan entrance

[[Page 37266]]

counseling about pre-dispute arbitration agreements, class action 
waivers, and the schools' internal dispute processes. Negotiators 
expressed two distinct points of view about the value of arbitration: 
Some believed that an internal dispute resolution process or 
arbitration proceeding serves the best interests of students, schools, 
and taxpayers. They noted that the Department, as well as accreditors, 
direct students with complaints to first attempt to resolve those 
complaints with the school. And some of those negotiators also asserted 
that arbitration can be quicker and less expensive than a court 
proceeding, provide meaningful relief to the student at the school's 
(rather than the Federal taxpayers') expense, and allow schools to 
resolve issues with students outside of the courts. In contrast, other 
negotiators expressed concerns that requiring students to use an 
internal dispute resolution process or arbitration, or prohibiting 
students from joining class action lawsuits, was more likely to 
suppress students' meritorious claims against their schools.
    Negotiators also differed as to the benefits of increased 
transparency about such agreements. Some negotiators supported the 
Department's proposal, asserting that it would enable prospective and 
continuing students to make an informed choice before taking out a 
Federal student loan to enroll or continue enrollment at a school that 
required these agreements. They also noted that, if these processes are 
beneficial to students, as asserted by some schools, this would be an 
additional reason for highlighting them in the enrollment and student 
loan application processes. One negotiator expressed concern that the 
Department's initial proposed language was too broad and could apply to 
arbitration agreements unrelated to the school's provision of 
educational services, such as arbitration agreements relating to the 
use of campus parking facilities or other student services.
    After hearing from the negotiators, and for the foregoing reasons, 
the Department has concluded that it is better to require schools to 
disclose the existence of pre-dispute arbitration agreements and class 
action waivers, rather than, as was done in 2016, outright ban these 
practices. We acknowledge one negotiator's concern about the 
Department's initial proposed language and have altered the proposed 
definition of ``pre-dispute arbitration agreement'' to make clear that 
the requirement applies only to agreements requiring arbitration of any 
future disputes between the parties relating to the making of a Direct 
Loan or the provision of educational services for which the student 
received title IV funding. The Department believes that it would be 
burdensome to schools and the Department to require submission of 
arbitration documentation (which also may contain confidential 
information) and are not proposing to include this requirement here. We 
therefore propose to rescind our 2016 final regulations that banned 
pre-dispute arbitration agreements and class action waivers, as well as 
the requirement that schools using arbitration submit specific 
documentation to the Department.

Closed School Discharges (Sec. Sec.  674.33, 682.402, and 685.214)

    Statute: Sections 437(c) and 464(g)(1) of the HEA provide for the 
discharge of a borrower's liability to repay a FFEL Loan or a Perkins 
Loan if the student is unable to complete the program in which the 
student was enrolled due to the closure of the school. The same 
discharge is available to Direct Loan borrowers under section 455(a) of 
the HEA.
    Current Regulations: Sections 674.33(g), 682.402(d), and 685.214 
describe the qualifications and procedures in the Perkins, FFEL, and 
Direct Loan Programs for a borrower to receive a closed school 
discharge. Under Sec. Sec.  674.33(g)(4), 682.402(d)(3), and 
685.214(c), a Perkins, FFEL, or Direct Loan borrower, respectively, 
must submit a written request and supporting sworn statement, under 
penalty of perjury, to apply for a closed school discharge. Sections 
674.33(g)(4)(i)(B), 682.402(d), and 685.214 provide that, to qualify 
for a closed school discharge a student must have been enrolled in the 
school at the time it closed or must have withdrawn from the school not 
more than 120 days before the school closed. The regulations also 
provide that the Secretary may extend the 120-day window under 
exceptional circumstances. Sections 674.33(g)(4)(i)(C), 
682.402(d)(3)(ii)(C), and 685.214(c)(1)(i)(C) provide that a borrower 
may qualify for a closed school discharge if the borrower did not 
complete, and is not in the process of completing, the program of study 
through a teach-out at another school.
    Proposed Regulations: Proposed revisions to Sec. Sec.  
674.33(g)(4), 682.402(d)(3) and (d)(6)(ii)(G) and (H), and 685.214(c) 
would replace the requirement that, to apply for a closed school loan 
discharge, the borrower submit a sworn statement with a requirement 
that the borrower submit a completed application signed under penalty 
of perjury.
    Proposed revisions to Sec. Sec.  674.33(g), 682.402(d), and 
685.214(c) would extend the window for a borrower to qualify for a 
closed school discharge based on withdrawal from a closed school 
without completion of a program from 120 days before the school closed 
to 180 days, and would modify some of the examples of ``exceptional 
circumstances'' under which the Secretary may extend the proposed 180-
day period.
    Proposed Sec. Sec.  674.33(g)(4)(i)(D), 682.402(d)(3)(iii), and 
685.214(c)(1)(ii) would state that if a closing school provided an 
opportunity to a borrower to complete the program of study while the 
school was still open by allowing students to complete their program of 
study before shutting down through an orderly closure (referred to by 
accreditors as a teach-out) approved by the school's accrediting agency 
and, if applicable, the school's State authorizing agency, the borrower 
would not qualify for a closed school discharge.
    Proposed revisions to Sec.  682.402(d)(6)(ii)(F) would require a 
guaranty agency that denies a closed school discharge request to inform 
the borrower of the opportunity to request a review of the guaranty 
agency's decision by the Secretary and explain how the borrower may 
request that review. Proposed Sec.  682.402(d)(6)(ii)(J) would describe 
the responsibilities of the guaranty agency and the Secretary if the 
borrower requests a review.
    Reasons:

Application Process

    The current regulations refer to a borrower submitting a sworn 
statement made under penalty of perjury, but borrowers now apply for 
closed school discharges by filing a Federal closed school discharge 
application. This application includes several certifications that the 
borrower must make under penalty of perjury. The closed school 
discharge application takes the place of the sworn statement that was 
formerly required, and several of our proposed revisions to the 
regulations reflect that change.
    In the 2016 regulations, the Department included provisions that 
provided automatic closed school discharges for borrowers who have not 
re-enrolled in a Title IV-eligible institution within three years of 
their schools' closures. See, e.g., 81 FR at 76038.
    During the 2017-2018 negotiations, some negotiators proposed that 
the Department also provide for an automatic closed school discharge in 
certain circumstances. The negotiators

[[Page 37267]]

proposed that a borrower who attended a closed school and who did not 
re-enroll within one year, or, alternatively, three years, of the 
school closing be granted a closed school discharge without being 
required to submit an application.
    In these regulations, we are not proposing an automatic closed 
school discharge. Under existing Sec. Sec.  674.33(g)(3)(ii), 
682.402(d)(8), and 685.214(c)(2), the Department may grant a closed 
school discharge without an application if the Secretary determines, 
based on information in the Secretary's (or, in the case of a FFEL 
loan, the guaranty agency's) possession that the borrower qualifies for 
the discharge. Thus, the Secretary already has the authority to grant a 
discharge without an application in appropriate cases at her 
discretion, and, therefore, we do not believe that it is necessary to 
establish in the proposed regulations a requirement that the Secretary 
grant automatic closed school discharges. In addition, because an 
institution (or the entity maintaining records from a closed school) 
might withhold official transcripts of borrowers who received a defense 
to repayment of closed school discharge, automatic discharges could 
have collateral consequences for students who did not opt-in.
    Furthermore, through these proposed regulations, the Department is 
encouraging schools that are closing to go through an orderly closure, 
which includes offering appropriate teach-outs to their students. Under 
the proposed regulations, students who decline to participate in an 
appropriate teach-out, when made available by the institution and 
approved by the accreditor (and, if applicable, State authorizing 
entities) are not eligible for a closed school discharge. An 
application will be useful, and in some cases necessary, for the 
Department to determine whether the student was provided with an 
appropriate opportunity to complete a teach-out. For these reasons, we 
are proposing to rescind the regulations concerning automatic closed 
school discharge that were part of the 2016 final regulations.

Extending the Window To Qualify for a Closed School Discharge From 120 
Days to 180 Days

    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 that a borrower may withdraw and 
still qualify for a closed school discharge. The Department has 
nevertheless long interpreted the statute to allow discharge for 
students who withdraw a short time before a school closure, recognizing 
that a precipitous closure may be preceded by degradation in academic 
quality or student services. In 2013, the Department expanded the 
window for eligibility for a closed school loan discharge from 90 to 
120 days, meaning that students who withdraw from the school within 120 
days of the school's closure are eligible for closed school loan 
discharge.
    In the 2016 final regulations, the Department determined that the 
120-day look-back period to qualify for closed school discharge in 
current regulations is sufficient. The Department noted that under 
current regulations in Sec.  685.214(c)(1)(B), it has the authority to 
extend the look-back period due to ``exceptional circumstances.'' At 
that time, we believed that this provision provided appropriate 
flexibility to the Department in cases where it may be necessary to 
extend the look-back period. See 81 FR at 76040.
    However, during the 2017-2018 negotiated rulemaking sessions, the 
Department proposed to extend the window for a borrower to qualify for 
a closed school discharge from 120 days to 150 days, and most 
negotiators supported that proposal. Some negotiators expressed 
concerns that extending the window to 150 days would significantly 
increase the number of borrowers who could qualify for a closed school 
discharge, even if those borrowers could have graduated before the 
school closed. They also noted that closed school discharges apply to 
locations of a school that are closed, not just to schools that have 
closed entirely, and many large universities have campuses at different 
locations that they may choose to close in a responsible, planned 
manner. One negotiator noted that schools often engage in short-term 
partnerships with private entities to provide instruction at specific 
off-campus locations. Even though such programs may be intended to last 
for only a short term to address a specific need in the community, 
students attending the school at these locations could qualify for 
closed school discharges. In the view of these negotiators, extending 
the window for eligibility for a closed school discharge could have the 
effect of discouraging innovation and creativity by schools involving 
other locations.
    Some negotiators expressed concern that a longer window could lead 
to strategic behavior on the part of borrowers. For example, if a 
borrower is aware that a school will be closing, the borrower could 
continue to attend the school and take out more loans, with the 
intention of getting the loans discharged once the school closes. These 
borrowers may be unaware that the institution might withhold official 
transcripts from students who receive closed school discharges. Since a 
longer window under which a borrower could qualify for a closed school 
discharge would also increase the opportunity for a borrower to 
complete the program in a school that is planning to close, these 
negotiators argued that a borrower should not qualify for a closed 
school discharge if the borrower could have completed the program 
before the school closure date.
    Other negotiators did not agree that borrowers should be ineligible 
for a closed school discharge if they could have completed the program 
at the school prior to its closure. They pointed out that schools that 
close precipitously may show symptoms of failing months before the 
actual closure date. These negotiators stated that they have seen 
evidence of degradation in their interactions with such schools as 
teachers and administrative staff members leave and the quality of 
services provided by the school deteriorates. In the view of these 
negotiators, borrowers at such schools should qualify for a closed 
school discharge, even if they could have stayed at the failing school 
and completed their program before the school officially closed its 
doors.
    Some of these negotiators proposed extending the window for a 
closed school discharge to a year, since, in their view, a school that 
closes may have problems well in advance of the actual closure date. 
The negotiators pointed out that a school that only planned to open a 
location temporarily, or that engaged in a planned, responsible closure 
of a location, could stop accepting new students at the location, and 
commit to allowing the current students to complete their studies at 
the location before shutting down--in other words, conduct an orderly 
closure under an approved teach-out plan--to avoid a dramatic expansion 
of the borrowers entitled to closed-school discharge under this longer 
look-back period.
    Other negotiators objected strongly to the proposal to extend the 
window to a full year. They stated that this would put schools in the 
position of having to track every student who may have withdrawn or 
transferred during that one-year period until those students completed 
a program at another school, creating a ``quagmire'' for schools.

[[Page 37268]]

    Based on the feedback we received and the Department's recent 
experience with precipitous school closures, the Department is 
proposing to extend the period to 180 days--60 days longer than 
provided in the current regulations. We believe that 180 days makes the 
most sense because it takes into account the situation in which, as a 
result of the summer break during which time many institutions offer 
few or no classes, a student who withdraws one semester prior to a 
school's precipitous closure could have withdrawn as many as 180 days 
earlier.

Exceptional Circumstances

    The Department proposes clarifications and modifications to 
Sec. Sec.  674.33(g)(4)(i)(B), 682.402(d), and 685.214 that provide 
examples of ``exceptional circumstances'' under which the Secretary may 
extend the period of time to provide a closed school discharge. For 
example, we propose replacing the reference in the existing regulations 
to the ``loss of accreditation'' with language referring to 
``revocation or withdrawal by an accrediting agency of the school's 
institutional accreditation.''
    Generally, the negotiating committee approved of these changes. One 
negotiator proposed adding an additional exceptional circumstance: The 
school's discontinuation of the student's program of study. However, 
other negotiators noted that the closed school discharge is intended 
for closed school situations, not situations in which a school 
terminates an academic program. These negotiators believed that adding 
a reference to the discontinuation of a student's academic program in 
the ``extenuating circumstances'' provision would be inconsistent with 
the statutory intent of the closed school discharge. Because the closed 
school discharge regulations are intended to address the closure of an 
entire school or branch campus, as opposed to discontinuation of a 
specific program offered at such a location, we agree with these 
negotiators. Therefore, we have declined to include this additional 
exceptional circumstance in the proposed regulations.

Teach-Out Plans, Orderly Closures and Transfer of Credits

    Under these proposed regulations, we are proposing that students 
who are provided an opportunity to complete their program through a 
teach-out plan or an orderly closure approved by the school's 
accreditor and, if applicable, the school's State authorizing agency 
would not have the right to receive a closed school discharge as long 
as the school upheld the conditions of the teach-out plan or orderly 
closure. We believe that closing schools should be encouraged to offer 
accreditor-approved and, if applicable, State authorizer-approved 
teach-out plans and orderly closures to allow students the reasonable 
opportunity to complete the academic programs, either at another 
location after the school has closed, or by continuing to offer classes 
to students until they have completed their program of study before the 
school officially closes.
    One negotiator noted that while closing schools may conduct orderly 
closures or offer teach-out plans, a borrower can choose not to 
participate in an orderly closure or a teach-out plan. This negotiator 
argued that a borrower should not qualify for a closed school discharge 
if he or she could have completed the program through an orderly 
closure or through a teach-out plan, but chose not to do so. In this 
negotiator's view, the law is written to encourage borrowers in closed 
school situations to complete their programs under the approved teach-
out plan or through an orderly closure and not to receive closed school 
discharges.
    We agree that borrowers who have a reasonable opportunity to 
complete their academic programs through an orderly closure or a teach-
out plan should not qualify for a closed school discharge, 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. In such cases, the closure of the school did not render the 
student unable to complete the program in which the student was 
enrolled. Borrowers who attend closing schools may be better served by 
completing their programs, either at the school or at another school 
through a teach-out plan, than by having their loans forgiven and being 
required to start their education over at another institution. Students 
should be encouraged to complete their academic program, not to have 
their loans discharged. And schools should be encouraged to provide 
their students with an opportunity to do so. It is for this reason that 
accreditors are required to review and approve a school's teach-out 
plan if the institution is at risk for closure.

Department Review of Guaranty Agency Denial of a Closed School 
Discharge Request

    In the Perkins Loan and Direct Loan Programs, closed school 
discharge determinations are made by the Department. The Department is 
the loan holder for all Direct Loans and becomes the loan holder for 
Perkins Loans held by a school that closes. In the FFEL Program, closed 
school discharge determinations are generally made by the guaranty 
agency. The current FFEL Program regulations do not specifically 
provide an opportunity for a review of the guaranty agency's 
determination of a borrower's eligibility for a closed school 
discharge. Proposed Sec.  682.402(d)(6)(ii)(F) would provide an 
opportunity for the borrower to receive Departmental review of closed 
school discharge claims which have been denied by the guaranty agency 
to provide a more complete review of the claims, comparable to that 
provided for false certification discharge claims.
    A negotiator pointed out that existing regulations allow the 
Department to review closed school discharge application denials for 
Direct Loan borrowers. This proposal is intended to establish parity 
between the FFEL and Direct Loan programs with regard to the review of 
closed school discharge applications.

Additional Closed School Discharge Proposals

    The negotiated rulemaking committee also discussed several 
additional proposed revisions to the closed school discharge 
regulations.
    Some negotiators proposed adding a provision specifying that a 
borrower who graduated prior to the school's closure could not qualify 
for a closed school discharge. The Department does not need to add such 
a provision. A borrower who graduates prior to the closure of a school 
is already ineligible for closed school discharge because the student 
has completed his or her program of study and received a credential.
    One negotiator proposed narrowing the scope of the closed school 
discharge by disqualifying a borrower from a closed school discharge if 
the borrower completed a ``comparable program'' of study at another 
school. Another negotiator suggested defining ``comparable program'' as 
meaning a program of equal or greater value or quality, based on 
academic outcomes, graduation rates, and default rates. Another 
negotiator recommended determining ``comparable program'' based on the 
Classification of Instructional Programs (CIP) code plus credential 
level. However, other negotiators expressed concerns that this proposal 
might push borrowers into programs in which they originally did not 
intend to enroll. They expressed concern that a student may be pushed 
into a program that is not really ``comparable'' to the borrower's 
original

[[Page 37269]]

program. A student may enroll in the program because there is nothing 
else comparable nearby, although the better option for the student 
would have been to apply for the closed school discharge. Other 
negotiators questioned the value of adding the ``comparable program'' 
language at all. One negotiator suggested that, since a borrower can 
transfer credits to another program, there is no need to explicitly use 
or define the term ``comparable program'' in the regulations.
    Given the uncertain statutory authority for, or effect of adding 
the ``comparable program'' language suggested by the negotiator, the 
Department declines to propose including such a provision in the 
regulations.

False Certification Discharges (Sec.  685.215)

    Statute: Section 437(c) of the HEA provides for the discharge of a 
borrower's liability to repay a FFEL Loan if the student's eligibility 
to borrow was falsely certified by the school. The false certification 
discharge provisions also apply to Direct Loans, under the parallel 
terms, conditions, and benefits provision in section 455(a) of the HEA. 
Section 484(d) of the HEA specifies the requirements that a student who 
does not have a high school diploma or a recognized equivalent of a 
high school diploma must meet to qualify for a title IV, HEA loan.
    Current Regulations: Section 685.215(a)(1)(i) provides that a 
Direct Loan borrower may qualify for a false certification discharge if 
the school certified the eligibility of a borrower who was admitted on 
the basis of the ability to benefit, but the borrower did not in fact 
meet the eligibility requirements in 34 CFR part 668 and section 484(d) 
of the HEA, as applicable. Section 685.215(c) and (d) describes the 
qualifications and procedures for receiving a false certification 
discharge.
    Proposed Regulations: The proposed changes to Sec.  
685.215(a)(1)(i) would eliminate the reference to ``ability to 
benefit'' and specify that a borrower qualifies for a false 
certification discharge if the borrower reported not having a high 
school diploma or its equivalent and did not satisfy the alternative to 
graduation from high school requirements in 34 CFR part 668 and section 
484(d) of the HEA. Thus, under proposed Sec.  685.215(a)(1)(i), if a 
school certified the eligibility of a borrower who is not a high school 
graduate (and does not meet the applicable alternative to high school 
graduation requirements) at the time the loan was disbursed, the 
borrower would qualify for a false certification discharge.
    Proposed Sec.  685.215(c) and (d) would update the procedures for 
applying for a false certification discharge. Proposed Sec.  
685.215(c)(1) would describe the requirements a borrower must meet to 
qualify for a discharge based on a false certification of high school 
graduation status. Proposed Sec.  685.215(c)(1)(ii) would specify that 
a borrower who was unable to obtain an official transcript or diploma 
from his or her high school and, in place of a high school transcript 
or diploma, submitted a written attestation that the borrower had a 
high school diploma, does not qualify for a false certification 
discharge if the borrower actually did not have a high school diploma. 
The attestation would have to be provided under penalty of perjury.
    Reasons:

Application Process

    Current Sec.  685.215(c) requires the borrower to submit a 
``written request and a sworn statement'' to apply for a false 
certification discharge. We propose replacing this language with a 
requirement that the borrower submit an application for discharge on 
``a form approved by the Secretary, signed under penalty of perjury,'' 
to bring the regulations up to date with the current process. Borrowers 
applying for false certification discharges now submit a Federal false 
certification discharge application. This application includes several 
certifications that the borrower must make under penalty of perjury. 
The false certification discharge application takes the place of the 
sworn statement that was formerly required.

False Certification of a Borrower Without a High School Diploma or 
Equivalent

    We propose removing the ``ability to benefit'' language from Sec.  
685.215(a)(1)(i) because there is no longer a statutory basis for 
certifying the eligibility of non-high school graduates based on an 
``ability to benefit.'' Section 484(d) of the HEA establishes different 
standards under which a non-high school graduate may qualify for title 
IV aid. We believe that it is preferable to refer to section 484(d) of 
the HEA by cross-reference, rather than to incorporate the statutory 
language in the regulations. Under this approach, the regulatory 
language will incorporate any current or future alternatives to the 
high school graduation requirements specified in section 484(d) of the 
HEA.
    Some of the non-Federal negotiators noted that a borrower may 
provide false information to the school the borrower is applying to 
attend regarding their high school graduation status. The negotiators 
asserted that, unless the school investigates the borrower's claim that 
he or she is a high school graduate--for instance by requesting 
transcripts, which are harder to falsify than a diploma--the school may 
unknowingly falsely certify the borrower's eligibility. One negotiator 
proposed adding language specifying that, for a borrower to qualify for 
a false certification discharge, the school must be unable to provide 
to the Department clear and convincing evidence that the student 
provided the school with evidence of their high school graduation 
status. The negotiator pointed out that in some instances--for example 
with homeschooled students--the school basically only has a 
representation from the student that the student is a high school 
graduate. Under this proposal, the borrower would have to demonstrate 
that the school knowingly certified the eligibility of the borrower 
even though the borrower did not meet the high school graduation 
requirements.
    There was strong disagreement between the negotiators over whether 
the school must ``knowingly'' falsely certify the high school 
graduation status of a borrower for the borrower to qualify for a false 
certification discharge. Some negotiators noted that it is the school's 
responsibility to determine the borrower's eligibility. If the school 
does not, and certifies eligibility anyway, the borrower's eligibility 
may have been falsely certified, and the borrower should qualify for 
the discharge. Other negotiators felt that a mistaken certification of 
eligibility should not qualify a borrower for a false certification 
discharge. One negotiator pointed out that, regardless of whether the 
school knew if the borrower was a high school graduate, if the school 
certified a non-high school graduate's eligibility, the borrower's 
eligibility would still have been falsely certified, and the borrower 
would still qualify for a false certification discharge. Other 
negotiators expressed concern with this proposal, noting that borrowers 
would have a difficult time proving that the school ``knowingly'' 
falsified the borrower's eligibility.
    Under current regulations, a school may be responsible for the 
repayment of funds related to a false certification discharge due to a 
school's ``negligent or willful false certification'' (34 CFR 
685.308(a)(2)). It would be inconsistent with these requirements to 
require that a school would have to ``knowingly'' falsely certify a 
borrower's eligibility for the borrower to qualify for a false 
certification discharge. However, the

[[Page 37270]]

Department believes that schools should be able to rely on an 
attestation from a borrower that the borrower earned a high school 
diploma in cases when the borrower is unable to obtain an official 
transcript or diploma from the high school. Therefore, we are proposing 
regulatory language that would provide that when a borrower provides an 
institution an attestation of their high school graduation status for 
purposes of admission to the institution, they may not subsequently 
qualify for a false certification discharge based on not having a high 
school diploma. Moreover, if the institution has confirmed with a State 
authority that the school was approved by that State to issue high 
school diplomas at the time of the borrower's graduation from that 
school, the institution must collect evidence that a student has a bona 
fide diploma from the school. The school has no additional obligation 
to collect transcripts or other information in order to certify the 
student.
    A negotiator noted that the current regulations specify that the 
borrower qualifies for a false certification discharge if the borrower 
did not have a high school diploma or recognized equivalent at the time 
the loan was originated. The negotiator pointed out that the loan can 
be originated but the funds might not be disbursed and suggested that 
the date of disbursement might be the appropriate date rather than the 
date of origination. In addition, a borrower could be a senior in high 
school at the time the loan was originated, with the expectation that 
the borrower will have graduated high school at the time of enrollment. 
While a loan can be originated months before a borrower enrolls in a 
school, it is not disbursed until the student is enrolled.
    The Department agrees that using disbursement date rather than 
origination date would be a more accurate indicator that a school 
falsely certified a borrower's high school graduation status, and has 
made that change in the proposed language.
    One negotiator suggested amending the regulations to specify that a 
borrower must have a ``valid high school diploma.'' The negotiator 
believed that this addition would protect schools from companies that 
create false diplomas for potential student loan borrowers. Although 
the 2016 final regulations did not use the phrase ``valid high school 
diploma,'' those regulations added language to 34 CFR 685.215 intended 
to state more explicitly that a school's certification of eligibility 
for a borrower who is not a high school graduate, and who does not meet 
the alternative to high school graduate requirements, is grounds for a 
false certification discharge. As explained in the preamble to the NPRM 
for the 2016 final regulations, the added language was meant to address 
the problem of schools encouraging students to obtain false high school 
diplomas to qualify for Direct Loans. See 81 FR 39377. Upon further 
review however, the Department believes that the existing language of 
34 CFR 685.215, with its proposed updates for changes in the 
Department's statutory authority as noted above, already covers such 
circumstances. The Department accordingly does not propose including 
such additional language in the regulations proposed in this NPRM, and 
proposes to rescind these provisions of the 2016 final regulations. A 
school still falsely certifies a borrower's eligibility if it is aware 
that a student does not have a high school diploma and encourages the 
student to obtain a false diploma. The addition of the word ``valid'' 
to the requirement that a borrower have a high school diploma would not 
have any meaningful effect, as an ``invalid'' high school diploma would 
not be a ``high school diploma'' for the purposes of this regulation.
    In the 2016 final regulations, the Department also added language 
to clarify a provision in existing 34 CFR 685.215 that a borrower may 
receive a false certification discharge of a Direct Loan if the school 
certified the eligibility of a student who, because of a physical or 
mental condition, age, criminal record, or other reason accepted by the 
Secretary, would not meet the requirements for employment in the 
student's State of residence in the occupation for which the training 
program for which the loan was provided was intended--or in other 
words, certified the student despite the fact that the student had a 
disqualifying status. 34 CFR 685.215(a)(1)(iii). Upon further review, 
however, the Department believes 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. We, therefore, 
propose to rescind this provision of the 2016 final regulations.
    Finally, in the 2016 final regulations, the Department added that 
the Department may consider evidence that a school had falsified the 
Satisfactory Academic Progress (SAP) of its students to determine 
whether to discharge a borrower's loan without an application from the 
borrower. 81 FR 76082 (text of 34 CFR 685.215(c)(8)). Existing 34 CFR 
685.215 already provides that the Department may discharge a borrower's 
Direct Loan by reason of false certification without an application. 
Evaluation of an institution's implementation of their SAP policy is 
already part of an FSA program review, so there is already a mechanism 
in place to identify inappropriate activities in implementing an 
institution's SAP policy. Therefore, the Department declines to include 
such a provision in the regulations proposed in this NPRM and proposes 
rescinding this provision of the 2016 final regulations.

Financial Responsibility (Sec.  668.171 General)

    Statute: Section 487(c)(1) of the HEA authorizes the Secretary to 
establish reasonable standards of financial responsibility. Section 
498(a) of the HEA provides that, for purposes of qualifying an 
institution to participate in the title IV, HEA programs, the Secretary 
must determine the legal authority of the institution to operate within 
a State, its accreditation status, and its administrative capability 
and financial responsibility.
    Section 498(c)(1) of the HEA authorizes the Secretary to establish 
ratios and other criteria for determining whether an institution has 
the financial responsibility required to (1) provide the services 
described in its official publications, (2) provide the administrative 
resources necessary to comply with title IV, HEA requirements, and (3) 
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 for programs administered by the 
Secretary.
    Current Regulations: The current regulations in Sec.  668.171(a) 
mirror the statutory requirements that to begin and to continue to 
participate in the title IV, HEA programs, an institution must 
demonstrate that it is financially responsible. The Secretary 
determines whether an institution is financially responsible based on 
its ability to provide the services described in its official 
publications, properly administer the title IV, HEA programs, and meet 
all of its financial obligations.
    The Secretary determines that a private non-profit or proprietary 
institution is financially responsible if it satisfies the ratio 
requirements and other criteria specified in the general standards 
under Sec.  668.171(b) and appendix A or B to subpart L of the General 
Provisions regulations. Under those standards, an institution:
    <bullet> Must have a composite score of at least 1.5, based on its 
Equity, Primary Reserve, and Net Income ratios;

[[Page 37271]]

    <bullet> Must have sufficient cash reserves to make required 
refunds;
    <bullet> Must be current in its debt payments. An institution is 
not current in its debt payment if it is in violation of any loan 
agreement or fails to make a payment for 120 days on a debt obligation 
and a creditor has filed suit to recover funds under that obligation; 
and
    <bullet> Must be meeting all of its financial obligations, 
including but not limited to refunds it is required to make under its 
refund policy or under Sec.  668.22, and repayments to the Secretary 
for debts and liabilities arising from the institution's participation 
in the title IV, HEA programs.
    Proposed Regulations: We propose to restructure Sec.  668.171, in 
part, by amending paragraph (b) and adding new paragraphs (c) and (d) 
that provide that an institution does not or may not be able to meet 
its financial or administrative obligations if it is subject to one or 
more of the following actions or events:
    Mandatory triggering events:
    <bullet> Liabilities from borrower defenses to repayment or final 
judgments or determinations. After the end of the fiscal year for which 
the Secretary has most recently calculated an institution's composite 
score, the institution incurs a liability arising from borrower defense 
to repayment discharges granted by the Secretary, or a final judgment 
or determination from an administrative or judicial action or 
proceeding initiated by a Federal or State entity and as a result of 
that liability, the institution's recalculated composite score is less 
than 1.0, as determined by the Secretary under proposed paragraph (e) 
of this section.
    <bullet> Withdrawal of owner's equity. 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, 
including by declaring a dividend (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 as a result of that 
withdrawal, the institution's recalculated composite score is less than 
1.0, as determined by the Secretary under proposed paragraph (e) of 
this section.
    <bullet> SEC and Exchange Actions for publicly traded institutions. 
The 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 on 
the institution's securities on any national securities exchange 
pursuant to section 12(k) of the Exchange Act or the national 
securities exchange on which the institution's securities are traded 
delists, either voluntarily or involuntarily, the institution's 
securities pursuant to the rules of the relevant national securities 
exchange.
    Discretionary triggering events:
    <bullet> Accrediting agency actions. The institution is issued a 
show-cause order that if not satisfied, would lead the accreditor to 
withdraw, revoke or suspend institutional accreditation.
    <bullet> Loan agreement violations. The institution violated a 
provision or requirement in a security or loan agreement with a 
creditor, and 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.
    <bullet> The institution is cited by a State licensing or 
authorizing agency for violating a State or agency requirement and 
notified that its licensure or authorization will be withdrawn or 
terminated if the institution does not take the steps necessary to come 
into compliance with those requirements.
    <bullet> 90/10 Revenue Requirement. For its most recently completed 
fiscal year, a proprietary institution did not derive at least 10 
percent of its revenue from sources other than title IV, HEA program 
funds, as provided under Sec.  668.28(c).
    <bullet> Cohort default rate (CDR). The institution's two most 
recent official cohort default rates are 30 percent or greater, as 
determined under 34 CFR part 668, subpart N, unless 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 
that challenge, request, or appeal remains pending, results in reducing 
below 30 percent the official cohort default rate for either or both 
years, or precludes the rates from either or both years from resulting 
in a loss of eligibility or provisional certification.
    Also, we propose to add a new paragraph (e) under which the 
Secretary would recalculate an institution's most recent composite 
score for a mandatory triggering event under proposed paragraph (c)(1) 
by recognizing as an expense the actual amount of the liability 
incurred by an institution or by accounting for the withdrawal of 
owner's equity. Specifically, the Secretary would use the audited 
financial statements from which the institution's most recent composite 
score was calculated and would account for that expense or withdrawal 
by:
    <bullet> For the actual liabilities incurred by a proprietary 
institution, (1) increasing expenses and decreasing adjusted equity by 
that amount for the primary reserve ratio, (2) decreasing modified 
equity by that amount for the equity ratio, and (3) decreasing income 
before taxes by that amount for the net income ratio.
    <bullet> For the withdrawal of owner's equity, (1) decreasing 
adjusted equity by the amount for the primary reserve ratio, and (2) 
decreasing modified equity by that amount for the equity ratio.
    <bullet> For the actual liabilities incurred by a non-profit 
institution, (1) increasing expenses and decreasing expendable net 
assets by that amount for the primary reserve ratio, (2) decreasing 
modified net assets by that amount for the equity ratio, and (3) 
decreasing change in net assets without donor restrictions by that 
amount for the net income ratio.
    In addition, we propose to add a new paragraph (f) under which an 
institution would be required to notify the Secretary no later than 45 
days after the end of its fiscal year if it did not satisfy the 90/10 
revenue requirement, and notify the Secretary no later than 10 days 
after any other mandatory or discretionary triggering event occurs. In 
that notice, or in response to a preliminary determination by the 
Secretary that the institution is not financially responsible based on 
one or more of those actions or events, the institution could:
    <bullet> Demonstrate that the reported withdrawal of owner's equity 
was used exclusively to meet tax liabilities of the institution or its 
owners for income derived from the institution;
    <bullet> Show that the mandatory or discretionary event has been 
resolved, or demonstrate that the institution has insurance that will 
cover all or part of the liabilities that arise from final judgments or 
determinations; or
    <bullet> Provide information about the conditions or circumstances 
that precipitated that triggering event that demonstrates that the 
action or event has not or will not have a material adverse effect on 
the institution.
    <bullet> Show that the creditor waived a violation of a loan 
agreement and if applicable, identify any conditions or changes to the 
loan agreement that the creditor imposed in exchange for granting the 
waiver.
    Finally, the Secretary would consider the information provided by 
the institution in determining whether to issue a final determination 
that the

[[Page 37272]]

institution is not financially responsible.
    Reasons: Under the current process, for the most part, the 
Department determines annually whether an institution is financially 
responsible based on its audited financial statements, which are 
submitted to the Department six to nine months after the end of the 
institution's fiscal year. Under these proposed regulations, we may 
determine at the time that certain actions or events occur that the 
institution is not financially responsible. We address the significance 
of an action or event that occurs after the close of an audited period 
(or, in other words, between audit cycles), to assess in a more timely 
manner whether the institution, regardless of its composite score, 
satisfies the statutory requirements that it is able to provide the 
services described in its publications and statements, to provide the 
administrative resources necessary to comply with title IV, HEA 
requirements, and to meet all of its financial obligations. In doing 
so, we propose to expand the range of events that could make an 
institution not financially responsible, from the provisions under 
Sec.  668.171(b)(3) relating to whether an institution is current in 
its debt payments, to other events that may pose a material adverse 
risk to the financial viability of the institution. In cases where the 
Department determines that an event poses a material adverse risk, this 
approach would enable us to address that risk contemporaneously by 
taking the steps necessary to protect the Federal interest.

Mandatory Triggering Events

    With regard to liabilities arising from defenses to repayment 
discharges adjudicated by the Secretary or an administrative or 
judicial action or proceeding initiated by a Federal or State entity, 
we would assess the risk by determining whether the payment of those 
liabilities would cause the institution's composite score to fall below 
1.0. As noted above, the actual amount of the liability would be 
treated as an expense and the Department would recalculate the 
institution's most recent composite score using that amount. Assuming 
that an institution's composite score is 1.0 or higher, if its 
recalculated composite score does not fall below 1.0, we would conclude 
that the institution has the resources to pay those liabilities and 
continue operations. In cases where the institution's recalculated 
score is less than 1.0, we would conclude that the payment of those 
liabilities would have a material adverse effect on its operations that 
warrants additional oversight and financial protection.
    During negotiated rulemaking, several non-Federal negotiators 
argued that including liabilities arising from judicial or 
administrative actions initiated by a Federal or State entity may cause 
small or not material changes from an accounting perspective, and 
reporting those liabilities to the Department would be burdensome and 
of little value. They suggested that an institution should report only 
those liabilities that are material, as determined by the institution 
or its accountant. While we agree that reporting all liabilities from 
actions resulting in final judgments or determinations may not be 
necessary, we are concerned that the subjective nature of materiality 
evaluations could result in an institution not reporting an otherwise 
significant action. We believe that a better, more objective, approach 
would be to evaluate the impact of the liability on the institution's 
composite score, regardless of the amount or materiality of the 
liability.
    The withdrawal of owner's equity is currently an event that an 
institution reports to the Department under the provisions of the zone 
alternative in Sec.  668.175(d). An institution participates under the 
zone alternative if its composite score is between 1.0 and 1.5. We 
proposed at negotiated rulemaking to relocate this provision to the 
general standards of financial responsibility under Sec.  668.171. 
Under those general standards, this provision would still be a 
reportable event, but only in cases where an institution's financial 
condition is already precarious and any withdrawal of funds from the 
institution would further jeopardize its ability to continue as a going 
concern. In this NPRM, we propose to account for the withdrawal of 
owner's equity by decreasing adjusted equity and modified equity in 
recalculating the institution's composite score. Doing so would enable 
the Department to quantify objectively the impact of the withdrawal.
    For publicly-traded institutions, we believe that the SEC or stock 
exchange-related issues listed in the proposed regulations are actions 
which would jeopardize the institution's ability to meet its financial 
obligations or continue as a going concern.
    When the SEC suspends trading on the institution's stock, the SEC 
does not make this warning public or announce that it is considering a 
suspension until it determines that the suspension is required to 
protect investors and the public interest.\4\ In that event, the SEC 
posts the suspension and the grounds for the suspension on its website. 
Therefore, under the reporting requirements in proposed Sec.  
668.171(e), the institution would be required to notify the Department 
within 10 days of receiving notification from the SEC that the 
institution is being suspended. The SEC may decide to, for example, 
suspend trading on the institution's stock based on (1) a lack of 
current, accurate, or adequate information about the institution, for 
example when the institution is not current in filing its periodic 
reports; (2) questions about the accuracy of publicly available 
information, including information in institutional press releases and 
reports and information about the institution's current operational 
status, financial condition, or business transactions; or (3) questions 
about trading in the stock, including trading by insiders, potential 
market manipulation, and the ability to clear and settle transactions 
in the stock.\5\ Because an action by the SEC to suspend trading in, or 
delist, an institution's stock directly impairs an institution's 
ability to raise funds--creditors may call in loans or the 
institution's credit rating may be downgraded--the Department needs to 
be informed of those actions in a timely manner.
---------------------------------------------------------------------------

    \4\ See SEC Investor Bulletin: Trading Suspensions, available at 
www.sec.gov/answers/tradingsuspension.htm.
    \5\ Id.
---------------------------------------------------------------------------

    With regard to compliance with stock exchange requirements, the 
major exchanges typically require institutions whose stock is listed to 
satisfy certain minimum requirements such as stock price, number of 
shareholders, and the level of shareholder's equity.\6\ Among other 
things, if a stock falls below the minimum price, the institution fails 
to provide timely reports of its performance and operations in its Form 
10-Q or 10-K filings with the SEC, or other requirements are not met, 
the exchange may delist the institution's stock. Delisting is generally 
regarded as the first step toward a Chapter 11 bankruptcy. However, 
before the exchange initiates a process to delist the stock, the 
exchange notifies the institution and may, as applicable, give the 
institution several days to respond

[[Page 37273]]

with a plan of the actions it intends to take to come into compliance 
with exchange requirements.
---------------------------------------------------------------------------

    \6\ See, e.g., New York Stock Exchange Rule 801.00:
    Suspension and Delisting: Securities admitted to the list may be 
suspended from dealings or removed from the list at any time that a 
company falls below certain quantitative and qualitative continued 
listing criteria. When a company falls below any criterion, the 
Exchange will review the appropriateness of continued listing.
    Available at nysemanual.nyse.com/lcm/sections/lcmsections/chp_1_9/default.asp.
---------------------------------------------------------------------------

    With respect to an institution's failure to timely file a required 
annual or quarterly report with the SEC, we noted previously in this 
discussion that the late filing of, or failure to file, a required SEC 
report may precipitate an adverse action by the SEC or a stock 
exchange. Or, a late filing may limit the institution's ability to 
conduct certain types of registered securities offerings. In addition, 
capital markets tend to react negatively in response to late filings. 
All told, the consequences of late SEC filing may impact the 
institution's capital position and its financial responsibility for 
title IV purposes.
    With regard to the proposed provision regarding an institution that 
voluntarily delists its stock; we note that this action would typically 
relate to a change in ownership that would be subject to Department 
review. However, even if that action does not trigger a change in 
ownership, we believe the shift from equity to private financing is a 
significant event warranting review.

Discretionary Triggering Events

    During negotiated rulemaking, the Department proposed several 
actions or events, all of which were discretionary, that would likely 
have a material adverse effect on an institution's financial condition. 
Some of the non-Federal negotiators noted that the 2016 final 
regulations contained a wider range of triggering events, some 
mandatory and some discretionary, and urged the Department to adopt 
that framework and those triggering events in this NPRM to better 
protect taxpayers. As previously discussed, we are proposing in this 
NPRM only mandatory triggering events whose consequences are known and 
quantified (e.g., the actual liabilities incurred from defense to 
repayment discharge) 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 
warrant financial protection.
    This approach differs from that in the 2016 final regulations. 
Those regulations included as mandatory triggering events (1) events 
whose consequences were speculative (e.g., estimating the 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., high drop-out rates and 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 test (e.g., a 
financial stress test) whose future development and application was 
unspecified. Upon further review, we believe these triggering events 
are inappropriate and would have unnecessarily required institutions to 
provide a letter of credit or other financial protection. But we 
propose to include some of the 2016 triggers as discretionary events- 
certain accrediting agency actions, violations of loan agreements, 
State licensure and authorization violations, and high cohort default 
rates. We are also proposing to rescind the mandatory triggering event 
provisions of the 2016 final regulations.
    When an accrediting agency issues an institutional accreditation 
show-cause order, such action may call into question the institution's 
continued ability to operate as an accredited institution. As a 
discretionary trigger, we would work with the institution and the 
accreditor to determine whether that action has or will have a material 
adverse effect on the institution's condition or its ability to 
continue as a going concern before determining whether the institution 
is financially responsible.
    The Department also intends to modify the provisions currently in 
Sec.  668.171(b)(3) to address violations of loan agreements as a 
discretionary triggering event. That section currently provides that an 
institution is not current in debt payments if a loan agreement 
violation is noted in its audited financial statements or it is more 
than 120 days delinquent in making a payment and a creditor has filed 
suit. The Department intends to replace that rule with a discretionary 
trigger that looks more holistically at the nature and outcome of loan 
violations. Doing so removes the constraints of relying on disclosures 
in annual audits or the filing of a lawsuit, and is more in keeping 
with our goal of assessing potential financial issues 
contemporaneously. As noted in the proposed provision, a violation of a 
loan agreement can precipitate a number of consequences that may have a 
material adverse effect on an institution's ability to meet its 
financial obligations. For example, the creditor may decide to waive 
the violation entirely or waive it in exchange for other concessions. 
In any case, as a discretionary trigger, the Department would work with 
the institution to determine whether the violation has or could have 
material financial consequences before determining whether the 
institution is financially responsible.
    The Department similarly plans a more targeted approach to 
violations of State authorization or licensing requirements. Unlike the 
2016 final regulations where an institution would report to the 
Department any violation of a State authorization or licensing 
requirement, we propose to consider only those violations that, if 
unresolved, could lead to termination of the institution's ability to 
continue to provide educational programs or otherwise continue to 
operate in the State. Therefore, we propose to rescind these mandatory 
reporting provisions of the 2016 final regulations.
    The Department also proposes to treat the 90/10 revenue requirement 
as a discretionary triggering event. A proprietary institution that 
fails the requirement for one fiscal year is in danger of losing its 
eligibility to participate in the title IV, HEA programs if it fails 
again in the subsequent fiscal year. Along the same lines, an 
institution whose cohort default rate is 30% or more for two 
consecutive years is in danger of losing its title IV loan eligibility 
if its default rate is 30% or more in the subsequent year. In either 
case, that risk of lost eligibility may require the Department to seek 
financial protection from the institution. While the 2016 final 
regulations would have required an affected institution to provide a 
letter of credit or other financial protection immediately, the 
Department believes it is more appropriate for the Department to review 
the institution's efforts to remedy or mitigate the reasons for its 
failure, to evaluate the institution's potential and plan to teach-out 
students if closure appears inevitable, and to assess the extent to 
which there were anomalous or mitigating circumstances leading to its 
failure, before determining whether the institution is financially 
responsible.
    In response to requests by the non-Federal negotiators that a 
process be created to allow an institution to provide information about 
an action or event to the Department before the Department issues a 
final determination, we suggested such a process during the 
negotiations and propose that same process in these regulations. Under 
that process, an institution has the opportunity to provide information 
for reportable events twice--once when it notifies the Department that 
the event occurred and then, if it has additional information, whenever 
the Department makes a preliminary determination that the event would 
have a material adverse impact on the institution. For the

[[Page 37274]]

reporting requirements in proposed paragraph (f), we adopt the 
timeframe currently in Sec.  668.28 for notifying the Department of 90/
10 failures. For all other events addressed in these proposed 
regulations, we believe 10 days provides sufficient time for 
institutions to report those events and for the Department to take 
action, if needed.

Financial Ratios (Sec.  668.172)

    Statute: Section 498(c)(1) of the HEA authorizes the Secretary to 
establish ratios and other criteria for determining whether an 
institution has the financial responsibility required to (1) provide 
the services described in its official publications; (2) provide the 
administrative resources necessary to comply with title IV, HEA 
requirements; and (3) 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 for programs 
administered by the Secretary.
    Current Regulations: Section 668.172 defines the Primary Reserve, 
Equity, and Net Income ratios that comprise the composite score and 
Appendices A and B illustrate how the composite score is calculated 
using sample financial statements from proprietary and private non-
profit institutions.
    Proposed Changes: The Secretary proposes to calculate a composite 
score in accordance with new standards issued by the Financial 
Standards Accounting Board (FASB) in Accounting Standards Update (ASU) 
2016-02, ASC 842 (Leases). However, the Department will need to update 
the composite score calculation to take into account this dramatic 
change in FASB standards, which it cannot do immediately. As a result, 
for 6 years following the implementation of the new FASB standards, or 
following the publication of new composite score formula regulations to 
take into account the FASB change, whichever is shorter, institutions 
that fail the composite score based on the new FASB standards, but 
would have had a passing composite score under the former FASB 
standards (with regard to leases), may request the calculation of an 
alternative composite score based on additional data provided by the 
institution to the Department to enable it to calculate an alternative 
composite score excluding operating leases. The Department will use the 
higher of those two composite scores to determine whether the 
institution is financially responsible.
    Reasons: The new FASB reporting requirements could negatively 
impact an institution's composite score even though the underlying 
financial condition of the institution has not changed. Based on 
changes FASB announced in February, 2016 in ASU-2016-2, operating 
leases longer than 12 months will be recorded under GAAP as separate 
liabilities and right-of-use assets. Consequently, adding operating 
leases to the Balance Sheet (for proprietary institutions) or to the 
Statement of Financial Position (for non-profit institutions) could 
decrease the Equity Ratio if the right-of-use assets in the Modified 
Assets category significantly increased compared to Modified Equity or 
Modified Net Assets, resulting in a lower composite score. With that in 
mind, some of the non-Federal negotiators argued that, due to the long-
term nature of some leases, the Department should allow an institution 
some time to change its business model regarding leases before applying 
the new FASB standards to its existing leases for purposes of 
calculating the composite score. We agreed, and in the final session of 
negotiated rulemaking proposed a six year transition period during 
which existing leases would be treated under the previous FASB 
guidance.
    However, upon further review, we believe that a transition period 
would only partially defer and not adequately address the consequences 
of the accounting changes and how those changes are reflected in the 
composite score. While we recognize that schools must adhere to the new 
FASB reporting requirements, which will be reflected in their audited 
statements, we believe that including assets and liabilities associated 
with those transactions in the composite score, where no lease-related 
assets or liabilities are currently included, could encourage some 
institutions to make changes in their business model that have negative 
consequences for students. To mitigate a negative impact of the new 
lease reporting requirements on their composite score, institutions may 
enter into shorter term but higher cost leases instead of continuing in 
or entering into longer term leases which typically have better terms, 
such as lower monthly lease rates and more cost-effective lease 
improvements. Shorter, more expensive leases may raise costs for 
institutions, and therefore students, and could result in more frequent 
campus relocations or closures that may interfere with students' 
ability to complete their programs and raise the risk to taxpayers of 
increased numbers of closed school student loan discharges. We believe 
that it is undesirable to put an institution in a position where it 
could incur increased costs from short-term leases or where the 
institution would have to relocate or close because it could not 
negotiate or renew a favorable lease agreement without jeopardizing its 
composite score. In some instances, even if the school is able to 
relocate to another comparable facility, the State authorizing body or 
the accreditor may not approve that relocation if the new facility is 
more than a certain geographic distance or travel time away from the 
original campus, if it is on a different public transportation line or 
if it lacks comparable access via public transportation. In such a 
case, the campus move is treated as a campus closure, which requires 
the institution to either teach-out the closing campus or suffer the 
financial losses associated with closed school loan discharges. The 
higher costs of short-term leases or relocation costs, or both, would 
likely be passed on to students. Unfortunately, the composite score 
currently has no mechanism for automatic updates in the event of 
changes in accounting standards.
    For these reasons, and because the impact of the upcoming FASB 
lease requirements is unknown, we believe it is necessary to update the 
composite score regulations to take into account this and other FASB 
changes. Future negotiated rulemaking will be required to update the 
composite score regulations, so until such time as revised composite 
score regulations are established, or for six years after 
implementation of the new FASB standards (for leases), the Department 
will allow institutions the option to continue calculating the 
composite score under current GAAP standards. Therefore, the Department 
proposes an approach under which we will calculate a composite score 
for all institutions under the new FASB requirements when they take 
effect since all audited financial statements will be based on the new 
requirements, but we will allow institutions to provide additional data 
to support the calculation of an alternative composite score under 
current GAAP standards (GAAP prior ASU-2016-2 implementation), and in 
such a case, to use the higher of the two composite scores to evaluate 
financial responsibility, for the next six years or until revised 
composite score regulations are promulgated, which ever period is 
shortest.

Appendix A to Subpart L, Part 668

    Statute: Section 498(c)(1) of the HEA authorizes the Secretary to 
establish ratios and other criteria for determining whether an 
institution has the financial responsibility required to (1) provide

[[Page 37275]]

the services described in its official publications, (2) provide the 
administrative resources necessary to comply with title IV, HEA 
requirements, and (3) 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 for programs 
administered by the Secretary.
    Current Regulations: As provided under Sec.  668.172(a), appendix A 
to subpart L contains three sections that illustrate how the composite 
score is calculated for a proprietary institution. Section 1 sets forth 
the ratios and defines the ratio terms. Section 2 provides a model 
Balance Sheet and Statement of Income and Retained Earnings with 
numbered line entries and shows the numbered entries that are used to 
calculate each of the financial ratios. Section 3 takes the calculated 
ratios from Section 2 and applies strength factors and weights 
associated with each ratio to derive a blended, or composite, score 
that the Secretary uses to determine, in part, whether the institution 
is financially responsible.
    Proposed Changes: The Secretary proposes revising these three 
sections by amending the first section to reflect changes in accounting 
standards and to make other clarifying changes that the Secretary 
believes will improve compliance with the financial responsibility 
standards. We propose to add a new section 2 that would provide a 
Supplemental Schedule which schools would be required to provide as 
part of their annual financial statement audit submission. Proposed 
section 2 would be titled, ``Section 2: Financial Responsibility 
Supplemental Schedule Requirement and Example.'' Proposed Section 3 
would combine sections 2 and 3 from the current regulations, and would 
be titled, ``Example Financial Statements and Composite Score 
Calculation.''

Appendix A, Section 1

    For a proprietary institution, the Secretary proposes to revise the 
numerator, Adjusted Equity, and the denominator, Total Expenses, of the 
Primary Reserve Ratio.
    Changes to Adjusted Equity:
    As currently defined, Adjusted Equity includes ``post-employment 
and retirement liabilities'' and ``all debt obtained for long-term 
purposes.'' The Secretary proposes changing these terms to ``post-
employment and defined benefit pension liabilities'' and ``all debt 
obtained for long-term purposes, not to exceed property, plant and 
equipment (PP&E),'' respectively. In addition, the Secretary proposes 
to clarify the term ``unsecured related party receivables'' by 
referencing the related entity disclosure requirements under Sec.  
668.23(d). With regard to determining the value of PP&E, which is 
currently the amount net of accumulated depreciation, the Secretary 
proposes to include construction in progress and lease right-of-use 
assets.
    As noted above, we propose to amend the current definition of 
``debt obtained for long-term purposes'', which currently includes the 
short-term portion of the debt, up to the amount of PP&E. Specifically, 
we are proposing to change the meaning of the term ``debt obtained for 
long-term purposes'', to include lease liabilities for lease right-of-
use assets and the short-term portion of the debt, up to the amount of 
net PP&E. However, if an institution wishes to include the debt as part 
of the total debt obtained for long-term purposes, including debt 
obtained through long-term lines of credit, the institution would have 
to provide a disclosure in the financial statements that the debt, 
including lines of credit, exceeds twelve months and was used to fund 
capitalized assets (i.e., PP&E or capitalized expenditures per 
Generally Accepted Accounting Principles (GAAP)). The disclosure for 
the debt would include the issue date, term, nature of capitalized 
amounts and amounts capitalized. The debt obtained for long-term 
purposes would be limited to those amounts disclosed in the financial 
statements that were used to fund capitalized assets. Any other debt 
amount, including long-term lines of credit used to fund operations, 
would be excluded from debt obtained for long-term purposes.
    Changes to Total Expenses:
    Currently, the regulations provide that the term ``Total Expenses'' 
excludes income tax, discontinued operations, extraordinary losses or 
change in accounting principle. The Department proposes to change that 
term to ``Total Expenses and Losses'' and define the proposed term as: 
All expenses and losses, (excludes income tax, discontinued operations 
not classified as an operating expense or change in accounting 
principle), less any losses on investments, post-employment and defined 
benefit pension plans and annuities. Any losses on investments would be 
the net loss for the investments and Total Expenses and Losses would 
include the nonservice component of net periodic pension and other 
post-employment plan expenses.

Net Income Ratio

    The Department proposes to modify the numerator of the Net Income 
ratio, ``Income before Taxes,'' and the denominator, ``Total 
Revenues.''
    Currently, ``Income before Taxes'' is taken directly from the 
institution's audited financial statements. The Department proposes to 
define ``Income before Taxes'' to include all revenues, gains, expenses 
and losses incurred by the institution during the accounting period. 
Income before taxes would not include income taxes, discontinued 
operations not classified as an operating expense or changes in 
accounting principle.
    With regard to the denominator, we propose to change the term 
``Total Revenues'' to ``Total Revenues and Gains.''
    We note that while the current regulations define the term ``Total 
Pretax Revenues'' (total operating revenues + non-operating revenues 
and gains, where investments gains should be recorded net of investment 
losses), that term was erroneously published and we should have used 
the term Total Revenues. The Secretary proposes to correct that error 
and define the term, ``Total Revenues and Gains'' as all revenues and 
gains not including positive income tax amounts, discontinued 
operations not classified as an operating gain, or change in accounting 
principle (investment gains would be recorded net of investment 
losses).
    Reasons: The proposed changes are intended to reflect current 
accounting standards, particularly Accounting Standards Update (ASU) 
2016-2 Leases (Topic 842), and clarify how the composite score is 
calculated.
    When implemented, ASU 2016-2 will require all non-profit and 
proprietary institutions to recognize the assets and liabilities that 
arise from leases. In accordance with FASB Concepts Statement No. 6, 
Elements of Financial Statements, all leases create an asset and a 
liability as of the date of the Statement of Financial Position, or 
Balance Sheet, and therefore, an institution must recognize those lease 
assets and lease liabilities as of that date. This is a change compared 
to the previous GAAP approach, which did not require lease assets and 
lease liabilities to be recognized for most leases.
    Under this ASU, a proprietary institution is required to recognize 
in its Balance Sheet a liability for the value of the lease agreement 
(the lease liability) and a right-of-use asset representing its right 
to use the underlying asset for lease terms longer than one fiscal 
year. The principal difference from previous accounting guidance is 
that the lease assets and lease liabilities arising from

[[Page 37276]]

operating leases will now be recognized in the Balance Sheet.
    The Subcommittee asked the Department to consider including defined 
benefit pension plan liabilities as a retirement liability that would 
be added back to Adjusted Equity. The Subcommittee stated that changes 
in accounting practice that now require defined pension plan 
liabilities to be on the face of the financial statements, as well as, 
the required insurance for pension liabilities and the timing of when 
the liability would be payable, all indicate that defined benefit plan 
liabilities should not reduce Adjusted Equity. In addition, the 
Subcommittee argued that all other retirement liabilities are already 
included in post-employment liabilities and rather than having post-
employment and retirement liabilities for expendable net assets it 
would be clearer to the community to use post-employment and defined 
benefit pension plan liabilities. The Department agreed that the 
Subcommittee proposals would clarify how defined benefit pension plan 
liabilities will be treated for purposes of Adjusted Equity.
    In the preamble to the notification of final regulations published 
in the Federal Register on November 25, 1997 (62 FR 62867) (1997 
Regulations), the Department was clear that the expenses included in 
the Primary Reserve Ratio included losses; however the appendix did not 
include language concerning losses. Since the inception of the 
composite score as a measure of a school's financial health, the 
Department has included losses as part of the denominator for the 
Primary Reserve Ratio. The proposed changes to the denominator for the 
Primary Reserve Ratio reflect changes in the accounting terminology and 
clarify what has consistently been the Department's practice. With 
regard to losses, the Subcommittee suggested that there were some 
losses that should not be reflected in the Primary Reserve Ratio. The 
Subcommittee proposed that the Primary Reserve Ratio not include any 
losses from post-employment and defined benefit pension plans and 
annuities. The Department agreed.
    As a result of ASU 2016-2, the Department proposes including the 
right-of-use asset from leases as part of PP&E (which is a component of 
Adjusted Equity in the Primary Reserve ratio). The Subcommittee 
recommended that the Department include construction in progress in 
PP&E for the purpose of calculating the Primary Reserve ratio. The 
Subcommittee members pointed out that by its very nature, construction 
in progress could not be considered an expendable asset because it 
cannot be easily converted to cash or cash equivalents when an 
institution is in financial difficulty. The Department agreed and 
proposes here to include construction in progress with PP&E.
    Initially, the Subcommittee's discussion about how to treat debt 
obtained for long-term purposes in calculating the composite score, 
focused around the change in accounting for leases under ASU 2016-2. 
Under ASU 2016-2 the liability for leases is not considered debt for 
accounting purposes. The Subcommittee noted that although the lease 
liability was not debt, the liability was clearly associated with PP&E 
and argued that it should be included as debt obtained for long-term 
purposes for the composite score. This discussion then expanded to 
consider the various types of debt and liabilities that the Department 
encounters in evaluating financial statements and computing the 
composite score. In 2017, both the Government Accountability Office 
(GAO) and the Department's Office of Inspector General (OIG) issued 
audit reports that found that the Department was not doing enough to 
limit manipulation of the composite score to protect students from 
institutions that could be in danger of financial difficulty 
(``Education Should Address Oversight and Communication Gaps in Its 
Monitoring of the Financial Condition of Schools'' (GAO-17-555) \7\ and 
``Federal Student Aid's Processes for Identifying At-Risk Title IV 
Schools and Mitigating Potential Harm to Students and Taxpayers'' (ED-
OIG A09Q0001) \8\). The Department is aware that some institutions use 
debt, including long-term lines of credit, to improve their composite 
scores without actually using the debt for long-term purposes. The use 
of debt to improve the composite score, including long-term lines of 
credit, can be difficult to identify from examining an institution's 
audited financial statements. When the composite score was originally 
developed, the Department's intention was that the long-term debt would 
be added back for purposes of the calculation of the expendable net 
assets was the amount of debt that was used for the purchase of 
capitalized assets. We question the viability of an institution that 
uses debt, including long-term lines of credit, for current operations 
as opposed to long-term purposes. Consequently, the amount of long-term 
debt that is added back for expendable net assets should have some 
relationship to PP&E--and therefore should not be included in debt 
obtained for long-term purposes if it is not used for the purchase of 
capitalized assets.
---------------------------------------------------------------------------

    \7\ Available at: www.gao.gov/products/GAO-17-555.
    \8\ Available at: www2.ed.gov/about/offices/list/oig/auditreports/fy2017/a09q0001.pdf.
---------------------------------------------------------------------------

    The Subcommittee specifically discussed the treatment of long-term 
lines of credit with regard to debt obtained for long-term purposes and 
agreed with the Department's proposed treatment of long-term lines of 
credit. The Department proposes extending this treatment to all debt 
not used for long-term purposes to further reduce or mitigate 
manipulation of the composite score.
    In the preamble to the 1997 Regulations, the Department was clear 
that the calculation of expenses for the Primary Reserve Ratio included 
losses; however, the Appendices to subpart L did not include language 
concerning losses. Since the inception of the composite score, the 
Department has included losses as part of the denominator for the 
Primary Reserve Ratio. The proposed changes to the denominator for the 
Primary Reserve Ratio reflect changes in the accounting terminology and 
clarify what has consistently been the Department's practice. With 
regard to losses, the Subcommittee suggested that there were some 
losses that should not be reflected in the Primary Reserve Ratio. The 
Subcommittee proposed that the Primary Reserve Ratio should not include 
any losses on investments, post-employment and defined benefit pension 
plans and annuities. The Department agreed and has reflected this 
change in the proposed regulations.
    The Department proposes to add a reference to the disclosure 
requirement for unsecured related party transactions under Sec.  
668.23(d). For both proprietary and non-profit schools, related party 
receivables or other related assets are excluded from the composite 
score calculation if the amount is not secured and perfected at the 
date of the financial statements. The Related Party disclosure should 
provide enough detail about the relationship, transaction(s) and any 
conditions for the Department to be able to make a determination on 
whether the related party receivable or other related assets are 
properly secured for inclusion in the composite score calculation.

Appendices A and B, Section 2

    Proposed changes: Under proposed Section 2 for appendices A and B, 
proprietary and non-profit institutions would be required to submit a 
Supplemental Schedule as part of their audited financial statements. 
The Supplemental Schedule would contain

[[Page 37277]]

all of the financial elements required to calculate the composite score 
and a corresponding or related reference to the Statement of Financial 
Position, Statement of Activities, Schedule of Natural to Functional 
Expenses, Balance Sheet, Income Statement, or Notes to the Financial 
Statements. The amount entered in the Supplemental Schedule for each 
element would tie directly to a line item, be part of a line item, tie 
directly to a note, or be part of a note in the financial statements. 
In addition, the audit opinion letter would contain a paragraph 
referencing the auditor's additional analysis of the Supplemental 
Schedule.
    Reasons: As a result of the FASB updates, some elements needed to 
calculate the composite score would no longer be readily available in 
the audited financial statements, particularly for non-profit 
institutions. The Subcommittee suggested using a Supplemental Schedule 
as a means to address this issue. Moreover, by referencing the 
financial statements, the Supplemental Schedule would increase 
transparency in how the composite score is calculated for both 
institutions and the Department. The Subcommittee requested and 
received advice from auditors and accountants that the burden stemming 
from the Supplemental Schedule would be minimal. The Subcommittee 
believed, and we agree, that any burden is outweighed by the need for 
the information and the increase in transparency.

Appendices A and B, Section 3

    Proposed changes: Proposed Section 3 would combine, conceptually, 
Sections 2 and 3 of the current appendices. While we do not propose to 
modify the current strength factors and weights for each, proposed 
Section 3 would be updated to reflect changes in terminology based on 
the changes in accounting standards and modifications to the item 
amounts used in the example financial statements.
    Reasons: We propose to revise current Section 3 of appendices A and 
B to conform with the proposed changes to Sections 1 and 2 of those 
appendices.

Appendix B to Subpart L, Section 1

    Statute: Section 498(c)(1) of the HEA authorizes the Secretary to 
establish ratios and other criteria for determining whether an 
institution has the financial responsibility required to (1) provide 
the services described in its official publications, (2) provide the 
administrative resources necessary to comply with title IV, HEA 
requirements, and (3) 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.
    Current Regulations: Appendix B to subpart L contains three 
sections that illustrate how the composite score is calculated for a 
non-profit institution. Specifically, Section 1 sets forth the ratios 
and defines the ratio terms. Section 2 provides a model Statement of 
Activities and Balance Sheet with numbered line entries and shows the 
numbered entries that are used to calculate each of the financial 
ratios. Section 3 takes the calculated ratios from Section 2 and 
applies strength factors and weights associated with each ratio to 
derive a blended, or composite, score that the Secretary uses to 
determine, in part, whether the institution is financially responsible.
    Proposed Changes: We propose to revise appendix B by amending the 
definitions of terms used in Section 1 to reflect changes in accounting 
standards and other changes that the Secretary believes would clarify 
how the composite score is calculated. We previously noted in the 
discussion for appendix A the proposed changes to Sections 2 and 3 of 
appendix B.

Appendix B, Section 1

    The Department proposes to modify the definition of the terms 
``Expendable Net Assets'' and ``Total Expenses'' as those terms are 
used in calculating the Primary Reserve Ratio. Under the current 
regulations, the ``Expendable Net Assets'' are:

(unrestricted net assets) + (temporarily restricted net assets)-
(annuities, term endowments and life income funds that are 
temporarily restricted)-(intangible assets)-(net property, plant and 
equipment) * + (post-employment and retirement liabilities) + (all 
debt obtained for long-term purposes) **-(unsecured related-party 
receivables).

    *The value of property, plant and equipment is net of 
accumulated appreciation, including capitalized lease assets.
    ** The value of all debt obtained for long-term purposes 
includes the short-term portion of the debt, up to the amount of net 
property, plant and equipment.

    The Department proposes to revise the definition of ``Expendable 
Net Assets'' to be:

(Net assets without donor restrictions) + (net assets with donor 
restrictions)-(net assets with donor restrictions: Restricted in 
perpetuity) *-(annuities, term endowments and life income funds with 
donor restrictions) **-(intangible assets)-(net property, plant and 
equipment) *** + (post-employment and defined benefits pension plan 
liabilities) + (all long-term debt obtained for long-term purposes, 
not to exceed total net property, plant and equipment) ****-
(unsecured related party transactions) *****.

    * Net assets with donor restrictions: Restricted in perpetuity 
is subtracted from total net assets. The amount of net assets with 
donor restrictions: Restricted in perpetuity is disclosed as a line 
item, part of line item, in a note, or part of a note in the 
financial statements.
    ** Annuities, term endowments and life income funds with donor 
restrictions are subtracted from total net assets. The amount of 
annuities, term endowments and life income funds with donor 
restrictions is disclosed in as a line item, part of line item, in a 
note, or part of a note in the financial statements.
    *** The value of property, plant and equipment includes 
construction in progress and lease right-of-use assets and is net of 
accumulated depreciation/amortization.
    **** All Debt obtained for long-term purposes, not to exceed 
total net property, plant and equipment includes lease liabilities 
for lease right-of-use assets and the short-term portion of the 
debt, up to the amount of net property, plant and equipment. If an 
institution wishes to include the debt, including debt obtained 
through long-term lines of credit in total debt obtained for long-
term purposes, the institution must include a disclosure in the 
financial statements that the debt, including lines of credit 
exceeds twelve months and was used to fund capitalized assets (i.e., 
property, plant and equipment or capitalized expenditures per 
Generally Accepted Accounting Principles (GAAP)). The disclosures 
that must be presented for any debt to be included in expendable net 
assets include the issue date, term, nature of capitalized amounts 
and amounts capitalized. Institutions that do not include debt in 
total debt obtained for long-term purposes, including long-term 
lines of credit, do not need to provide any additional disclosures 
other than those required by GAAP. The debt obtained for long-term 
purposes will be limited to only those amounts disclosed in the 
financial statements that were used to fund capitalized assets. Any 
debt amount including long-term lines of credit used to fund 
operations must be excluded from debt obtained for long-term 
purposes.
    ***** Unsecured related party receivables as required at 34 CFR 
668.23(d).

    Under the current regulations, the term ``Total Expenses'' is 
defined as ``Total unrestricted expenses taken directly from the 
audited financial statements.'' We propose to change the term to 
``Total Expenses without Donor Restrictions and Losses without Donor 
Restrictions.'' In addition, the Department proposes to define the new 
term ``Total Expenses without Donor Restrictions and Losses without 
Donor Restrictions'' as all expenses and losses without donor 
restrictions from the Statement of Activities less any losses

[[Page 37278]]

without donor restrictions on investments, post-employment and defined 
benefit pension plans, and annuities. (For institutions that have 
defined benefit pension and other post-employment plans, total expenses 
include the nonservice component of net periodic pension and other 
post-employment plan expenses and these expenses will be classified as 
non-operating. Consequently such expenses will be labeled non-operating 
or included with ``other changes-non-operating changes in net assets 
without donor restrictions'' when the Statement of Activities includes 
an operating measure).
    The numerator of the Equity Ratio, Modified Net Assets, is 
currently defined as ``(total assets)-(intangible assets)-(unsecured 
related-party receivables).'' We propose to change the definition of 
Modified Net Assets to ``(net assets without donor restrictions) + (net 
assets with donor restrictions)-(intangible assets)-(unsecured related 
party receivables)''.
    For the Net Income Ratio, the current regulations specify that the 
amounts for both the numerator, ``Change in Unrestricted Net Assets,'' 
and the denominator, ``Total Unrestricted Revenue'', are taken directly 
from the audited financial statements. We propose to rename the 
numerator as ``Change in Net Assets without Donor Restrictions,'' and 
the denominator as ``Total Revenue without Donor Restriction and Gains 
without Donor Restrictions.'' In addition, the Department proposes that 
the denominator, Total Revenue, would include amounts released from 
restriction plus total gains. The Department notes that with regard to 
gains, investment returns are reported as a net amount (interest, 
dividends, unrealized and realized gains and losses net of external and 
direct internal investment expense). Institutions that separately 
report investment spending as operating revenue (e.g. spending from 
funds functioning as endowment) and remaining net investment return as 
a non-operating item, will need to aggregate these two amounts to 
determine if there is a net investment gain or a net investment loss 
(net investment gains are included with total gains).
    Reasons: The proposed changes are intended to reflect current 
accounting standards and clarify how the composite score is calculated. 
Many of the proposed changes stem from significant changes to the 
accounting standards, primarily ASU 2016-2 Leases (Topic 842) and 2016-
14 Not-for-Profit Entities (Topic 958), ASU 2016-2 and ASU 2016-14 
respectively.
    When implemented, ASU 2016-2 will require all non-profit and 
proprietary institutions to recognize the assets and liabilities that 
arise from leases. In accordance with FASB Concepts Statement No. 6, 
Elements of Financial Statements, all leases create an asset and a 
liability as of the Statement of Financial Position, or Balance Sheet, 
date and, therefore, an institution must recognize those lease assets 
and lease liabilities as of that date.
    A non-profit institution must recognize in the Statement of 
Financial Position a liability for the value of the lease agreement 
(the lease liability) and a right-of-use asset representing its right 
to use the underlying asset for the lease term. The principal 
difference from previous guidance is that the lease assets and lease 
liabilities arising from operating leases should be recognized in the 
Statement of Financial Position.
    Under ASU 2016-14, a non-profit institution must present on the 
face of the Statement of Financial Position amounts for two classes of 
net assets at the end of the period, rather than for the currently 
required three classes. That is, the institution will report amounts 
for net assets with donor restrictions and net assets without donor 
restrictions, as well as the currently required amount for total net 
assets. Temporarily restricted net assets, which were previously 
reported, will be eliminated as a class of net assets. A non-profit 
institution must also present on the face of the Statement of 
Activities the amount of the change in each of the two classes of net 
assets rather than the currently required three net asset classes, as 
well as report the currently required amount of the change in total net 
assets for the period. These changes were made as a result of 
complexities arising from using the three classes of net assets which 
focus on the absence or presence of donor imposed restrictions and 
whether those restrictions are temporary or permanent.
    ASU 2016-14 eliminated the use of the term ``temporarily restricted 
net assets'' because of difficulties with classifying assets as 
temporarily restricted. On its face, under this ASU, assets with donor 
restrictions would not be considered expendable net assets. In 
discussions with the Subcommittee, the Department agreed that there are 
some elements of assets with donor restrictions that could be 
considered expendable. An example of this would be an endowment where 
the corpus is permanently restricted by the donor, but the earnings 
from the endowment can be used to pay salaries. The Subcommittee put 
forward that the primary element of assets with donor restrictions that 
is not expendable is ``net assets with donor restrictions: restricted 
in perpetuity.'' Subtracting ``net assets with donor restrictions: 
restricted in perpetuity'' from net assets with donor restrictions plus 
net assets without donor restrictions roughly approximates the amount 
that would have been included in the composite score using unrestricted 
net assets and temporarily restricted net assets. Likewise, using the 
amounts from annuities, term endowments and life income funds with 
donor restrictions, approximates the amount of annuities, term 
endowments and life income funds that are temporarily restricted that 
would have been used prior to the proposed change.
    The Subcommittee asked the Department to consider including defined 
benefit pension plan liabilities as a retirement liability that would 
be added back to expendable net assets. The Subcommittee stated that 
changes in accounting practice that now require defined pension plan 
liabilities to be on the face of the financial statements, as well as 
the required insurance for pension liabilities and the timing of when 
the liability would be payable, all indicate that defined benefit plan 
liabilities should not reduce expendable net assets. In addition, the 
Subcommittee argued that all other retirement liabilities are already 
included in post-employment liabilities, and rather than having post-
employment and retirement liabilities for expendable net assets, it 
would be clearer to the community to use post-employment and defined 
benefit pension plan liabilities. The Department agreed that the 
Subcommittee proposals would clarify how defined benefit pension plan 
liabilities will be treated for expendable net assets.
    As a result of ASU 2016-2, the Department proposes including the 
right-of-use asset from leases as part of PP&E (which is a component of 
Expendable Net Assets in the Primary Reserve ratio). During the general 
discussions with the Subcommittee about PP&E, the Subcommittee 
recommended that the Department should include construction in progress 
in PP&E for purposes of calculating the Primary Reserve ratio. The 
Subcommittee pointed out that by its very nature, construction in 
progress could not be considered an expendable asset because it cannot 
be easily converted to cash or cash equivalents when an institution is 
in financial difficulty. The Department agreed and

[[Page 37279]]

proposes here to include construction in progress with PP&E.
    Initially, the discussion in the Subcommittee surrounding how to 
treat debt obtained for long-term purposes in calculating the composite 
score, focused around the change in accounting for leases under ASU 
2016-2. Under ASU 2016-2 the liability for leases is not considered 
debt for accounting purposes. The Subcommittee noted that although the 
lease liability was not debt, the liability was clearly associated with 
PP&E and argued that it should be included as debt obtained for long-
term purposes in the composite score calculation. This discussion then 
expanded to consider the various types of debt and liabilities that the 
Department encounters in evaluating financial statements and computing 
the composite score. As noted above, in 2017, both GAO and OIG issued 
audit reports that found that the Department was not doing enough to 
limit manipulation of the composite score to protect students from 
institutions that could be in danger of financial difficulty. The 
Department is aware that some institutions use debt, including long-
term lines of credit, to improve their composite scores without 
actually using the debt for long-term purposes. The use of debt to 
improve the composite score, including long-term lines of credit, can 
be difficult to identify from examining an institution's audited 
financial statements. When the composite score was originally 
developed, the long-term debt that was intended to be added back for 
purposes of expendable net assets was the amount of debt that was used 
for the purchase of capitalized assets. We question the viability of an 
institution that uses debt, including long-term lines of credit, for 
current operations as opposed to long-term purposes. Consequently, the 
amount of long-term debt that is added back for expendable net assets 
should have some relationship to PP&E--and therefore should not be 
included in debt obtained for long-term purposes if it is not used for 
the purchase of capitalized assets.
    The Subcommittee specifically discussed the treatment of long-term 
lines of credit with regard to debt obtained for long-term purposes and 
agreed with the Department's proposed treatment of long-term lines of 
credit. The Department proposes extending this treatment to all debt 
not used for long-term purposes to further reduce or mitigate 
manipulation of the composite score.
    In the preamble to the 1997 Regulations, the Department was clear 
that expenses for the Primary Reserve Ratio included losses; however, 
the Appendices to subpart L did not include language concerning losses. 
Since the inception of the composite score, the Department has included 
losses as part of the denominator for the Primary Reserve Ratio. The 
proposed changes to the denominator for the Primary Reserve Ratio 
reflect changes in the accounting terminology and clarify what has 
consistently been the Department's practice. With regard to losses, the 
Subcommittee suggested that there were some losses that should not be 
reflected in the Primary Reserve Ratio. The Subcommittee proposed that 
the Primary Reserve Ratio should not include any losses without donor 
restrictions on investments, post-employment and defined benefit 
pension plans and annuities. The Department agreed.
    All of the proposed changes to the Equity Ratio are based solely on 
changes in accounting terminology as a result of ASU 2016-14.
    The change to the numerator for the Net Income Ratio is based 
solely on changes in accounting terminology as a result of ASU 2016-14. 
The proposed changes to the denominator are based on changes in 
accounting terminology and Department practice concerning gains. In the 
preamble to the 1997 Regulations, the Department was clear that revenue 
for the Net Income Ratio included gains; however the Appendices to 
subpart L did not include language concerning gains. Since the 
inception of the composite score, the Department has included gains as 
part of the denominator for the Net Income Ratio.
    The Department proposes to add a reference to the regulatory 
disclosure requirement for unsecured related party transactions under 
Sec.  668.23(d). While the Department believes that this reference 
promotes clarity, Subcommittee members representing the non-profit 
sector expressed concern that certain aspects of related party 
transactions unique to the non-profit sector required more thorough 
explanation. The Department agreed, and provides additional information 
below.
    For both proprietary and non-profit institutions, related party 
receivables or other related assets are excluded from the composite 
score if the amount is not secured and perfected as of the date of the 
financial statements. The Related Party disclosure should provide 
enough detail about the relationship, transaction(s) and any conditions 
for the Department to be able to make a determination on whether the 
related party receivable or other related assets are properly secured 
for inclusion in the composite score.
    For non-profit schools, related party contributions receivables 
from board members would be allowed to be included in secured related 
party receivables if there was no additional relationship or 
transactions with the board member or his/her family or related 
entities and there were no additional conditions associated with the 
contribution if disclosed in the related party disclosure.

Alternative Standards and Requirements (Sec.  668.175)

    Statute: Section 498(c)(3) of the HEA provides that if an 
institution fails the composite score or other criteria established by 
the Secretary to determine whether the institution is financially 
responsible, the Secretary must determine that the institution is 
financially responsible if it provides third-party financial 
guarantees, such as performance bonds or letters of credit payable to 
the Secretary, for an amount that is not less than one-half of the 
annual potential liabilities of the institution to the Secretary for 
title IV, HEA funds, including liabilities for loan obligations 
discharged pursuant to section 437 of the HEA, and to students for 
refunds of institutional charges, including required refunds of title 
IV, HEA funds.
    Current Regulations: As provided in Sec.  668.175, an institution 
that is not financially responsible under the general standards in 
Sec.  668.171 may begin or continue to participate in the title IV, HEA 
programs only by qualifying under an alternative standard.
    Under the zone alternative in Sec.  668.175(d), a participating 
institution that is not financially responsible solely because its 
composite score is less than 1.5 may participate as a financially 
responsible institution for no more than three consecutive years, but 
the Secretary requires the institution to (1) make disbursements to 
students under the heightened cash monitoring or reimbursement payment 
methods described in Sec.  668.162, and (2) provide timely information 
regarding any adverse oversight or financial event, including any 
withdrawal of owner's equity from the institution. In addition, the 
Secretary may require the institution to (1) submit its financial 
statement and compliance audits earlier than the date specified in 
Sec.  668.23(a)(4), or (2) provide information about its current 
operations and future plans.
    Under the provisional certification alternative in Sec.  
668.175(f), an institution that is not financially responsible

[[Page 37280]]

because it does not meet the general standards in Sec.  668.171(b), or 
because of an audit opinion in Sec.  668.171(d) or a condition of past 
performance in Sec.  668.174(a), may participate under a provisional 
certification for no more than three consecutive years, if the 
institution (1) provides an irrevocable letter of credit, for an amount 
determined by the Secretary that is not less than 10 percent of the 
title IV, HEA program funds the institution received during its most 
recently completed fiscal year, (2) demonstrates that it was current in 
its debt payments and has met all of its financial obligations for its 
two most recent fiscal years, and (3) complies with the provisions 
under the zone alternative.
    Proposed Regulations: We propose to relocate to proposed new Sec.  
668.171(c) one of the oversight and financial events that an 
institution currently reports to the Department under the zone 
alternative in Sec.  668.175(d)(2)(ii)--any withdrawal of owner's 
equity from the institution.
    We propose to remove Sec.  668.175(e) because the transition year 
alternative, which pertained only to fiscal years beginning after July 
1, 1997 and before June 30, 1998, is no longer relevant.
    Also, we propose to add a new paragraph (h) that would expand the 
types of financial protection the Secretary may accept. Specifically, 
in lieu of submitting a letter of credit, the Secretary may permit an 
institution to:
    <bullet> 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;
    <bullet> Provide cash for the amount required; or
    <bullet> Enter into an arrangement under which the Secretary would 
offset 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, the amount offset equals the amount of 
financial protection the institution is required to provide. Under this 
arrangement, the Secretary would use the funds offset to satisfy the 
debts and liabilities owed to the Secretary that are not otherwise paid 
directly by the institution, and would provide to the institution any 
funds not used for this purpose during the period covered by the 
agreement, or provide the institution any remaining funds if the 
institution subsequently submits other financial protection for the 
amount originally required.
    In addition, we propose to amend the zone and provisional 
certification alternatives under Sec.  668.175(d) and (f), to allow for 
these expanded types of financial protection.
    Reasons: Because the costs of obtaining an irrevocable LOC have 
increased over time, to the point where financial institutions are not 
only charging fees but in many cases requiring the LOC to be fully 
collateralized, we are proposing to allow an institution to provide 
alternative forms of financial protection that would reduce the costs 
to an institution. Providing cash would eliminate the cost of fees 
associated with an LOC and the administrative offset alternative would 
relieve an institution from any collateralization requirements or from 
having to commit upfront the resources needed to obtain the required 
financial protection. However, we note that, to implement an 
administrative offset, the Department would need to control the title 
IV funds flowing to the institution and the current process for doing 
that is to place the institution on the heightened cash monitoring 
payment method (HCM2) under Sec.  668.162(d)(2). The Secretary would 
provide funds to the institution under HCM2, but would withhold 
temporarily a portion of any reimbursement claim payable to the 
institution in an amount that ensures that by the end of the offset 
period, the total amount withheld equals the amount of cash or the 
letter of credit the institution would otherwise provide.
    During negotiated rulemaking, we proposed that the offset agreement 
would have to provide that the entire amount of the financial 
protection required by the Department would have to be in place within 
a nine-month period. The non-Federal negotiators argued that the 
Department should have flexibility in setting the offset period 
depending on the amount of protection that is needed or the amount of 
the offset that the institution could reasonably provide on a monthly 
basis as specified in the agreement. We agreed and propose here the 
suggestion from the non-Federal negotiators that the total amount 
offset must be in place within a six- to 12-month period, as determined 
by the Department.
    With regard to other types of surety, we are not aware of any 
instruments or surety products that would provide the Department with 
the level of financial protection, or ready access to funds, as an 
irrevocable letter of credit. However, should such surety products 
become available that the Department finds acceptable and that are less 
costly or more readily available to institutions, the Secretary would 
identify those products in a notice published in the Federal Register. 
After that, an institution could use those products to satisfy the 
financial protection requirements in these regulations.

Initial and Final Decisions (Sec.  668.90)

    Statute: Section 498(d) of the HEA authorizes the Secretary to 
consider the past performance of an institution or of a person in 
control of an institution in determining whether an institution has the 
financial capability to participate in the title IV, HEA programs. 
Section 487(c)(1)(F) of the HEA, provides that the Secretary shall 
prescribe such regulations as may be necessary to provide for the 
limitation, suspension, or termination of the participation of an 
eligible institution in any program under title IV of the HEA.
    Current Regulations: When the Department proposes to limit, 
suspend, or terminate a fully certified institution's participation in 
a title IV, HEA program, the institution is entitled to a hearing 
before a hearing official under Sec.  668.91. In addition to describing 
the procedures for issuing initial and final decisions, Sec.  668.91 
also provides requirements for hearing officials in making initial and 
final decisions in specific circumstances.
    The regulations generally provide that the hearing official is 
responsible for determining whether an adverse action--a fine, 
limitation, suspension, or termination--is ``warranted,'' but direct 
that, in specific instances, the sanction must be imposed if certain 
predicate conditions are proven. For instance, in an action involving a 
failure by the institution to provide a surety in the amount specified 
by the Secretary under Sec.  668.15, the hearing official is required 
to consider the surety amount demanded to be ``appropriate,'' unless 
the institution can demonstrate that the amount was ``unreasonable.''
    Further, Sec.  668.91(a)(3)(v) states that, in a termination action 
brought on the grounds that the institution is not financially 
responsible under Sec.  668.15(c)(1), the hearing official must find 
that termination is warranted unless the conditions in Sec.  
668.15(d)(4) are met. Section 668.15(c)(1) provides that an institution 
is not financially responsible if a person with substantial control 
over that institution exercises or exercised substantial control over 
another institution or third-party servicer that owes a liability to 
the Secretary for a violation of any title IV, HEA program 
requirements, and that liability is not being repaid. Section 
668.15(d)(4) provides that the Secretary can nevertheless consider the 
first institution to be financially responsible if the person at issue 
has repaid a portion of the liability or the liability is being repaid 
by others, or the institution

[[Page 37281]]

demonstrates that the person at issue in fact currently lacks that 
ability to control or lacked that ability as to the debtor institution.
    Proposed Regulations: The Secretary proposes to amend Sec.  
668.91(a)(3)(iii) by substituting the terms ``letter of credit or other 
financial protection'' for ``surety'' in describing what an institution 
must provide to demonstrate financial responsibility and adding Sec.  
668.171(b),(c), or (d) to the list of sections under which a condition 
or event may trigger a financial protection requirement. Additionally, 
we are proposing to modify Sec.  668.91(a)(3)(iii) to require the 
hearing official to uphold the amount of a letter of credit or 
financial protection demanded by the Secretary, unless the institution 
demonstrates that the events or conditions on which the demand is based 
no longer exist or have been resolved, do not and will not have an 
material adverse effect on the institution's financial condition, or 
the institution has insurance that will cover the liabilities arising 
from those events or conditions. We propose to further modify Sec.  
668.91(a)(3)(v) to list the specific circumstances in which a hearing 
official may find that a termination or limitation action brought for a 
failure of financial responsibility for an institution's past 
performance failure under Sec.  668.174(a), or a failure of a past 
performance condition for persons affiliated with an institution under 
Sec.  668.174(b)(1), was not warranted. For the former, revised Sec.  
668.91(a)(3)(v) would state that these circumstances would be 
consistent with the provisional certification and financial protection 
alternative in Sec.  668.175(f). For the latter, the circumstances 
would be those provided in Sec.  668.174(b)(2).
    Reasons: The proposed changes to Sec.  668.91(a)(3)(iii) would 
update the regulations to reflect both the current language in Sec.  
668.175 and proposed changes to that section. We believe that the new 
language would provide more clarity than the current regulation, which 
provides only that the institution has to show that the amount was 
``unreasonable.'' The proposed language would clearly state that the 
amount of the letter of credit or other financial protection would be 
considered unwarranted only if the reasons for which the Secretary 
required the financial protection no longer exist or have been 
resolved, do not and will not have an material adverse effect on the 
institution's financial condition, or the institution has insurance 
that will cover the liabilities arising from those events or 
conditions.
    Our proposed revisions to Sec.  668.91(a)(3)(iii) would reflect 
previous, as well as proposed, changes to the financial responsibility 
standards. First, the current financial responsibility standards in 
Sec.  668.175 require an institution in some instances to provide a 
letter of credit to be considered financially responsible. We propose 
to modify Sec.  668.91(a)(3)(iii) to reflect that language as well as 
changes proposed to Sec.  668.175 by substituting the terms ``letter of 
credit or other financial protection'' for ``surety.'' Thus, the 
proposed changes to Sec.  668.91 would clarify that a limitation, 
suspension, or termination action may involve a failure to provide any 
of the specified forms of financial protection.
    We further propose to modify Sec.  668.91(a)(3)(iii) to state the 
specific grounds on which a hearing official may find that a limitation 
or termination action for failure to provide financial protection 
demanded is not warranted. Under the proposed regulations, the hearing 
official must accept the amount of the letter of credit or financial 
protection demanded by the Secretary, unless the institution 
demonstrates that the events or conditions on which the demand for 
financial protection or letter of credit is based no longer exist or 
have been resolved, do not and will not have an material adverse effect 
on the institution's financial condition, or the institution has 
insurance that will cover the liabilities arising from those events or 
conditions. Consequently, under the proposed regulations, the 
institution could not claim that the event or condition does not 
support the demand for financial protection or that the amount demanded 
is unreasonable based on the institution's assessment of the risk posed 
by the event or condition.
    The proposed changes to Sec.  668.91(a)(3)(v) would also clarify 
the regulation and conform it with existing regulations describing the 
alternative methods by which an institution may meet the financial 
responsibility standards. Section 668.91(a)(3)(v) would be revised to 
state the grounds on which a hearing official could find that a 
termination or limitation action based on an institution's failure of 
financial responsibility, an institution's failure of a past 
performance condition under Sec.  668.174(a) or a failure of a past 
performance condition for persons affiliated with an institution under 
Sec.  668.174(b)(1) was not warranted. The changes would not add 
substantive new restrictions, but simply conform Sec.  668.91 to the 
substantive requirements already in current regulations. Thus, as 
revised, Sec.  668.91(a)(3)(v) would require the hearing official to 
find that the limitation or termination for adverse past performance by 
the institution itself was warranted, unless the institution met the 
provisional certification and financial protection alternatives in 
current Sec.  668.175(f). For an action based on the adverse past 
performance of a person affiliated with an institution, the hearing 
official would be required to find that limitation or termination of 
the institution was warranted unless the institution demonstrated 
either proof of repayment or that the person asserted to have 
substantial control in fact lacks or lacked that control, as already 
provided in Sec.  668.174(b)(2), or that the institution has accepted 
provisional certification and provided the financial protection 
required under Sec.  668.175.
    This proposal is very similar to changes made to this section 
(previously designated as Sec.  668.90) in the 2016 final regulations. 
81 FR 76072. It parallels the changes made in those regulations to 
conform this section to existing regulations, but departs from them to 
conform to changes we are proposing in this notification. Specifically, 
because we propose here different actions or events that might cause an 
institution not to be financially responsible than were included in the 
2016 final regulations, the changes we now propose to this section to 
this section track our current proposal. Therefore, we propose to 
rescind this provision of the 2016 final regulations.

Limitation (Sec.  668.94)

    Statute: Section 487(c)(1)(F) of the HEA, 20 U.S.C. 1094, provides 
that the Secretary shall prescribe such regulations as may be necessary 
to provide for the limitation, suspension, or termination of an 
eligible institution's participation in any program under title IV of 
the HEA.
    Current Regulations: Section 668.86 provides that the Secretary may 
limit an institution's participation in a title IV, HEA program, under 
specific circumstances, and describes procedures for the institution to 
appeal the limitation. Current Sec.  668.94 lists types of specific 
restrictions that may be imposed by a limitation action, and includes 
in paragraph (i) ``other conditions as may be determined by the 
Secretary to be reasonable and appropriate.'' 34 CFR 668.94(i).
    The regulations at Sec.  668.13(c) provide that the Secretary may 
provisionally certify an institution whose participation has been 
limited or suspended under subpart G of part 668, and Sec.  668.171(e) 
provides that the Secretary may take action under subpart G to limit or 
terminate the participation

[[Page 37282]]

of an institution if the Secretary determines that the institution is 
not financially responsible under Sec.  668.171 or Sec.  668.175.
    Proposed Regulations: The Secretary proposes to amend Sec.  668.94 
to clarify that a change in an institution's participation status from 
fully certified to provisionally certified to participate in a title 
IV, HEA program under Sec.  668.13(c) is a type of limitation that may 
be the subject of a limitation proceeding under Sec.  668.86.
    Reasons: The proposed change to Sec.  668.94 would clarify current 
policy and provide for a more complete set of limitations covered in 
Sec.  668.94. The 2016 final regulations included this same change to 
this regulation (previously designated as Sec.  668.93, see 81 FR 
76072), and we propose it again here to seek comment on it in the 
context of our complete current proposal.

Guaranty Agency (GA) Collection Fees (34 CFR 682.202(b), 682.405(b), 
and 682.410(b)(2) and (4))

    Statute: Section 428F(a) of the HEA provides that to complete a 
FFEL borrower's loan rehabilitation, the FFEL guaranty agency must sell 
the loan to a FFEL Program lender or assign the loan to the Secretary.
    Section 428H(e)(2) of the HEA allows a FFEL Program lender to 
capitalize outstanding interest when the loan enters repayment, upon 
default, and upon the expiration of periods of deferment and 
forbearance, but does not specifically authorize the capitalization of 
interest when the borrower rehabilitates a defaulted loan.
    Current Regulations: The current FFEL Program regulations in 
Sec. Sec.  682.202, 682.405, and 682.410 permit FFEL Program lenders to 
capitalize interest when the borrower enters or resumes repayment and 
requires a guaranty agency to capitalize interest when it pays the FFEL 
Program lender's default claim. However, these regulations do not 
specifically address whether a guaranty agency may capitalize interest 
when the borrower has rehabilitated a defaulted FFEL Loan or whether a 
FFEL Program lender may capitalize interest when purchasing a 
rehabilitated FFEL Loan from a guaranty agency. In addition, the 
Department interprets these regulations to bar guaranty agencies from 
imposing collection costs when a borrower enters into a satisfactory 
repayment agreement within 60 days of the first notice of default sent 
to the borrower.
    Proposed Regulations: The proposed revisions to Sec. Sec.  682.202, 
682.405, and 682.410 would provide that the only time a guaranty agency 
may capitalize interest owed by the borrower is when it pays the FFEL 
Program lender's default claim. Therefore, the guaranty agency would 
not be allowed to capitalize interest when it sells a rehabilitated 
FFEL Loan.
    Similarly, the proposed regulations would bar a FFEL Program lender 
from capitalizing outstanding interest when purchasing a rehabilitated 
FFEL Loan.
    The proposed regulations would also provide that when a guaranty 
agency holds a defaulted FFEL Loan and the guaranty agency has 
suspended collection activity to give the borrower time to submit a 
closed school or false certification discharge application, interest 
capitalization is not permitted if collection on the loan resumes 
because the borrower does not return the appropriate form within the 
allotted timeframe.
    Finally, the Department proposes to prohibit guaranty agencies from 
charging collection costs to borrowers who, within 60 days of receiving 
notice of default, enter into an acceptable repayment arrangement, 
including a loan rehabilitation plan.
    Reasons: Recently, the Department became aware that some guaranty 
agencies and FFEL Program lenders were capitalizing interest when a 
borrower rehabilitates a loan, while others were not. In addition, some 
guaranty agencies were capitalizing interest when resuming collection 
on a defaulted FFEL Loan when a borrower had not submitted a closed 
school or false certification discharge within a specific timeframe. 
The Department does not believe that interest capitalization in either 
circumstance is appropriate, and the Department does not capitalize 
interest on loans that it holds in comparable circumstances.
    Additionally, to encourage borrowers to enter into satisfactory 
repayment plans, the Department proposes that guaranty agencies may not 
assess collection costs to a borrower who enters into an acceptable 
repayment agreement, including a rehabilitation agreement, and honors 
that agreement, within 60 days of receiving notice of default.
    The negotiators did not object to any of these changes. In 
addition, the 2016 final regulations included the changes we propose in 
this NPRM regarding interest capitalization when a borrower 
rehabilitates a loan, as well as when a guaranty agency resumes 
collection on a defaulted FFEL Loan when a borrower had not submitted a 
closed school or false certification discharge within a specific 
timeframe. 81 FR 76079-80. We propose these changes again here to seek 
comment on them in the context of our complete current proposal.
    The changes we propose regarding collection costs for borrowers who 
enter into an acceptable repayment arrangement, including a loan 
rehabilitation plan, within 60 days of receiving notice of default were 
not included in the 2016 final regulations. These changes are 
consistent with the interpretation and position that the Department 
previously took in Dear Colleague Letter (DCL) GE-15-14 (July 10, 
2015). That DCL was withdrawn in order to allow for public comment on 
our interpretation, which we seek through this notification.

Subsidized Usage Period and Interest Accrual (34 CFR 685.200(f))

    Statute: Section 455(q) of the HEA provides that a first-time 
borrower on or after July 1, 2013, is not eligible for additional 
Direct Subsidized Loans if the borrower has received Direct Subsidized 
Loans for a period that is equal to or greater than 150 percent of the 
length of the borrower's current program of study (``150 percent 
limit''). In addition, some borrowers who are not eligible for Direct 
Subsidized Loans because of the 150 percent limit become responsible 
for the interest that accrues on their loans when it would otherwise be 
paid by the government. The statute does not address what effect a 
discharge of a Direct Subsidized Loan has on the 150 percent limit. The 
statute also does not address whose responsibility it is to pay the 
outstanding interest on any remaining loans that have not been 
discharged, but which have previously lost eligibility for interest 
subsidy.
    Current Regulations: Section 685.200(f)(4) provides two exceptions 
to the calculation of the period of time that counts against a 
borrower's 150 percent limit--the subsidized usage period--that can 
apply based on the borrower's enrollment status or loan amount. The 
regulations do not have an exception to the calculation of a subsidized 
usage period if the borrower receives a discharge of his or her Direct 
Subsidized Loan. They also do not address whose responsibility it is to 
pay the outstanding interest on any remaining loans that have not been 
discharged, but have previously lost eligibility for the interest 
subsidy based on the borrower's remaining eligibility period and 
enrollment.
    Proposed Regulations: Proposed Sec.  [thinsp]685.200(f)(4)(iii) 
would specify that a discharge based on a school closure, false 
certification, unpaid refund, or borrower defense will lead to the 
elimination, or recalculation, of the subsidized usage period that is

[[Page 37283]]

associated with the loan or loans discharged.
    The proposed regulations would also specify that, when the full 
amount of a Direct Subsidized Loan or a portion of a Direct Subsidized 
Loan is discharged, the entire subsidized usage period associated with 
that loan is eliminated. In the event that a borrower receives a closed 
school, false certification, or, depending on the circumstances, 
borrower defense or unpaid refund discharge, the Department would 
completely discharge a Direct Subsidized Loan or a portion of a Direct 
Subsidized Consolidation Loan that is attributable to a Direct 
Subsidized Loan.
    The proposed regulations would also specify that, when only a 
portion of a Direct Subsidized Loan or a portion of a Direct 
Consolidation Loan that is attributable to a Direct Subsidized Loan is 
discharged, the subsidized usage period would be recalculated instead 
of eliminated. Depending on the circumstances, discharges due to a 
borrower defense or unpaid refund could result in only part of a Direct 
Subsidized Loan or only a portion of the part of a Direct Consolidation 
Loan that is attributable to a Direct Subsidized Loan being discharged.
    The proposed regulations would specify that when a subsidized usage 
period is recalculated, the period is only recalculated if the 
borrower's subsidized usage period was calculated as one year as a 
result of receiving the Direct Subsidized Loan in the amount of the 
annual loan limit for a period of less than an academic year. For 
example, if a borrower received a Direct Subsidized Loan in the amount 
of $3,500 as a first-year student on a full-time basis for a single 
semester of a two-semester academic year, the subsidized usage period 
would be one year. If the borrower later receives an unpaid refund 
discharge in the amount of $1,000, the subsidized usage period would be 
recalculated, and the subsidized usage period would become 0.5 years 
because the subsidized usage period was previously based on the amount 
of the loan and, after the discharge, is based on the relationship 
between the period for which the borrower received the loan (the loan 
period) and the academic year for which the borrower received the loan.
    In contrast, if the borrower received a Direct Subsidized Loan in 
the amount of $3,500 as a first-year student on a full-time basis for a 
full two-semester academic year, the subsidized usage period would be 
one year. If the borrower later receives an unpaid refund discharge in 
the amount of $1,000, the subsidized usage period would still be one 
year because the subsidized usage period would still be calculated 
based on the relationship between the loan period and the academic year 
for which the borrower received the loan.
    Proposed Sec.  [thinsp]685.200(f)(3) would provide that, if a 
borrower receives a discharge based on a school closure, false 
certification, unpaid refund, or a borrower defense discharge that 
results in a remaining eligibility period greater than zero, the 
borrower is no longer responsible for the interest that accrues on a 
Direct Subsidized Loan or on the portion of a Direct Consolidation Loan 
that repaid a Direct Subsidized Loan, unless the borrower once again 
becomes responsible for the interest that accrues on a previously 
received Direct Subsidized Loan or on the portion of a Direct 
Consolidation Loan that repaid a Direct Subsidized Loan, for the life 
of the loan.
    For example, suppose a borrower receives Direct Subsidized Loans 
for three years at school A and then transfers to school B and receives 
Direct Subsidized Loans for three additional years. Further suppose 
that at this point, the borrower has no remaining Subsidized Loan 
eligibility period and enrolls in an additional year of academic study 
at school B, which triggers the loss of interest subsidy on all Direct 
Subsidized Loans received at schools A and B. If the borrower later 
receives a false certification discharge with respect to school B, the 
borrower's remaining eligibility period is now greater than zero. The 
borrower is no longer responsible for paying the interest subsidy lost 
on the three loans from school A. If the borrower then enrolled in 
school C and received three additional years of Direct Subsidized 
Loans, resulting in a remaining eligibility period of zero, and then 
enrolled in an additional year of academic study, the borrower would 
lose the interest subsidy on the Direct Subsidized Loans received at 
schools A and C.
    Reasons: The proposed regulations would clarify and codify the 
Department's current practice in this area. Under the circumstances in 
which a borrower receives a closed school, false certification, 
borrower defense, or unpaid refund discharge, the borrower has not 
received all or part of the benefit of the loan due to an act or 
omission of the school. In such an event, we believe that a student's 
eligibility for future loans and the interest subsidy on existing loans 
should not be negatively affected by having received the loan. 
Accordingly, under the proposed regulations, we would increase the 
borrower's eligibility for Direct Subsidized Loans or reinstate the 
interest subsidy on other Direct Subsidized Loans under the 150 percent 
limit where the borrower receives a discharge of a Direct Subsidized 
Loan and the discharge was based on an act or an omission of the school 
that caused the borrower to not receive all or part of the benefit of 
the loan. The negotiators did not raise any objections to this change. 
The 2016 final regulations included these same changes to this 
regulation (81 FR 76080), and we propose them again here to seek 
comment on them in the context of our complete current proposal.

Appendix A to Subpart L, Part 668: Ratio Methodology for Proprietary 
Institutions

Section 1: Ratio and Ratio Terms

Primary Reserve Ratio Adjusted Equity
    Total Expenses and Losses
Equity Ratio Modified Equity
    Modified Assets
Net Income Ratio Income before Taxes
    Total Revenues and Gains

Definitions

Adjusted Equity = (total owner's equity) - (intangible assets) - 
(unsecured related-party receivables) * - (net property, plant and 
equipment) ** + (post-employment and defined benefit pension 
liabilities) + (all debt obtained for long-term purposes, not to exceed 
total net property, plant and equipment) ***

    Total Expenses and Losses excludes income tax, discontinued 
operations not classified as an operating expense or change in 
accounting principle and any losses on investments, post-employment and 
defined benefit pension plans and annuities. Any losses on investments 
would be the net loss for the investments. Total Expenses and Losses 
include the nonservice component of net periodic pension and other 
post-employment plan expenses.

Modified Equity = (total owner's equity) - (intangible assets) - 
(unsecured related-party receivables)
Modified Assets = (total assets) - (intangible assets) - (unsecured 
related-party receivables)

    Income before Taxes includes all revenues, gains, expenses and 
losses incurred by the school during the accounting period. Income 
before taxes does not include income taxes, discontinued operations not 
classified as an operating expense or changes in accounting principle.
    Total Revenues and Gains does not include positive income tax 
amounts, discontinued operations not classified

[[Page 37284]]

as an operating gain, or change in accounting principle (investment 
gains should be recorded net of investment losses.
    * Unsecured related party receivables as required at 34 CFR 
668.23(d).
    ** The value of property, plant and equipment includes construction 
in progress and lease right-of-use assets, and is net of accumulated 
depreciation/amortization.
    *** All debt obtained for long-term purposes, not to exceed total 
net property, plant and equipment includes lease liabilities for lease 
right-of-use assets and the short-term portion of the debt, up to the 
amount of net property, plant and equipment. If an institution wishes 
to include the debt, including debt obtained through long-term lines of 
credit in total debt obtained for long-term purposes, the institution 
must include a disclosure in the financial statements that the debt, 
including lines of credit exceeds twelve months and was used to fund 
capitalized assets (i.e., property, plant and equipment or capitalized 
expenditures per Generally Accepted Accounting Principles (GAAP)). The 
disclosures that must be presented for any debt to be used in adjusted 
equity include the issue date, term, nature of capitalized amounts and 
amounts capitalized. Institutions that do not include debt in total 
debt obtained for long-term purposes, including long-term lines of 
credit, do not need to provide any additional disclosures other than 
those required by GAAP. The debt obtained for long-term purposes will 
be limited to only those amounts disclosed in the financial statements 
that were used to fund capitalized assets. Any debt amount including 
long-term lines of credit used to fund operations must be excluded from 
debt obtained for long-term purposes.

Section 2: Financial Responsibility Supplemental Schedule Requirement 
and Example

    A Supplemental Schedule must be submitted as part of the required 
audited financial statements submission. The Supplemental Schedule 
contains all of the financial elements required to compute the 
composite score. Each item in the Supplemental Schedule must have a 
reference to the Balance Sheet, Statement of (Loss) Income, or Notes to 
the Financial Statements. The amount entered in the Supplemental 
Schedules should tie directly to a line item, be part of a line item, 
tie directly to a note, or be part of a note in the financial 
statements. When an amount is zero, the institution would identify the 
source of the amount as NA (Not Applicable) and enter zero as the 
amount in the Supplemental Schedule. The audit opinion letter must 
contain a paragraph that references the auditor's additional analysis 
of the financial responsibility Supplemental Schedule.

Executive Orders 12866, 13563, and 13771

    Under Executive Order 12866, the Secretary must determine 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 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.
    Under Executive Order 12866,\9\ section 3(f)(1), this regulatory 
action is economically significant and subject to review by OMB. Also 
under Executive Order 12866 and the Presidential Memorandum ``Plain 
Language in Government Writing'', the Secretary invites comment on how 
easy these regulations are to understand in the Clarity of the 
Regulations section.
---------------------------------------------------------------------------

    \9\ Exec. Order No. 12866, 58 FR 190 (October 4, 1993). 
Regulatory Planning and Review. Available at: www.reginfo.gov/public/jsp/Utilities/EO_12866.pdf.
---------------------------------------------------------------------------

    Under Executive Order 13771,\10\ 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 2018, 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. These 
proposed regulations are a deregulatory action under E.O. 13771 and 
therefore the two-for-one requirements of E.O. 13771 do not apply.
---------------------------------------------------------------------------

    \10\ Exec. Order No. 13771, 82 FR 22 (January 30, 2017). 
Reducing Regulation and Controlling Regulatory Costs. Available at: 
www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02451.pdf.
---------------------------------------------------------------------------

    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--
    (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 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.''
    Under Executive Order 13563,\11\ the Secretary certifies that the 
best available techniques were used to quantify the impacts of these 
regulations. Finally, the Secretary certifies that this regulatory 
action would not unduly interfere with State, local, and tribal 
governments in

[[Page 37285]]

the exercise of their governmental functions.
---------------------------------------------------------------------------

    \11\ Public Law 106-554 appendix C 114 STAT 2763A-153-155. 
section 515 Available at: www.gpo.gov/fdsys/pkg/PLAW-106publ554/pdf/PLAW-106publ554.pdf.
---------------------------------------------------------------------------

    The Department has analyzed the need for regulatory action, 
alternatives available to it, and measured the impact of the changes 
that would result from the proposed regulations relative to the 
existing regulatory baseline under a cost-benefit approach. The 
required Accounting Statement is included in the Net Budget Impacts 
section.

Regulatory Impact Analysis (RIA)

    As further detailed in the Net Budget Impacts section, this 
proposed regulatory action would have an annual effect on the economy 
of approximately $697 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 PB2019 budget. As 
explained in Section (B)(1)(Baseline) of this RIA, we compare the 
proposed regulations to the delayed 2016 regulations. We discuss the 
need for regulatory action; regulatory alternatives considered; costs, 
benefits, and transfers; net budget impacts and accounting statement; 
regulatory flexibility act (small business impacts); and paperwork 
reduction.
A. Need for Regulatory Action
    These proposed regulations address a significant increase in burden 
resulting from the vast increase in borrower defense claims since 2015. 
The 2016 borrower defense regulations fail to adequately address this 
increase in burden. These proposed regulations reduce burden by 
restoring the limitation of defense to repayment claims to those loans 
that are in certain collections proceedings, provide an opportunity for 
institutions to submit a response to borrower allegations, and provide 
for the Secretary to recover losses from institutions.
    Although the borrower defense to repayment regulations have 
provided an option for borrower relief for borrowers in a collections 
proceeding since 1994, in 2015 the number of borrower defense to 
repayment claims increased dramatically when institutions owned by 
Corinthian Colleges, Inc., were placed on Heightened Cash Monitoring 1 
(HCM1) status with an additional 20 day hold and the company declared 
bankruptcy. Students enrolled at Corinthian 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 a new 
interpretation of the defense to repayment regulation (34 CFR 
685.206(c)). The Department encouraged Corinthian borrowers to submit 
defense to repayment claims, which it agreed to consider for all 
Corinthian-related loans, including those not in a collections 
proceeding. We refer to these claims as affirmative claims, as opposed 
to defensive claims, which require the loan to be in a collections 
proceeding.
    This resulted in a significant increase in claim volume compared to 
the prior years, when claim volume was no more than 10 in any given 
year. Since 2015, the Department has considered both affirmative and 
defensive claims, thus significantly expanding the number of claims 
received and the potential cost to the Federal budget. The 2016 
regulations also provide that borrowers could submit both affirmative 
and defensive claims.
    The proposed regulations revert back to the plain meaning of the 
regulation, as it had been implemented prior to 2015, such that only 
those borrowers in a collection proceeding would have a mechanism by 
which they could exercise defenses to repayment. With the anticipated 
substantial increase in the number of defense to repayment 
applications, the Department believes that revisions to the 2016 
regulations are necessary.\12\ However, the Department is also seeking 
comment on continuing to accept affirmative claims and, if such claims 
were accepted, on ways of reducing burden and taxpayer liability 
associated with affirmative claims, since borrowers have nothing to 
lose by attempting to seek student loan relief, even if 
misrepresentation or harm as a result of misrepresentation did not 
occur. In addition, provisions in the 2016 regulation that enable the 
Secretary to initiate defense to repayment claims on behalf of entire 
classes of borrowers in a collection proceeding to exercise defenses to 
repayment as a last resort after exhausting other available consumer 
protection processes. The Department also realized that claims received 
from borrowers who had attended institutions that the Department had 
not investigated or found instances of misrepresentation (i.e., other 
than Corinthian)create the potential for unsubstantiated claims that 
place no burden on the part of the borrower, but significant burden on 
the part of the Department, it needed a mechanism to collect evidence 
from institutions and to provide an opportunity for those institutions 
to defend themselves against frivolous claims. Because an institution 
might withhold official transcripts from students who receive a defense 
to repayment loan discharge, (as institutions are permitted to do in 
the case of loan discharges), automatic discharges could have 
collateral consequences for students who unknowingly had their loans 
discharged. An ``opt out'' mechanism could result in borrowers who 
unknowingly lose the ability to verify the credentials they earned 
using the subsequently discharged loans. Therefore, the Department 
believes that it is imperative that individual borrowers apply for a 
closed school loan discharge rather than receiving it automatically.
---------------------------------------------------------------------------

    \12\ U.S. Department of Education Office of Inspector General 
(December 8, 2017), ``Federal Student Aid's Borrower Defense to 
Repayment Loan Discharge Process'', retrieved from www2.ed.gov/about/offices/list/oig/auditreports/fy2018/i04r0003.pdf.
---------------------------------------------------------------------------

    The group discharge process, which would be removed by the proposed 
regulations, may otherwise create large and unnecessary liabilities for 
taxpayer funds. If group claims initiated by the Secretary include 
borrowers who were not subjected to the misrepresentation, did not rely 
on a misrepresentation to make an enrollment decision, or were not 
harmed by the misrepresentation then those borrowers' loans should not 
be forgiven with taxpayer funds. The Department believes that 
institutions should be held accountable for acts or omissions that 
constitute misrepresentation, but that arbitration, other student 
complaint resolution or legal proceedings brought in State court should 
serve as the primary means for borrowers to seek remedies against such 
acts.
    The increased number of school closures in recent years has 
prompted the Department to review regulations related to closed schools 
and therefore to propose changes to them. Under the current 
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 student loan discharge 
provided that the student does not transfer credits from the closed 
school and complete the program at another institution. To ensure that 
borrowers who left an institution in the semester prior to its closure 
do not lose eligibility for closed school discharge because of a summer 
break, the Department proposes to expand the closed school discharge 
window from 120 days to 180 days prior to the school's closure. These 
regulations also

[[Page 37286]]

incentivize institutions to provide students with an opportunity to 
complete their program through an approved teach-out opportunity that 
takes place at the closing institution or at another institution. The 
teach-out opportunity must be approved by the accreditor and, if 
applicable, the State authorizing agency. In the proposed regulation, a 
borrower given the opportunity to complete his or her program through 
an orderly teach-out at a closing institution, or through a partnership 
with another institution, would not be eligible for closed school loan 
discharge. 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. The teach-out opportunity must be approved by the 
accreditor and, if applicable, the State authorizing agency to ensure 
that the institution or its teach-out partner institution continues to 
provide educational and student support services that meet the 
accreditor's and agency's standards. Although the 2016 regulations 
included an automatic closed school loan discharge for eligible 
borrowers who did not re-enroll within 3 years of their school's 
closure, upon further consideration, the Department has determined that 
this could have unintended consequences for students because an 
institution, or the custodian of its student records, is permitted to 
and might withhold the official transcripts of borrowers who received a 
closed school discharge. Although the 2016 regulation included an opt-
out provision, students who miss the notification (perhaps due to a 
change in email or mailing address) or who do not fully understand the 
opportunity or its potential consequences, could end up by default 
participating in an action that could prevent them from verifying their 
credits or credential in the future. The Department has heretofore 
favored opt-in requirements rather than opt-out requirements, such as 
in the case of Trial Enrollment Periods (https://ifap.ed.gov/dpcletters/GEN1112.html), to be sure that a student's omission does not 
result in actions with negative financial or academic consequences. The 
opt-out provision also could increase 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. Therefore, the proposed regulations require borrowers to 
submit an application in order to receive a closed school loan 
discharge.
    The proposed regulations also update the Department's regulations 
regarding false certification loan discharges in response to the change 
made to the HEA by Public Law 112-74, Consolidated Appropriations Act, 
2012, that eliminated the option for students who did not have a high 
school diploma or its equivalent to receive Title IV aid by 
demonstrating the ability to benefit and to codify current practices. 
Whereas the ability to benefit test once allowed students who were 
unable to obtain an official high school transcript or diploma to 
qualify for Title IV aid by other mechanisms, the elimination of this 
test prevents them from receiving Title IV aid. Now when a student is 
unable to obtain 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 then be eligible for a false certification discharge if the 
borrower had misstated the truth in signing the attestation.
    These proposed regulations also address several provisions related 
to determining the financial responsibility of institutions and 
requiring surety 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 lease 
liabilities are considered in determining an institution's financial 
position. To align with these new standards, these proposed 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 composite score methodology must be updated to 
align with the new FASB standards, but in the meantime, the 
misalignment between the new FASB standards and the old composite score 
methodology could have unintended consequences. Some of these 
consequences could include institutions signing shorter term equipment 
or facilities leases, thereby increasing the cost of education, or 
potentially even closing schools whose financial position hasn't 
changed from prior years, thereby increasing the number of closed 
school loan discharges. Therefore, the Department would continue to 
calculate the composite score under the prior FASB standard 
(``alternative composite score'') for institutions that would have 
passed the composite score under that standard but not the current 
standard. This alternative composite score methodology will be in place 
for the six years following the implementation of the new FASB standard 
or until an updated composite score is developed through negotiated 
rulemaking, whichever is sooner.
    In addition, the proposed regulations expand the financial 
responsibility requirements and add surety requirements in response to 
certain triggering events that occur between audit cycles. 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 propose 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 materially adverse risk, this approach would enable us to address 
that risk quickly by taking the steps necessary to protect the Federal 
interest.
    We adopted a similar approach in the 2016 final regulations, but 
here we propose to focus on known and quantifiable expenses. For 
example, the actual liabilities incurred from defense to repayment 
discharges could trigger surety requirements, but the existence of 
pending litigation may or may not have a financial impact on the 
school. We are proposing additional surety requirements for other 
metrics or events for which the potential consequences pose a severe 
and imminent risk (for example, SEC or stock exchange actions) to the 
Federal interest.
    We propose other triggering events, such as high cohort defaults 
rates, loan agreement violations, and accrediting agency actions, that 
could have a material adverse effect on an institution's operations or 
its ability to continue operating, but the Department intends to fully 
consider the circumstances surrounding such event before making a 
determination that the institution is not financially responsible. In 
that regard, these proposed regulations do not contain certain 
mandatory triggering events that were included in the 2016 regulations 
because the cost and burden of seeking surety is significant, and in 
many cases speculative events, such as pending litigation or pending 
defense to repayment claims, may be resolved with no or minimal 
financial impact on the institution. Similarly, while the 2016 
regulations included a mandatory surety for all State law violations, 
the Department recognizes that many violations do not threaten the 
financial stability or existence of the institution and therefore 
should not trigger

[[Page 37287]]

mandatory surety requirements. These regulations also do not include as 
a mandatory triggering event the results of a financial stress test, 
which was included in the 2016 regulations without an explanation of 
what that stress test would be and on what empirical basis it would be 
developed.
B. Alternatives Considered
    The Department and the non-Federal negotiators exchanged proposals 
on every topic included in these proposed regulations. The table below 
provides a side-by-side comparison of the 2016 regulations, the 
proposed regulations, and two alternatives--Scenario 1 and Scenario 2. 
OMB circular A-4 requires that agencies carefully consider all 
appropriate alternatives for the key attributes or provisions of a 
rule. They generally should analyze at least three options: The 
preferred option; a more stringent option that achieves additional 
benefits (and presumably costs more) beyond those realized by the 
preferred option; and a less stringent option that costs less (and 
presumably generates fewer benefits) than the preferred option. The 
2016 regulations are summarized in this section and are also available 
to the reader online.\13\ The specifics of the alternatives selected 
are discussed more thoroughly in this section. Scenario 1 reflects a 
more stringent option. Scenario 2 reflects the regulations currently in 
effect (which in the case of defense to repayment dates back to 1994). 
Further, the HEA refers to proprietary institutions, but some of the 
Department's prior notifications and regulations use the term 
``private, for-profit institutions.'' For the purposes of discussion, 
the Department defines private, for-profit institutions to be the same 
as proprietary institutions, and uses the term ``proprietary 
institution'' throughout in order to be consistent with the HEA.
---------------------------------------------------------------------------

    \13\ https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf.

                                       Table 1--Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------
              Topic                    Baseline            Proposal           Scenario 1          Scenario 2
----------------------------------------------------------------------------------------------------------------
Closed school discharge           120 days..........  180 days..........  150 days..........  120 days.
 eligibility window.
Closed school discharge           Borrower completed  School offered a    School offered a    Borrower completed
 exclusions.                       teach-out or        teach-out plan.     teach-out plan.     teach-out or
                                   transferred                                                 transferred
                                   credits.                                                    credits.
Borrower Defense claims accepted  Affirmative and     Defensive only....  Affirmative and     Defensive only.
                                   defensive.                              defensive.
Party that adjudicates borrower   Department........  Department........  State court or      Department.
 defense claims.                                                           arbiter.
Standard for borrower defense     Federal Standard..  Federal standard..  State laws........  State laws.
 claims.
Borrower defense application      Application.......  Select borrower     Submit judgment     Submit sworn
 process.                                              defense in          from state court    attestation or
                                                       response to wage    or similar using    application.
                                                       garnishment or      application.
                                                       similar actions.
Loans associated with BD claims.  Forbearance during  Forbearance not     Forbearance not     Forbearance during
                                   adjudication        necessary.          necessary.          adjudication
                                   Interest accrues.                                           Interest accrues.
Composite score calculation and   No FASB updates...  Higher of current   Higher of current   No FASB updates.
 timeline.                                             or FASB-updated     or FASB-updated
                                                       score forever.      score for 6
                                                                           years, then FASB-
                                                                           updated score.
Financial responsibility          Reporting that      New reporting that  New reporting that  None.
 triggers.                         automatically       may result in       automatically
                                   results in surety   surety request.     results in surety
                                   request.                                request.
Notification of mandatory         Prohibits           On website and      On website, during  None.
 arbitration and class action      mandatory           entrance            entrance and exit
 waivers.                          arbitration         counseling.         counseling, and
                                   clauses and class                       annually by email
                                   action waivers.                         to students.
----------------------------------------------------------------------------------------------------------------

1. Baseline
    Usually, the impact of a regulation is quantified relative to the 
regulations currently in effect, which in this case would be the 
borrower defense regulations from 1995, and associated data. However, 
this impact analysis does not follow that practice because the 2016 
regulations, although not yet in effect, would go into effect were it 
not for these proposed regulations. Therefore, this analysis compares 
the proposed regulations to the 2016 borrower defense regulations 
rather than the 1995 regulations. Similarly, the delayed 2016 
regulations on financial responsibility, closed school discharges, and 
false certification discharges are used as a baseline for these topics. 
Composite score calculations and FASB standards were not covered in the 
2016 regulations, so they are compared to the regulations currently in 
effect.
2. Summary of Proposed Regulations
    The proposed regulations would amend the baseline regulations to 
update composite score calculations to comply with new FASB standards, 
create an alternative composite score that does not include new FASB 
standards for lease liabilities, require institutions to disclose fewer 
adverse events to the Department and notify students of mandatory 
arbitration or class-action prohibitions, permit mandatory arbitration 
clauses and class-action waivers, expand the closed school discharge 
eligibility period, modify the conditions under which a Direct Loan 
borrower may qualify for false certification and closed school 
discharges, create a different process for adjudicating defense to 
repayment applications, and, as part of the adjudication process, 
provide that the Secretary will used the revised misrepresentation 
standard explained in this NPRM, request evidence from institutions 
prior to completing adjudication of any borrower defense claims. 
Finally, the Department is also proposing changes to the regulations 
regarding subsidy usage periods and collection costs charged by 
guaranty agencies.
3. Alternative Scenario 1
    Under Scenario 1, the Department would require borrowers to submit 
a judgment from a Federal or State court or arbitration panel to 
qualify for a defense to repayment discharge. Scenario 1 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

[[Page 37288]]

hire a lawyer in order to present their claims to a State court or 
incur costs associated with an arbitration 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.
    Under Scenario 1, a guaranty agency would be able to charge a 
borrower collection fees and capitalize interest after rehabilitating a 
loan. The closed school discharge eligibility window would be expanded 
to 150 days, but only students whose institutions did not offer them a 
teach-out plan would be eligible for such a discharge.
    This scenario would require an institution to notify current and 
potential students of its pre-dispute arbitration and class-action 
waiver policies on its website, at entrance and exit counselling for 
all title IV borrowers, and annually to all enrolled students by email. 
Institutions would also be required to disclose certain financial 
responsibility risk events to the Department if they occur.
    Lastly, this scenario 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. This scenario would include a requirement 
that the institution automatically provide a surety in the event that a 
financial responsibility risk event occurs.
4. Alternative Scenario 2
    Scenario 2 would be to rescind the 2016 regulations on borrower 
defenses and go back to the 1995 regulations. In Scenario 2 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.
    Scenario 2 would return the eligibility period for closed school 
discharge to 120 days. Borrowers who complete a teach-out or transfer 
credits would not qualify. The technical changes to the false 
certification discharge provisions reflected in the 2016 regulations 
would be rescinded.
C. In Scenario 2, no Changes to the Composite Score or Financial 
Responsibility Standards Would Be Made as a Result of Changes to the 
FASB Standards
    Under this scenario, a guaranty agency could not capitalize 
interest or charge collection fees on a loan that is sold following the 
completion of loan rehabilitation, which is current Department practice 
in the Direct Loan Program.\14\
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    \14\ https://ifap.ed.gov/dpcletters/GEN1514.html.
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Costs, Benefits, and Transfers

    These proposed 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.
1. Borrowers
    These proposed regulations would affect borrowers relative to 
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 the cost savings and campus stability associated with 
longer leases from a more generous ``look back'' period with regard to 
closed school loan discharges, and from the ability to increased 
opportunities for borrowers to complete their program through an 
approved teach-out plan. Borrowers are also more likely to have their 
defense to repayment applications processed and decided more quickly if 
the Department has a smaller volume of unjustified or ineligible 
claims.
    Borrowers may be disadvantaged by receiving fewer opportunities to 
discharge loans if the Department returns to the pre-2015 practice of 
accepting defense to repayment claims only from borrowers in a 
collections proceeding. In addition, the Department is concerned that 
students could engage in strategic defaults in order to avail 
themselves to defense to repayment relief. Students who default and 
then are unsuccessful in receiving defense to repayment loan relief may 
suffer additional financial penalties and have the default listed on 
their credit report. Therefore, the Department is considering 
continuing to accept affirmative claims to enable borrowers who are 
harmed by misrepresentations to seek relief while they are in 
repayment. In the event that the Department continues to accept 
affirmative claims, it will place certain limits and conditions on the 
affirmative claims process to serve borrowers who were harmed while 
preventing frivolous claims. These limits will also ensure that the 
affirmative claim process aligns with the Department's record retention 
policies so that institutions will have the ability to respond to the 
borrower's claim. Some borrowers may incur burden to review 
institutional disclosures on mandatory arbitration and class action 
waivers, or to complete applications for defense to repayment 
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.
a. Borrower Defenses
    When 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 $693.9 million. This is based on 
the difference in cashflows associated with loan discharges when the 
proposed regulations are compared to the President's Budget 2019 
baseline (PB2019) and discounted at 7 percent. The proposed regulations 
do not include a formula for computing partial discharges because 
partial discharges are based on the nature of each borrower's 
application and the magnitude of the harm experienced by the borrower. 
The Department is interested in options for determining partial relief 
and invites commenters to submit specific formulae for determining 
partial relief derived from an assessment of the financial harm the 
borrower experienced, as well as sources of data that could be used to 
support the recommended formulae. 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 borrower defense 
discharge is a remedy available to students when other consumer 
protection tools are ineffective. Students harmed by institutional 
misrepresentations continue to have the right to seek relief directly 
from the

[[Page 37289]]

institution through arbitration, lawsuits in State court, or other 
available means. Borrowers would possibly receive quicker and more 
generous financial remedies from institutions through arbitration since 
schools may be more motivated to make students whole in order to avoid 
defense to repayment claims. The 2016 regulations would have eliminated 
this complaint resolution option by prohibiting mandatory arbitration, 
and while institutions may have continued to provide voluntary 
arbitration, schools may not have made it obvious to students how to 
avail themselves of arbitration opportunities. The proposed regulation 
allows for mandatory arbitration clauses, but requires institutions to 
provide the borrower with information about the meaning of a mandatory 
arbitration clauses 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. The proposed regulations, 
therefore, would provide borrowers with the incentive to seek redress 
first from institutions that should incur the cost of the harm to the 
student. Only as a last resort should taxpayer funds be used to pay the 
costs of institutional misrepresentations.
b. Closed School Discharges
    Some borrowers may be impacted by the proposed changes to the 
closed school discharge regulations. These proposed regulations would 
extend the window for a student's eligibility for a closed school 
discharge from 120 to 180 days from the date the school closed, to 
account for the days a student would be unable to attend an institution 
during a summer term at institutions that offer no or only limited 
classes during that time. The regulations would provide that borrowers 
offered a reasonable teach-out plan by their institutions would not be 
eligible for closed school discharges, if the plan was approved by the 
institution's accrediting agency and, if applicable, the institution's 
State authorizing agency. These proposed regulations also eliminate the 
regulations that provided for an automatic closed school discharge 
without application for students that had not received a closed school 
discharge or re-enrolled at a title IV participating institution within 
3 years of a school's closure. While the automatic discharge may 
benefit 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 would increase the number 
of students eligible under this criterion 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 teach-out provision and the 
elimination of the 3-year automatic discharge may reduce debt relief 
for students who believe that their education provided no benefits, but 
have not tried to transfer credits or complete their program elsewhere. 
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 $96.5 
million, primarily due to the elimination of automatic closed school 
discharges. This is based on the difference in cashflows associated 
with loan discharges when the proposed regulations are compared to the 
President's Budget 2019 baseline (PB2019) and discounted at 7 percent. 
The Department's accreditation standards \15\ 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 the school 
decide, or be required, to 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, and therefore would not negate a student's 
access to closed school discharges. In addition, an institution whose 
financial position is so degraded that it could not provide adequate 
instructional or support services would similarly not have their teach-
out plan approved, thus enabling borrowers at those institutions to 
obtain a closed school discharge. In the case of two large, precipitous 
closures in 2015 and 2016, it is possible that enabling those 
institutions to teach-out their current students--including by 
arranging teach-outs plans delivered by other institutions or under the 
oversight of a qualified third party--would have benefited students and 
saved hundreds of millions of dollars of taxpayer funds.
---------------------------------------------------------------------------

    \15\ 34 CFR 602.24(c).
---------------------------------------------------------------------------

    Large numbers of small, private non-profit colleges could close in 
the next 10 years, which could contribute significantly to the cost of 
closed school discharges if these institutions are not encouraged to 
provide high quality teach-out options to their students.\16\ By way of 
example, Mt. Ida College announced \17\ 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 will 
accept 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.\18\ A proper teach-out plan may have enabled 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 opportunity to 
complete the program.
---------------------------------------------------------------------------

    \16\ www.insidehighered.com/news/2017/11/13/spate-recent-college-closures-has-some-seeking-long-predicted-consolidation-taking.
    \17\ www.insidehighered.com/news/2018/04/09/mount-ida-after-trying-merger-will-shut-down.
    \18\ www.insidehighered.com/news/2018/04/23/when-college-goes-under-everyone-suffers-mount-idas-faculty-feels-particular-sense.
---------------------------------------------------------------------------

c. False Certification Discharges
    Some borrowers may be impacted by the proposed changes to the false 
certification discharge regulations, although this provision of the 
proposed 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 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 misrepresented the truth in signing 
such an attestation from subsequently seeking

[[Page 37290]]

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 in the event 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 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.
d. Institutional Disclosures of Mandatory Arbitration Requirements and 
Class Action Waivers
    Borrowers, students, and their families would benefit from 
increased transparency from institutions' disclosures of mandatory 
arbitration clauses and class action lawsuit waivers in their 
enrollment agreements. Under the proposed regulations, institutions 
would be required to disclose that their enrollment agreements contain 
class action waivers and mandatory arbitration clauses. Institutions 
would be required to make these disclosures to students, prospective 
students, borrowers, and their families on institutions' websites and 
in their marketing materials. 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 $16.30 \19\ per hour to review 
these notifications during entrance counseling, for an annual burden of 
$446,506.
---------------------------------------------------------------------------

    \19\ 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.
---------------------------------------------------------------------------

    As institutions began preparing to implement the 2016 regulations, 
some eliminated both mandatory and voluntary arbitration provisions to 
be sure they would be in compliance with the letter and spirit of the 
regulations. Under the proposed regulations, institutions would be able 
to include these provisions in their enrollment agreements. The effect 
will be 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, because litigation costs are ultimately passed on to future 
students through tuition and fees. It also increases the likelihood 
that damages will be paid directly to students, rather than used to pay 
legal fees.
2. Institutions
    Institutions will be impacted by the proposed 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 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 and 
increased expenses to provide for teach-out plans in the event of a 
school closure.
1. Borrower Defenses
    Most institutions would not be burdened by the proposed regulatory 
changes in borrower defense to repayment. We estimate that successful 
defense to repayment applications under the proposed Federal standard 
and process for defensive claims 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, 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 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 $223 
million under the seven percent discount rate. However, the Department 
believes that by requiring institutions that utilize mandatory 
arbitration clauses to provide plain language information to students 
about the role of mandatory arbitration clauses and the process to 
access arbitration, more students may take advantage of arbitration to 
settle disputes. In addition, given the benefits to both students and 
institutions of resolving complaints through arbitration, more 
institutions could offer arbitration opportunities, which could result 
in added costs to institutions for arbitration and added financial 
benefits to students who may more easily seek and be awarded financial 
remedies.
2. Closed School Discharges
    A small percentage of institutions close annually, with some 
institutions providing 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. Although the proposed regulations expand the 
eligibility window for students who left the institution but are still 
eligible to receive closed school loan discharges from 120 to 180 days 
it codifies current practice under which borrowers who were provided an 
approved teach-out plan by their institution will have completed their 
credential, and therefore would not qualify for closed school loan 
discharges. The Department has worked with a number of schools that 
have successfully completed teach-out plans, to the benefit of 
borrowers and taxpayers. As additional schools close in the future, the 
Department wants to encourage them to engage in orderly teach-outs 
rather than precipitous closures. We believe the proposed regulations 
would encourage institutions to provide teach-out opportunities, 
despite their high cost, if they reduce the total liability that would 
result from having to reimburse the Secretary for losses due to closed 
school discharges. While teach-outs are costly to institutions, they 
better serve students and reduce the risk to taxpayers, and therefore 
should be incentivized.
    Title IV-granting institutions are required by their accreditors 
\20\ to have

[[Page 37291]]

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. Because accreditors, and in some cases, State authorizing 
agencies, must approve teach-out plans and carefully monitor teach-out 
activities, only those students who can be provided a high quality 
education will not be eligible for a closed school loan discharge under 
this provision.
---------------------------------------------------------------------------

    \20\ 34 CFR 602.24(c).
---------------------------------------------------------------------------

    The Department is not including in these regulations provisions for 
automatic closed school discharges for students who do not complete 
their program 3 years after the school closed, which it included in the 
2016 regulations. It is inappropriate for the Secretary to grant such 
loan discharges without receiving an application from the borrower.
    These proposed regulations will encourage more institutions to 
engage in teach-out plans rather than precipitous closures, which would 
generate significant savings to taxpayers. Although teach-outs have 
considerable cost for institutions, these costs will be offset by 
reducing the number of borrowers who seek and are granted closed school 
discharges. It is important to keep in mind that closed schools include 
branch campuses and additional locations of main campuses that continue 
to operate. The Department has recognized the benefits of helping 
students complete their programs prior to school closures, and 
therefore sees benefit in promoting orderly teach-outs.
3. False Certification Discharges
    A small percentage of institutions are affected by false 
certification discharges annually. However, elimination of the ability 
to benefit option for Title IV eligibility could result in growth in 
the coming years of the number of students who enroll having attested 
to receiving a high school diploma since an official high school 
diploma or transcript is not available. 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 
pursue a false certification loan discharge due to non-completion of 
high school, a GED or a home school program.
    The proposed regulations would continue to permit institutions to 
obtain written assurance from prospective students who 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. Although we believe this proposed regulation will not 
have a significant impact in the short term, primarily because the 
Department receives very few false certification discharge requests, 
the elimination of the ability to benefit option could result in 
increased numbers of enrollments by attestation, which could in turn 
increase the frequency and cost of false certification discharges in 
the future. The proposed regulations also will protect institutions as 
they seek to serve students who are pursuing postsecondary education 
but cannot obtain an official diploma or transcript.
    This provision may result in small cost savings to some affected 
institutions, but mostly it ensures that adult students who are most 
likely to have difficulty in obtaining official transcripts maintain 
the ability to pursue higher education without increasing the risk of 
financial losses to taxpayers.
4. Financial Responsibility Standards
    Both the 2016 final regulations and the proposed regulations 
include conditions under which institutions would have to provide a 
letter of credit or other form of surety 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 the proposed regulations. Mandatory events or 
actions automatically result in a determination that the institution is 
not financially responsible and trigger a request for surety 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.
BILLING CODE 4000-01-P

[[Page 37292]]

[GRAPHIC] [TIFF OMITTED] TP31JY18.003


[[Page 37293]]


[GRAPHIC] [TIFF OMITTED] TP31JY18.004


[[Page 37294]]


[GRAPHIC] [TIFF OMITTED] TP31JY18.005

BILLING CODE 4000-01-C
    Some institutions may incur burden from the requirement to report 
any action or event described in Sec.  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 burden of 2,994 hours. Using an 
hourly rate of $44.41,\21\ we estimate that the costs incurred by this 
regulatory change would be $132,964 annually ($44.41*2,994).
---------------------------------------------------------------------------

    \21\ Hourly wage data uses the Bureau of Labor Statistics, 
available at swww.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------

    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

[[Page 37295]]

new or reported differently, including long-term lease liabilities. 
These changes were not included in the 2016 regulations and are new to 
these proposed regulations.
    Changes in the definition of terms used under the financial 
responsibility standards are being proposed to align the regulations 
with current FASB standards.\22\ However, the new FASB lease standard 
could have a profound impact on an institution's composite score and 
the Department has no mechanism to make a timely adjustment to the 
composite score calculation to accommodate this change. The Department 
also has no data to understand what the impact of this change will be 
on institutional composite scores. Models were created in SAS \23\ to 
perform impact and sensitivity analyses on the proposed changes to the 
composite score calculations. However, the Department does not have 
structured data for these 12 values used in the calculation:
---------------------------------------------------------------------------

    \22\ www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350.
    \23\ SAS Software. SAS Institute Inc. SAS and all other SAS 
Institute Inc. product or service names are registered trademarks or 
trademarks of SAS Institute Inc., Cary, NC, USA.
---------------------------------------------------------------------------

    <bullet> Lease Right-of-use Assets (VAR1);
    <bullet> Lease Right-of-use Liabilities (VAR2);
    <bullet> Net Assets With Donor Restrictions (VAR3);
    <bullet> Net Assets Without Donor Restrictions (VAR4);
    <bullet> Net Assets With Donor Restrictions: Restricted in 
Perpetuity (VAR5);
    <bullet> Post-employment and defined benefit pension plan 
liabilities (VAR6);
    <bullet> Loss for defined pension and other post-employment, 
investments and annuities (VAR7);
    <bullet> Investment Gains (VAR8);
    <bullet> Non-operating investment amount needed for separation of 
expenses (VAR9);
    <bullet> Annuities, term endowments and life funds not restricted 
in perpetuity (VAR10);
    <bullet> Construction in process (VAR11); and
    <bullet> Debt purpose and related amount (VAR12).
    The Department invites commenters to submit data to the Department 
on these variables. Specific, numeric values submitted will be 
considered for inclusion in the Department's models prior to 
publication of the final regulations. We invite submission of data at 
the institutional level as well as means or medians. Please submit data 
in the format provided in Tables 3 and 4 (data without OPEID will also 
be accepted).

                                                  Table 3--Financial Data for Proprietary Institutions
--------------------------------------------------------------------------------------------------------------------------------------------------------
              OPEID                 VAR1      VAR2      VAR3      VAR4      VAR5      VAR6      VAR7      VAR8      VAR9      VAR10     VAR11     VAR12
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                   Table 4--Financial Data for Nonprofit Institutions
--------------------------------------------------------------------------------------------------------------------------------------------------------
              OPEID                 VAR1      VAR2      VAR3      VAR4      VAR5      VAR6      VAR7      VAR8      VAR9      VAR10     VAR11     VAR12
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Median
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mean
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Therefore, while the Department must obtain audited financial 
statements prepared in accordance with FASB standards, and it will 
automatically calculate a composite score for all institutions using 
the audited financial statements, those institutions that wish to have 
an alternative composite score calculated based on the current 
methodology (minus long term lease liabilities) can provide 
supplemental data to the Department and request the alternative score 
to be calculated. The Department will use the higher of the two scores 
to determine an institution's financial responsibility. Under this 
proposal, an institution can continue to rely on long-term leases that 
reduce costs, increase campus stability and prevent increased school 
closures that result from short-term leases that cannot be extended or 
satisfactorily renegotiated.
    The Department may use the data it would collect under the proposed 
regulations to conduct analyses that might inform future negotiated 
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. Further, 450 private 
institutions and 474 proprietary institutions would each need 15 
minutes to request that the Secretary make the second composite score 
calculation, for an additional annual burden of $10,303. The Department 
is not yet receiving these data on

[[Page 37296]]

institutions' financial statements, so it is unable to quantify 
anticipated changes. We invite data submissions in this section for the 
Department to use in composite score sensitivity analyses. If the 
Department receives a sufficient number of complete data submissions, 
it may include this sensitivity analysis in the RIA in the final 
regulations.
5. Enrollment Agreements
    The proposed 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, 584 U.S.__, 2018 
WL 2292444 (May 21, 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 proposed regulations. Students may also benefit from arbitration, 
which is easier and less costly to navigate. On the other hand, 
students will have reduced access to a judicial forum, which would 
decrease the ability of a borrower to hold the institution publicly 
accountable.
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 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,\24\ 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).
---------------------------------------------------------------------------

    \24\ Hourly wage data uses the Bureau of Labor Statistics, 
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------

3. Guaranty Agencies
    Guaranty agencies would incur one-time costs as well as annual 
costs under the proposed regulations. The one-time costs would be to 
update their systems to identify borrowers now eligible for closed 
school discharges for reporting to lenders and to update their 
notifications and establish a process for forwarding requests for 
escalated reviews to the Secretary. As further explained in the 
Paperwork Reduction Act of 1995 section, the Department estimates the 
burden for making these system changes would be 336 hours (240+96). 
Using an hourly rate of $44.41,\25\ we estimate costs incurred by this 
regulatory change would be $14,921.76 (336 hours * $44.41 per hour). 
Finally, there would be an ongoing, annual burden on guaranty agencies 
to forward a borrower's request for escalated review of a denied closed 
school discharge to the Secretary. We estimate this burden would be 74 
hours annually. Using the same hourly rate, we estimate costs incurred 
by this regulatory change would be $3,286.34 (74 hours * $44.41 per 
hour). Therefore, the Department estimates increased costs to guaranty 
agencies of $3,286 annually and $14,922 additional one-time costs in 
the first year.
---------------------------------------------------------------------------

    \25\ Hourly wage data uses the Bureau of Labor Statistics, 
available at www.bls.gov/ooh/management/postsecondary-education-administrators.thm.
---------------------------------------------------------------------------

    The Department does not have data on interest capitalization and 
collection costs for rehabilitated loans to estimate the impact of the 
changes in the proposed regulations. The Department invites commenters 
to submit the following data points: proportion of rehabilitated loans 
where collection costs were charged, mean collection costs charged 
under this circumstance per loan, proportion of rehabilitated loans 
where interest is capitalized prior to sale, and mean interest 
capitalized under this circumstance per loan.
3. Federal Government
    These proposed regulations would affect the Federal government's 
administration of the title IV, HEA programs. The Federal government 
would benefit in several ways, including significant reductions in 
student loan discharge transfers, reduced administrative burden, 
increased (or at least steady) public confidence in the student loan 
program, and increased access to data. The Federal government would 
incur costs to update its IT systems to implement the proposed changes.
a. Borrower Defenses
    Borrower defense to repayment was described in the 1994 regulations 
promulgated by the Department as a right that a borrower could exercise 
once involved in a collections proceeding. The Department altered this 
approach in 2015 by allowing borrowers to file affirmative borrower 
defense claims, meaning claims while loans are in repayment or 
forbearance, and the 2016 regulations continued that approach. The 
proposed regulations would return to accepting defensive claims only, 
transferring the cost burden of misrepresentation back to institutions 
and the cost of administering consumer fraud allegations to the 
appropriate entities--courts or arbitration. It is more likely that the 
cost of misrepresentation would be incurred by institutions committing 
the act or omission than the taxpayer, because borrowers would be 
encouraged first to go to the institution to litigate claims of 
misrepresentation and because the Department would recoup defense to 
repayment discharge transfers from institutions.
    In addition, although not quantifiable, a Federal student loan 
program that does not result in additional financial burden to the 
taxpayer is likely to be more stable and viable over the long term, and 
therefore more likely to continue receiving Congressional and taxpayer 
support. Therefore, restoring defense to repayment as a last resort 
option rather than a first resort consumer protection mechanism will 
likely ensure that the student loan program continues to serve 
borrowers into the future.
    Finally, the Department expects a marked reduction in 
administrative burden as a result of the proposed changes to the 
circumstances under which it would consider a borrower's defense to 
repayment application. While the proposed regulations would rely 
heavily upon existing collection processes to initiate a defense 
against collection actions, the Department has also requested public 
comment on how affirmative claims might be adjudicated and how 
sufficient guardrails could be put in place to minimize the submission 
of unjustified claims or those that do not fall within the scope of a 
defense to repayment claim. Thus, until the final determination is made 
regarding the Department's acceptance of affirmative claims, defensive 
claims, or both, it is unable to provide an estimate of this reduction 
in adjudication burden.

[[Page 37297]]

b. Loan Discharges
    Under the proposed regulations, the Department would expect to 
process and award fewer closed school and 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 Impacts section, the Department estimates that annualized 
transfers from the Federal government to affected borrowers, partially 
reimbursed by institutions, would be reduced by $693.9 million for 
borrower defenses and $96.5 million for closed school discharges with 
reductions in reimbursement from institutions of $223 million annually. 
This is based on the difference in cashflows associated with loan 
discharges when the proposed regulation is compared to the President's 
Budget 2019 baseline (PB2019) and discounted at 7 percent.
c. Financial Responsibility Standards
    The Department will benefit from receiving updated financial 
statements consistent with FASB standards. By receiving information to 
calculate both composite scores, the Department would have data 
necessary for developing updated composite score regulations through 
future rulemaking. The financial responsibility disclosures will enable 
the Department to receive information to continue 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. Further, the 
Department expects ongoing, increased administrative burden because it 
would need to compute two composite scores for each institution under 
the proposed regulations. However, the Department has not yet developed 
its internal process for implementing the proposed 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 proposed regulatory changes in the 
financial responsibility provisions.

Net Budget Impacts & Accounting Statement

    These proposed regulations are estimated to have a net Federal 
budget impact over the 2019-2028 loan cohorts of $[-12.715] billion in 
the primary estimate scenario, including $[-10.487] billion for changes 
to the defense to repayment provisions and $-2.227 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 
non-administrative Federal costs associated with a cohort of loans. The 
Net Budget Impact is compared to the 2019 President's Budget baseline 
(PB2019). This baseline assumed that the borrower defense regulations 
published by the Department on November 1, 2016, would go into effect 
in 2019 and utilized the primary estimate scenario,\26\ as modified by 
the change in the effective date to 2019, described in the final rule 
published February 14, 2018.\27\
---------------------------------------------------------------------------

    \26\ See 81 FR 76057 published November 1, 2016, available at 
ifap.ed.gov/fregisters/attachments/FR110116.pdf.
    \27\ See 83 FR 6468, available at www.gpo.gov/fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf.
---------------------------------------------------------------------------

    The proposed 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. 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.
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 estimates, and changes described 
here are evaluated against that baseline. In our main estimate, based 
on the assumptions described in Table 5, we present our best estimate 
of the impact of the changes to the defense to repayment provisions in 
the proposed regulation.
a. 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, 
defensive claims, defense to repayment applications success, and 
recoveries from institutions (respectively labeled as Conduct Percent, 
Defensive Claims Percent, Borrower Percent, and Recovery Percent in 
Table 5) to loan volume estimates to generate the estimated net number 
of borrower defense applications for each cohort, loan type, and 
sector. Table 5 presents the assumptions for the main budget estimate 
with the budget estimate for each scenario presented in Table 6. We 
also estimated the impact if the Department received no recoveries from 
institutions, the results of which are discussed after Table 6.
    The model can be described as follows: To generate gross 
applications (gc), loan volumes (lv) by sector were multiplied by the 
Conduct Percent (cp), the Defensive Applications Percent (dcp) and the 
Borrower Percent (bp); to generate net applications (nc) processed in 
the Student Loan Model, gross applications were then multiplied by the 
Recovery Percent (rp). That is, gc = (lv * cp * dcp * 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, and the Recovery Percent estimates the percent of net 
loans eventually discharged. The numbers in Table 5 are the percentages 
applied for the main estimate and PB2019 baseline scenarios for each 
assumption for cohorts 2019-2028.

[[Page 37298]]



                                        Table 5--Assumptions for Main Budget Estimate Compared to PB2019 Baseline
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          PB2019 baseline                                    NPRM main
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                                Pub            Priv            Prop             Pub            Priv            Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Conduct Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019....................................................             1.8             1.8           12.24            1.71            1.71           11.63
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
--------------------------------------------------------------------------------------------------------------------------------------------------------


 
                                                           2Yr pub/priv      2Yr prop      4Yr pub/priv      4Yr prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Defensive Applications Percent (not in PB2019 Baseline)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Cohorts.............................................              40              34              16              21  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------


 
                                                                          PB2019 baseline                                    NPRM main
                         Cohort                          -----------------------------------------------------------------------------------------------
                                                                Pub            Priv            Prop             Pub            Priv            Prop
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Borrower Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019....................................................            36.8            36.8            47.3               4               4               6
2020....................................................            42.4            42.4            54.6             4.4             4.4             6.6
2021....................................................            46.7            46.7              60               5               5             7.3
2022....................................................              50              50              63             5.5             5.5             7.9
2023....................................................              50              50              65               6               6             8.4
2024....................................................              50              50              65             6.4             6.4               9
2025....................................................              50              50              65               7               7             9.3
2026....................................................              50              50              65               7               7              10
2027....................................................              50              50              65               7               7              10
2028....................................................              50              50              65               7               7              10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Recovery Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
2019....................................................              75          24.871          24.871              75              16              16
2020....................................................              75            28.8            28.8              75              16              16
2021....................................................              75           31.68           31.68              75            18.5            18.5
2022....................................................              75           33.26           33.26              75            18.5            18.5
2023....................................................              75           34.93           34.93              75              21              21
2024....................................................              75           36.67           36.67              75              21              21
2025....................................................              75            37.4            37.4              75            22.5            22.5
2026....................................................              75            37.4            37.4              75            22.5            22.5
2027....................................................              75            37.4            37.4              75              25              25
2028....................................................              75            37.4            37.4              75              25              25
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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. Therefore, the PB2019 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 PB2019 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 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 24.59 
percent of Direct Loans disbursed in the proprietary sector in award 
year 2016-17 and the 50 largest proprietary institutions represent 66.6 
percent of Direct Loans disbursed in that same time period.\28\ The 
share of volume captured in the conduct percentage may be conservative 
and estimate a higher number of defense to repayment applications than 
may occur in the future as we did not want to underestimate costs 
associated with changes to the borrower defense regulations. Due to the 
similarities 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 PB2019 Baseline as much as the Borrower Percent. As recent 
loan cohorts progress further in their repayment cycles if

[[Page 37299]]

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 re-estimates.
---------------------------------------------------------------------------

    \28\ 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.
---------------------------------------------------------------------------

b. Discussion
    The Department has some additional experience with processing 
defense to repayment applications and data on the approximately 138,990 
applications received since 2015, but while this information has helped 
inform these estimates, it does not eliminate the uncertainty about 
institutional and borrower response to the proposed 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.
    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 claim. The conduct percent is 
assumed to be 95 percent of the PB2019 baseline level.
    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 5. We believe that institutions will not want to suffer the 
scrutiny that a significant number of borrower defense to repayment 
applications would invite. As expected, when regulatory provisions 
target specific institutional action or performance, institutional 
behavior changes over several years, resulting in removal of the worst 
performers and adaptation of other institutions' behavior so that a 
lower steady state is established. We still expect a similar pattern to 
develop with respect to borrower defense to repayment, as reflected in 
the Conduct Percent in Table 5. Also, allowing institutions to present 
evidence may result in fewer 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.
    Overall, we expect that the changes in the proposed regulations 
that will reduce the anticipated number of borrower defense 
applications are related more to changes in the process and emphasis on 
defensive claims, 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 PB2019 baseline.
    The proposed regulations reestablish a 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, and the inclusion 
of mandatory arbitration clauses in enrollment agreements may increase 
financial settlements with students, but defense to repayment 
applications through the Department will be reserved as a defense to 
collection efforts. The Defensive Applications Percent attempts to 
quantify the effect of this proposal by examining estimated lifetime 
default rates for loans in standard repayment plans by SLM risk group. 
The 2-year not for profit risk group was used for the 2-year or less 
private and public sectors, and the 2-year proprietary risk group was 
used for the 2-year proprietary sector. For 4-year institutions, the 4-
year freshman/sophomore risk group rate was used for 4-year proprietary 
schools, and the weighted average of the 4-year freshman/sophomore and 
4-year junior/senior rates were used for 4-year public and private 
nonprofit institutions. The estimated default rates were used 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 
repayment. We used the higher estimated default rates associated with 
the standard repayment plan so that we did not underestimate potential 
future costs of the proposed defense to repayment regulations. Using 
the higher rates also accounts for the possibility of increased 
defaults by borrowers who may decide that the consequences of default 
are worth the risk of a potentially successful defense to repayment 
applications. However, now that institutions have the ability to 
present evidence as borrowers' applications are considered, there may 
be a decrease in frivolous and unsubstantiated defense to repayment 
applications that, under current practice, could be approved.
    Several process changes contribute to the reduction in the Borrower 
Percent compared to the PB2019 baseline assumption. A separate 
assumption for the defensive claims provision was explicitly included 
so it could be varied in sensitivity runs or in response to comments. 
Another significant factor is the 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. Additionally, while there is 
no statute of limitations on borrowers' ability to submit a defense to 
repayment application in response to collection activities, borrowers 
will have to inform the Department of their intent to raise a defense 
to repayment within the timeframe specified for requesting a hearing in 
their notice of collection activity to guarantee their filing will be 
reviewed. The timeframes vary from 30 days for consumer reporting and 
wage garnishment to 65 days for Federal salary offset and tax refund 
offset. 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 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

[[Page 37300]]

different number of applications than the Department anticipates. 
Evidence developed in such proceedings could be used by borrowers to 
support their individual applications.
    The Department has used data available on defense to repayment 
applications, associated loan volumes, 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.
c. Additional Scenarios
    The Department recognizes the uncertainty associated with the 
factors contributing to the main budget assumption presented in Table 
5. 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 institutions to present evidence in response to 
borrowers' applications; the extent of full versus partial relief 
granted; and the level of State activity, is reflected in additional 
analyses that demonstrate the effect of changes in the specific 
assumption being tested.
    The Department designed the following scenarios to isolate the 
assumption being evaluated and adjust it in the direction that would 
increase costs, increasing the Defensive Applications or Borrower 
Percent and decreasing the recovery percent. The first scenario the 
Department considered is that the Defensive Applications Percent will 
increase by 15 percent (Def15). This could occur if economic conditions 
or strategic behavior by borrowers increase defaults. The second 
scenario the Department increased the Borrower Percent by 20 percent 
(Bor20) 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, Defensive Claims Percent, and 
the Borrower Percent, the scenarios capture the impact of a 15 percent 
or 20 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 36 percent to 
demonstrate the impact of that assumption. The Department also 
estimated the effect of allowing affirmative claims by removing the 
Defensive Claims Percent (Affirmative Claims Allowed scenario) which 
reduced savings by approximately $960 million when estimated on top of 
the other changes in the proposed regulations. The net budget impacts 
of the various additional scenarios compared to the PB2019 baseline 
range from $-9,528 billion to $-10,452 billion and are presented in 
Table 6.

   Table 6--Budget Estimates for Additional Borrower Defense Scenarios
------------------------------------------------------------------------
                                                             Estimated
                                                             costs for
                                                           cohorts 2019-
                        Scenario                           2028 (outlays
                                                             in $mns)
 
------------------------------------------------------------------------
Main Estimate...........................................        $-10,487
Def15...................................................         -10,452
Bor20...................................................         -10,445
Recs....................................................         -10,459
Affirmative Claims Allowed..............................          -9,528
------------------------------------------------------------------------

    The transfers among the Federal government, affected borrowers, and 
institutions associated with each scenario above are included in Table 
7, with the difference in amounts transferred to borrowers and received 
from institutions generating the budget impact in Table 6. The amounts 
in Table 6 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 approved defense to 
repayment applications. For the primary budget estimate, the annualized 
costs with no recovery are approximately $635.7 million at a 3 percent 
discount rate and $693.9 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 proposed defense 
to repayment regulations.
    The Department may revise its model related to these provisions as 
more data become available over time. We welcome comments on the 
Defense to Repayment Discharge model, its assumptions, and its 
conclusions; the Department may incorporate well-documented comments 
into this model as we develop the final regulations.
2. Closed School Discharges
    In addition to the provisions previously discussed, the proposed 
regulations also would make three changes to the closed school 
discharge process that are expected to have an estimated net budget 
impact of -$2.227 billion, of which -$359 million is a modification to 
cohorts 2014-2018 related to the elimination of the automatic 3-year 
discharge. The combined effect of the elimination of the 3-year 
automatic discharge, the limitation to students not offered a teach-out 
opportunity approved by the school's accrediting agency and the 
school's State authorizing agency, and the expansion of the eligibility 
window to 180 days is -$1.868 billion for cohorts 2019-2028. 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 PB2019 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.
    While the Secretary will retain the discretion to approve closed 
school discharges without applications, the standard path to such a 
discharge will require borrowers to submit an application. The 
Department does, however, plan to be more aggressive in informing 
students who are eligible for closed school discharges of their rights. 
In CY2015 to CY2017, closed school discharges excluding Corinthian and 
ITT ranged from 24.2 million to $69.9 million annually. Therefore, the 
savings from eliminating the 3-year automatic closed school discharge 
provisions offset the costs of expanding the eligibility window to 180 
days for cohorts 2019-2028. The precise interaction between the two 
effects is uncertain as outreach and better information for borrowers 
about the closed school discharge process may increase the rate of 
borrowers who submit applications. 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 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

[[Page 37301]]

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 PB2019 baseline, the 
Department applied this increase to the closed school discharge rate. 
For these proposed 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 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 discharge instead of completing 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 the institution fulfilled the 
plan. For these reasons, and especially the potential effect of the 
teach-out provision, the Department did not adjust for this factor in 
estimating the impact of the expansion of the eligibility window, but 
welcomes comments on the likelihood of its impacts and will consider 
those comments in developing estimates of the impact of the final 
regulations.
    While the expansion of the eligibility window and the elimination 
of the three-year automatic discharge provisions allow for borrower 
decisions to affect the number of closed school discharges, the 
proposal to add to the existing limitation on students who transferred 
credits and completed the program at another institution limits the 
availability of closed school discharges to borrowers not offered a 
reasonable approved, teach-out opportunity and places key eligibility 
factors in the hands of institutions. This makes closed school 
discharges a form of relief for borrowers who were enrolled at an 
institution that closed precipitously, decided implementation of a 
teach-out plan was not practical or worth the expense for some or all 
students, or failed to implement an approved plan. The Department's 
requirements that accreditors review and evaluate teach-out plans that 
must be submitted by institutions under certain circumstances 
emphasizes the importance of teach-out plans in serving the best 
interests of students. The Department expects that this proposed change 
could further reduce closed school discharges, but our data do not 
provide sufficient information to know if any of the past closed school 
discharges were awarded to students who were also provided with a 
reasonable teach-out opportunity. Students who took advantage of such 
activities would have completed their program, and therefore would not 
be eligible for a closed school discharge, including under the current 
regulation. It could be that the number of closed school discharges is 
relatively low (as compared with the potential pool of borrowers 
eligible) because most institutions provide a teach-out opportunity 
that allows the borrower to complete his or her program. To the extent 
many borrowers are currently completing teach-outs, the cost impact of 
the teach-out limitation may be minimal.
    The proposed regulations provide incentives for institutions to 
offer teach-outs so as to provide students the opportunity to complete 
their programs. To capture this effect, the Department reduced baseline 
closed school discharges by 65 percent. As is demonstrated by the 
estimated net savings from the closed school discharge changes, the 
removal of the three-year automatic discharge provisions and the change 
in eligibility to those offered an approved teach-out plan are expected 
to reduce the anticipated closed school discharge claims significantly 
more than the expansion of the window to 180 days increases them. In 
other words, the proposed regulations provide an incentive for 
institutions rather than students or taxpayers to bear the cost and 
burden of a closed school. In some scenarios, such as the precipitous 
closure of large institutions, the expansion of the window to 180 days 
could increase closed school discharges more than the other provisions 
reduce them, but the Department does not consider such a scenario to be 
likely. The Department welcomes comments on the assumptions used in 
estimating the net budget impact of the closed school discharge 
provisions, especially information on the frequency of teach-outs 
offered.
3. Other Provisions
    The proposed 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 provide that borrowers who provide a written attestation of 
high school completion in place of an unavailable high school diploma 
would be 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 expect 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 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.
4. 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 7). This table 
provides our best

[[Page 37302]]

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 2019 to 2028 from the PB2019 
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.

 Table 7--Accounting Statement: Classification of Estimated Expenditures
                              (In millions)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
           Category                             Benefits
------------------------------------------------------------------------
Disclosure to borrowers about                Not quantified.
 use of mandatory pre-dispute
 arbitration clauses and
 potential increase in
 settlements between borrowers
 and institutions.
Reduced administrative burden                Not quantified.
 related to processing defense
 to repayment applications.
------------------------------------------------------------------------
           Category                               Costs
------------------------------------------------------------------------
                                7%.................  3%.
Cost of compliance with         1.15...............  1.16.
 paperwork requirements.
------------------------------------------------------------------------
Changes in Department's                      Not Quantified.
 systems to collect relevant
 information and calculate
 revised composite score.
------------------------------------------------------------------------
           Category                             Transfers
------------------------------------------------------------------------
                                7%.................  3%.
Reduced defense to repayment    $693.9.............  $635.7.
 discharges from the Federal
 Government to affected
 borrowers (partially borne by
 affected institutions, via
 reimbursements.
Reduced reimbursements of       $223...............  $205.
 borrower defense claims from
 affected institutions to
 affected student borrowers,
 via the Federal government.
Reduced closed school           $96.5..............  $61.9.
 discharges from the Federal
 Government to affected
 borrowers.
------------------------------------------------------------------------

    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 $-1,448 million, reimbursements would be 
reduced $-414 million, and closed school discharge transfers would be 
reduced $-233 million at a 7 percent discount rate.
D. Regulatory Flexibility Act
    The U.S. Small Business Administration (SBA) Size Standards define 
proprietary institutions as small businesses if they are independently 
owned and operated, are not dominant in their field of operation, and 
have total annual revenue below $7,000,000. Nonprofit institutions are 
defined as small entities if they are independently owned and operated 
and not dominant in their field of operation. Public institutions are 
defined as small organizations if they are operated by a government 
overseeing a population below 50,000.
    The Department's eZ-Audit data shows that there were 1,522 Title IV 
proprietary schools with revenue less than $7,000,000 for the 2015-2016 
Award Year.\29\ However, the Department lacks data to identify which 
public and private, nonprofit institutions qualify as small. Given the 
data limitations, the Department proposes a data-driven definition for 
``small institution'' in each sector and uses its proposed definition 
to certify the RFA impacts of the proposed rule.
---------------------------------------------------------------------------

    \29\ studentaid.ed.gov/sa/about/data-center/school/proprietary 
(extracted from eZ-Audit on June 30, 2017)
---------------------------------------------------------------------------

1. Proposed Definition
    The Department has historically assumed that all private nonprofit 
institutions were small because none were considered dominant in their 
field. However, this approach masks significant differences in 
resources among different segments of these institutions. The 
Department proposes to use enrollment data for its definition of small 
institutions of postsecondary education. Prior analyses show that 
enrollment and revenue are correlated for proprietary institutions. 
Further, enrollment data are readily available to the Department for 
every postsecondary institution while revenue is not. The Department 
analyzed a number of data elements available in IPEDS, including 
Carnegie Size Definitions, IPEDS institutional size categories, total 
FTE, and its own previous research on proprietary institutions 
referenced in ED-2017-OPE-0076i. As a result of this analysis, the 
Department proposes to use this definition to define small 
institutions:
    <bullet> Two-year IHEs, enrollment less than 500 FTE; and
    <bullet> Four-year IHEs, enrollment less than 1,000 FTE.
    Table 8 shows the distribution of small institutions under this 
proposed definition using the 2016 IPEDS institution file.\30\
---------------------------------------------------------------------------

    \30\ U.S. Department of Education, National Center for Education 
Statistics. Integrated Postsecondary Education Data System 2016 
Institutional Characteristics: Directory Information survey file 
downloaded March 3, 2018. Available at nces.ed.gov/ipeds/datacenter/DataFiles.aspx.

                              Table 8--Small Institutions Under Proposed Definition
----------------------------------------------------------------------------------------------------------------
                 Level                            Type                 Small           Total          Percent
----------------------------------------------------------------------------------------------------------------
2-year................................  Public..................             342           1,240              28
2-year................................  Private.................             219             259               8
2-year................................  Proprietary.............           2,147           2,463              87
4-year................................  Public..................              64             759               8
4-year................................  Private.................             799           1,672              48

[[Page 37303]]

 
4-year................................  Proprietary.............             425             558              76
                                                                 -----------------------------------------------
    Total.............................  ........................           3,996           6,951              57
----------------------------------------------------------------------------------------------------------------

    Under the proposed definition, the two-year small institutions are 
68% of all two-year institutions (2,708/3,962), 68% of all small 
institutions (2,708/3,996), and 39% of the overall population of 
institutions (2,708/6,951); whereas, four-year small institutions are 
43% of all four-year institutions (1,288/2,989), 32% of all small 
institutions (1,288/3,996), and 19% of the overall population of 
institutions (1,288/6,951). Figure 1 shows a visual representation of 
the universe and the percentage that would be defined as small using 
the above proposed definition.
[GRAPHIC] [TIFF OMITTED] TP31JY18.006

    Similarly, small public institutions are 20 percent of all public 
institutions (406/1,999), 10 percent of all small public institutions 
(406/3,996), and 6 percent of the overall population of institutions 
(406/6,951). Small private nonprofit institutions are 53 percent of all 
private nonprofit institutions (1,018/1,999), 25 percent of all small 
institutions (1,018/3,996), and 15 percent of the overall population of 
institutions (1,018/6,951). Finally, small proprietary institutions are 
85 percent of all proprietary institutions (2,572/1,999), 64 percent of 
all small institutions (2,572/3,996), and 37 percent of the overall 
population of institutions (2,572/6,951).
    The Department requests comments on the proposed definition. It 
will consider these suggestions in development of the final rule.
2. Certification
    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (RFA) requires the agency to ``prepare and make 
available for public comment an initial regulatory flexibility 
analysis'' which will ``describe the impact of the proposed rule on 
small entities.'' (5 U.S.C. 603(a)). Section 605 of the RFA allows an 
agency to certify a rule, in lieu of preparing an analysis, if the 
proposed rulemaking is not expected to have a significant economic 
impact on a substantial number of small entities.
    This proposed rule directly affects all public nonprofit and 
proprietary institutions and a small proportion of all institutions 
participating in title IV programs. There are currently 5868 of these 
institutions, of which 1799 are public nonprofit and 1896 are 
proprietary. Using its proposed definition for small institution, 
below, the Department estimates that approximately 51 percent of these 
institutions are small entities. Further, 69 percent of the private 
nonprofit and proprietary institutions are small entities. Therefore, 
the Department has determined that this proposed rule would have an 
impact on a substantial number of small entities.

[[Page 37304]]

    However, the Department has determined that the impact on entities 
affected by the proposed regulations would not be significant. The 
effect of the proposed regulations would be to update financial 
statements submitted to the Department to comply with the new FASB 
standards and to reduce liabilities at some institutions associated 
with borrower defense claims. The Department expects the impact of the 
proposed financial responsibility regulations would be a de minimis 
increase in paperwork burden for private nonprofit and proprietary 
institutions. The Department asserts that the economic impact of the 
paperwork burden would be minimal to small institutions. The Department 
expects the impact of the proposed borrower defense to repayment 
regulations would be a benefit of reduced liability for a small number 
of small entities, which represent less than 8 percent of title IV-
participating institutions. The Department asserts that the economic 
impact of the reduced liability, if any, would be minimal and entirely 
beneficial to small institutions. Accordingly, the Secretary hereby 
certifies that these proposed regulations, if promulgated, would not 
have a significant economic impact on a substantial number of small 
entities. The Department invites comment from members of the public who 
believe there will be a significant impact on institutions.

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 understood, and the Department can properly assess the impact 
of collection requirements on respondents.
    Sections 668.41, 668.171, and 668.172, appendix A & B to part 668, 
subpart L, and Sec. Sec.  674.33, 682.402, 685.206, 685.214 685.215, 
and 685.304 of this proposed rule contain information collection 
requirements. 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 the final regulations, we will display the control numbers 
assigned by OMB to any information collection requirements proposed in 
this NPRM and adopted in the final regulations.
    Section 668.41 Reporting and disclosure of information.
    Requirements: Under the proposed changes in Sec.  668.41(h), an 
institution that uses pre-dispute arbitration agreements and/or class 
action waivers would 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.
    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 proposed regulation. 
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 would 
use a pre-dispute arbitration agreement and/or class action waiver and 
would 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.
    Section 668.171 General.
    Requirements: Under the proposed Sec.  668.171(f), in accordance 
with procedures to be established by the Secretary, an institution 
would 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 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 x 2 events x 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 x 3 events x 2 hours). This total burden of 2,994 hours 
will be assessed under OMB Control Number 1845-0022.
    Section 668.172 Financial Ratios.
    Requirements: Under Sec.  668.172(d), institutions can ask the 
Secretary to compute a second composite score excluding operating 
leases and have the higher of the two composite scores used to 
determine, in part, if the institution meets the financial 
responsibility requirements to participate in title IV financial aid 
programs.
    Burden Calculation: There will be burden on institutions to request 
that the Secretary perform the second composite scoring calculation. We 
estimate that it will take a school .25 hours (15 minutes) to request 
the recalculation. We further estimate that 25% of the private 
institutions 450 (1,799 x .25) will request the recalculation for 113 
hours (450 institutions x .25 hours). We estimate that 25% of the 
proprietary institutions 474 (1,896 x .25) will request the 
recalculation for 119 hours (474 institutions x .25 hours). This total 
burden of 232 hours (113 + 119) will be assessed under the OMB Control 
Number 1845-0022.

Appendix A and B for Section 668--Subpart L--Financial Responsibility

    Requirements: Under proposed Section 2 for appendix A and B, 
proprietary and private schools would 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 would no longer be readily available in the audited 
financial statements, particularly for private institutions. With the 
proposed updates to the Supplemental Schedule to reference the 
financial statements, this issue would 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 schools to provide the 
Supplemental Schedule to the Department. In development of this

[[Page 37305]]

proposal, the members of the negotiated rulemaking subcommittee 
indicated that they believed that as the information would 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 
x 1 hour). We estimate that 1,896 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 
1,896 hours (1,896 institutions x 1 hour). This total burden of 3,695 
hours will be assessed under OMB Control Number 1845-0022.
    The total additional burden under OMB Control Number 1845-0022 
would be 6,921 hours.
    Section 674.33 Repayment.
    Section 682.402 Death, disability, closed school, false 
certification, unpaid refunds, and bankruptcy payments.
    Section 685.214 Closed school discharge.
    Requirements: Under the proposed language in Sec. Sec.  674.33(g), 
682.402(d), and 685.214(c), the number of days that a borrower must 
have withdrawn from a closed school to qualify for a closed school 
discharge would be extended from 120 days to 180 days. 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 would not qualify for a closed school discharge. 
The proposed regulations further provide that the Secretary may extend 
that proposed 180 days further if there is a determination that 
exceptional circumstances justify an extension.
    Burden Calculation: The proposed extension from 120 days to 180 
days for withdrawal prior to the closing of the school would 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 would 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 is finalized.
    Section 682.402 Death, disability, closed school, false 
certification, unpaid refunds, and bankruptcy payments.
    Requirements: Under proposed regulations in Sec.  682.402 a second 
level of Departmental review for denied closed school discharge claim 
in the FFEL Program would be provided. The proposed regulations would 
require a guaranty agency that denies a closed school discharge 
application to inform the borrower of the opportunity for a review of 
the guaranty agency's decision by the Secretary, and an explanation of 
how the borrower may request such a review.
    Burden Calculation: We believe there would be burden on the 
guaranty agencies to update their systems to identify borrowers who 
were enrolled or withdrew no more than 120 days to 180 days before an 
institution's closure for reporting to lenders. We estimate that it 
will take the 13 public guaranty agencies 10 hours for programming and 
testing to update their systems with this change for 130 hour burden 
increase (13 guaranty agencies x 10 hours = 130). We estimate that it 
will take the 11 non-profit guaranty agencies 10 hours for programming 
and testing to update their systems with this change for 110 hour 
burden increase (11 guaranty agencies x 10 hours = 110). There would be 
a total increase in burden of 240 hours under OMB Control Number 1845-
0020.
    There would also be burden on guaranty agencies to provide 
information to borrowers denied closed school discharges regarding the 
opportunity for further review of the discharge request by the 
Secretary. We estimate that it will take the 13 public guaranty 
agencies 4 hours totaling 52 hours (13 guaranty agencies x 4 hours = 
52) to update their notifications and establish a process for 
forwarding any requests for escalated reviews to the Secretary. We 
further estimate that it will take the 11 non-profit guaranty agencies 
4 hours totaling 44 hours (11 guaranty agencies x 4 hours = 44) to 
update their notifications and establish a process for forwarding any 
requests for escalated reviews to the Secretary. There would be a total 
increase in burden of 96 hours under OMB Control Number 1845-0020.
    There would be burden on guaranty agencies, upon receipt of the 
request for escalated review from the borrower, to forward to the 
Secretary the discharge form and any relevant documents. For calendar 
year 2017 29,171 closed school discharge applications were received. It 
is estimated that 5 percent, or 1,459, of those borrowers would have 
their applications denied. We further estimate that 10 percent, or 146, 
of those borrowers whose applications were denied will request a review 
by the Secretary. We estimate that the process to forward the discharge 
to the Secretary will take 30 minutes per request. There would be an 
estimated burden of 40 hours for the 13 public guaranty agencies based 
on an estimated 79 requests (79 x .5 hours = 40 hours). There would be 
an estimated burden of 34 hours for the 11 non-profit guaranty agencies 
based on an estimated 67 requests (67 x .5 = 34 hours). There will be 
an increase in burden of 74 hours under OMB Control Number 1845-0020.
    There will be a total increase in burden of 410 hours based on the 
proposed changes to section 682.402 under OMB Control Number 1845-0020.
    Section 685.206 Borrower responsibilities and defenses.
    Requirements: Under proposed Sec.  685.206(d), a defense to 
repayment discharge claim on a Direct Loan disbursed after July 1, 2019 
would be evaluated under the proposed Federal standard. Under proposed 
Sec.  685.206(d), 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 would be completed 
and made available for comment through a full public clearance package 
before being made available for use.
    Section 685.215 Discharge for false certification of student 
eligibility or unauthorized payment.
    Requirements: Under proposed Sec.  685.215, the application 
requirements for false certification discharges would 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 proposed regulations also would remove the term 
``ability to benefit'' to reflect changes to the HEA. Under the 
proposed regulatory changes, a Direct Loan borrower would 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 proposed clarification to require the 
submission of a Federal application to receive a

[[Page 37306]]

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 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 would 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 685.304 Counseling Borrowers.
    Requirements: Under proposed Sec.  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 (entrance counseling). 
Schools that use pre-dispute arbitration agreements and/or class action 
waivers will have to include in the required entrance counseling 
information on the school's internal dispute resolution process and who 
the borrower may contact regarding a dispute related to educational 
services for which the loan was made. Schools that require borrowers to 
accept a pre-dispute arbitration agreement and/or class action waiver 
would 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 schools 
to create any school 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 would need to create additional entrance 
counseling information regarding the use of the pre-dispute arbitration 
agreement and/or class action waivers to provide to their student 
borrowers. We anticipate that it would take an average of 3 hours to 
adapt the information provided in proposed Sec.  668.41 as a part of 
the required entrance counseling, to identify staff who would be able 
to answer additional questions, and to obtain evidence indicating the 
provision of the material for a total of 2,832 hours (944 x 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 would 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 would be a total 
increase in burden of 30,225 hours under OMB Control Number 1845-0021.
    Consistent with the discussions above, the following chart 
describes the sections of the proposed regulations involving 
information collections, the 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 increased 
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-education-administrators.htm is $1,107,460 as shown in the chart below. This cost 
is based on an estimated hourly rate of $44.41 for institutions, 
lenders, and guaranty agencies and $16.30 for students.

                                            Collection of Information
----------------------------------------------------------------------------------------------------------------
                                                                        OMB control No. and
        Regulatory section                Information collection          estimated burden     Estimated costs
                                                                         (change in burden)
----------------------------------------------------------------------------------------------------------------
Sec.   668.41....................  Under the proposed regulatory        1845-0004; + 4,720   $209,615.
                                    language in 668.41(h) institutions   hours.
                                    that use pre-dispute arbitration
                                    agreements and/or class action
                                    waivers would 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.
Sec.   668.171...................  Under the proposed regulatory        1845-0022; + 2,994   132,964.
                                    language in 668.171(f) in            hours.
                                    accordance with procedures to be
                                    established by the Secretary, a
                                    school would 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 school's response, the
                                    school may show that certain of
                                    the actions or events are not
                                    material or that the actions or
                                    events are resolved.
Sec.   668.172...................  Under the proposed regulatory        1845-0022; + 232     10,303.
                                    language in 668.172(d)               hours.
                                    institutions must request a second
                                    calculation of the composite score
                                    from the Secretary to exclude
                                    operating leases.
Appendix A & B of 668 subpart L..  Under proposed Section 2 for         1845-0022; + 3,695   164,095.
                                    appendix A and B, proprietary and    hours.
                                    private schools would 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
                                    would no longer be readily
                                    available in the audited financial
                                    statements, particularly for
                                    private institutions. With the
                                    proposed updates to the
                                    Supplemental Schedule to reference
                                    the financial statements, this
                                    issue would be addressed in a
                                    convenient and transparent manner
                                    for both the schools and the
                                    Department by showing how the
                                    composite score is calculated.

[[Page 37307]]

 
Sec.   674.33, Sec.   682.402,     Under the proposed regulations, the  1845-0058; + 0       0.
 Sec.   685.2142.                   number of days that a borrower may   hours.
                                    have withdrawn from a closed
                                    school to qualify for a closed
                                    school discharge would extend from
                                    120 days to 180 days, and if a
                                    closed school provided a borrower
                                    an opportunity to complete their
                                    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
                                    would not qualify for a closed
                                    school discharge. The proposed
                                    language further allows that the
                                    Secretary may extend that proposed
                                    180 days further if there is a
                                    determination that exceptional
                                    circumstances justify an extension.
Sec.   682.402...................  Under proposed regulations in Sec.   1845-0020; + 410...  18,208.
                                     682.402 a second level of
                                    Departmental review for denied
                                    closed school discharge claim in
                                    the FFEL Program would be
                                    provided. The proposed regulations
                                    would require a guaranty agency
                                    that denies a closed school
                                    discharge request to inform the
                                    borrower of the opportunity for a
                                    review of the guaranty agency's
                                    decision by the Secretary, and an
                                    explanation of how the borrower
                                    may request such a review.
Sec.   685.206...................  Under proposed Sec.   685.206(d), a  A new collection     0.
                                    borrower defense claim related to    will be filed
                                    a direct loan disbursed after July   closer to the
                                    1, 2019 would be evaluated under     implementation of
                                    the proposed Federal standard.       this requirement;
                                    Under proposed Sec.   685.206(d),    + 0 hours.
                                    a borrower defense must be
                                    submitted within three years from
                                    the date the borrower is no longer
                                    enrolled at the institution.
Sec.   685.215...................  Under the proposed regulatory        1845-0058; + 0       0.
                                    language in Sec.   685.215, the      hours.
                                    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 proposed
                                    regulatory language proposed
                                    removing the use of term ``ability
                                    to benefit'' to bring the
                                    definition in line with the
                                    current HEA language. Under
                                    proposed regulatory language, a
                                    Direct Loan 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 would
                                    have to be provided under penalty
                                    of perjury.
Sec.   685.304...................  Under proposed Sec.   685.304 there  1845-0021; + 30,225  Inst. 125,769;
                                    are changes to the requirements to   hours (2,832         Indiv. 446,506,
                                    counsel Federal student loan         institutions +       TOTAL $572,275.
                                    borrowers prior to making the        27,393 individual
                                    first disbursement of a Federal      hours).
                                    student loan. Schools that use pre-
                                    dispute arbitration agreements and/
                                    or class action waivers include in
                                    the required entrance counseling
                                    information on the school's
                                    internal dispute resolution
                                    process and who the borrower may
                                    contact regarding a dispute
                                    related to educational services
                                    for which the loan was made.
                                    Schools that require a pre-dispute
                                    arbitration agreement and/or class
                                    action waiver would be required to
                                    review with the student borrower
                                    the agreement and when it would
                                    apply, how to enter into the
                                    process and who to contact with
                                    questions.
----------------------------------------------------------------------------------------------------------------

    The chart below does not include the burden generated by 2016 final 
regulations because that regulatory package is not effective.
    The total burden hours and change in burden hours associated with 
each OMB Control number affected by the proposed regulations follows:

------------------------------------------------------------------------
                                                     Total     Proposed
                                                   proposed    change in
                   Control No.                      burden      burden
                                                     hours       hours
------------------------------------------------------------------------
1845-0004.......................................      23,390     + 4,720
1845-0020.......................................   8,248,092       + 410
1845-0021.......................................     739,746    + 30,225
1845-0022.......................................   2,222,891     + 6,921
                                                 -----------------------
    Total.......................................  11,234,119    + 42,276
------------------------------------------------------------------------

    We have prepared Information Collection Requests for these 
information collection requirements. If you wish to review and comment 
on the Information Collection Requests, please follow the instructions 
in the ADDRESSES section of this notification.
    Note: The Office of Information and Regulatory Affairs in OMB and 
the Department review all comments posted at www.regulations.gov.
    In preparing your comments, you may want to review the Information 
Collection Requests, including the supporting materials, in 
www.regulations.gov by using the Docket ID number specified in this 
notification. These proposed collections are identified as proposed 
collections 1845-0004, 1845-0020, 1845-0021, 1845-0022.
    We consider your comments on these proposed collections of 
information in--
    <bullet> Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
    <bullet> Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
    <bullet> Enhancing the quality, usefulness, and clarity of the 
information we collect; and
    <bullet> Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques.
    Between 30 and 60 days after publication of this document in the 
Federal Register, OMB is required to make a decision concerning the 
collections of information contained in these proposed regulations. 
Therefore, to ensure that OMB gives your comments full consideration, 
it is important that OMB receives your comments on these Information 
Collection Requests by August 30, 2018. This does not affect the 
deadline for your comments to us on the proposed regulations.
    If your comments relate to the Information Collection Requests for 
these proposed regulations, please specify the Docket ID number and 
indicate ``Information Collection Comments'' on the top of your 
comments.

[[Page 37308]]

Intergovernmental Review

    These programs are not subject to Executive Order 12372 and the 
regulations in 34 CFR part 79.

Assessment of Educational Impact

    In accordance with section 411 of the General Education Provisions 
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on 
whether these proposed regulations would require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.
    Accessible Format: Individuals with disabilities can obtain this 
document in an accessible format (e.g., Braille, large print, 
audiotape, or compact disc) on request to one of the persons listed 
under FOR FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. You may 
access to the official edition of the Federal Register and the Code of 
Federal Regulations via the Federal Digital System at: www.gpo.gov/fdsys. At this site you can view this document, as well as all other 
documents of this Department published in the Federal Register, in text 
or Adobe Portable Document Format (PDF). To use PDF you must have Adobe 
Acrobat Reader, which is available free at the site.
    You may also access documents of the Department published in the 
Federal Register by using the article search feature at: 
www.federalregister.gov. Specifically, through the advanced search 
feature at this site, you can limit your search to documents published 
by the Department.

(Catalog of Federal Domestic Assistance Number does not apply.)

List of Subjects

34 CFR Part 668

    Administrative practice and procedure, Colleges and universities, 
Consumer protection, Grant programs--education, Loan programs-
education, Reporting and recordkeeping requirements, Selective Service 
System, Student aid, Vocational education.

34 CFR Part 674

    Loan programs--education, Reporting and recordkeeping, Student aid.

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: July 19, 2018.
Betsy DeVos,
Secretary of Education.

    For the reasons discussed in the preamble, the Secretary of 
Education proposes to amend parts 668, 674, 682, and 685, of title 34 
of the Code of Federal Regulations, as if the delayed amendments from 
the 2016 final regulations were never published, as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

0
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.

0
2. Section 668.41 is amended by:
0
a. In paragraph (a), in the definition of ``Undergraduate students'', 
adding the words ``at or'' before ``below'' and adding the word 
``level'' after ``baccalaureate''.
0
b. In paragraph (c)(2) introductory text, removing the phrase ``or 
(g)'' and adding the phrase ``(g), or (h)'' in its place.
0
c. Adding paragraph (h).
    The addition reads as follows:


Sec.  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) An institution of higher education that requires students 
receiving Title IV Federal student aid to accept or 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 on its website 
where information regarding admissions and tuition and fees is 
presented. The institution may not rely solely on an intranet website 
for the purpose of providing this notice to prospective students or the 
public.
    (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.
* * * * *
0
3. Section 668.91 is amended by revising paragraphs (a)(3)(i) through 
(v) to read as follows:


Sec.  668.91   Initial and final decisions.

    (a) * * *
    (3) * * *
    (i) If, in a termination action against an institution, the hearing 
official finds that the institution has violated the provisions of 
Sec.  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 Sec.  668.82(d)(1), the hearing official also finds that 
termination of the institution's participation or servicer's 
eligibility, as applicable, is warranted;
    (iii) In an action brought against an institution or third-party 
servicer that involves its failure to provide a letter of credit, or 
other financial protection under Sec.  668.175(h), for a condition or 
event under Sec.  668.15 or Sec.  668.171(b), (c) or (d), the hearing 
official finds that the amount of the letter of credit or other 
financial protection established by the Secretary under Sec.  
668.175(c), (d), or (f) is appropriate, unless the institution 
demonstrates that the amount was not warranted because--
    (A) The condition or event no longer exists or has been resolved;
    (B) The condition or event does not and will not have a material 
adverse effect on the financial condition, business, or results of 
operations of the institution; or
    (C) The institution has insurance that will cover the liabilities 
that arise from that condition or event;

[[Page 37309]]

    (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 Sec.  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 Sec.  
668.15(c)(1), the hearing official finds that the termination is 
warranted unless the institution demonstrates that all applicable 
conditions described in Sec.  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 Sec.  668.174(a), the hearing 
official finds that the limitation or termination is warranted unless 
the institution demonstrates that all the conditions in Sec.  
668.175(f) have been met; and
    (2) Upon proof of the conditions in Sec.  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 Sec.  668.174(b)(2) have been met; and
* * * * *
0
4. Section 668.94 is amended by:
0
a. Redesignating paragraphs (h) and (i) as paragraphs (i) and (j), 
respectively.
0
b. Adding a new paragraph (h).
    The addition reads as follows:


Sec.  668.94  Limitation.

* * * * *
    (h) A change in the participation status of the institution from 
fully certified to participate to provisionally certified to 
participate under Sec.  668.13(c);
* * * * *
0
5. Section 668.171 is revised to read as follows:


Sec.  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, 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 Sec.  
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 
Sec.  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 
be 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 Sec.  
668.22;
    (ii) It fails to make repayments to the Secretary for debts and 
liabilities 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 under paragraph (d) of this section (discretionary triggering 
events) that the Secretary determines is likely to have a material 
adverse effect on the financial condition of the institution. The 
Secretary considers a triggering event under these paragraphs only if 
it occurs on or after July 1, 2019; and
    (4) The institution or persons affiliated with the institution are 
not subject to a condition of past performance under Sec.  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--
    (i)(A) The institution incurs a liability arising from defense to 
repayment discharges adjudicated by the Secretary;
    (B) The institution incurs a liability from a final judgment or 
determination arising from an administrative or judicial action or 
proceeding; or
    (C) 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, including by declaring a dividend, 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;
    (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; or
    (iii) The U.S. SEC is not in timely receipt of a required report 
and did not issue an extension to file the report.
    (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--
    (1) The institution is issued a show-cause order that, if not 
satisfied, would result in the withdrawal, revocation or suspension of 
its institutional accreditation, by its institutional accrediting 
agency 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 violated a State licensing or authorizing 
agency and was notified that its licensure or authorization will be 
withdrawn or terminated if the institution does not take the steps 
necessary to come into compliance with those requirements;
    (4) For its most recently completed fiscal year, a proprietary 
institution did not receive at least 10 percent of its

[[Page 37310]]

revenue from sources other than title IV, HEA program funds, as 
provided under Sec.  668.28(c); or
    (5) 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 incurred by an institution under paragraph 
(c)(1) of this section as an expense or accounting for the actual 
withdrawal of owner's equity under paragraph (c)(1)(i)(C) of this 
section as a reduction in equity. For purposes of this paragraph (e), 
the Secretary uses the audited financial statements from which the 
institution's composite score was calculated and the additional 
information from which the alternative composite score was calculated 
under Sec.  668.172(d) and accounts for that expense by--
    (1) For liabilities incurred by a proprietary institution--
    (i) For the primary reserve ratio, increasing expenses and 
decreasing adjusted equity by that amount;
    (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 from a final judgment or determination 
under paragraph (c)(1)(ii) of this section, no later than 10 days after 
the date that the institution is notified of that judgment or 
determination;
    (ii) For a withdrawal of owner's equity described in paragraph 
(c)(1)(iii) of this section, no later than 10 days after the date that 
the withdrawal is made;
    (iii) For the provisions relating to a publicly traded institution 
under paragraph (c)(4) of this section, 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 delists, either voluntarily or involuntarily, the 
institution's securities pursuant to the rules of the relevant national 
securities exchange;
    (iv) For a probation or show cause action under paragraph (d)(1) of 
this section, 10 days after the institution is notified by its 
accrediting agency of that action;
    (v) For the loan agreement provisions in paragraph (d)(2) of this 
section, 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 or agency notice relating to terminating an 
institution's licensure or authorization under paragraph (d)(3) of this 
section, 10 days after the institution receives that notice; and
    (vii) For the non-title IV revenue provision in paragraph (d)(4) of 
this section, no later than 45 days after the end of the institution's 
fiscal year, as provided in Sec.  668.28(c)(3).
    (2) The Secretary may take an administrative action under paragraph 
(h) of this section against an institution if it fails to provide 
timely notice to the Secretary under this paragraph (f).
    (3)(i) In its notice to the Secretary under this paragraph (f), 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)(iii) of this section 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) of this section. 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) of this section, 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 from defense to repayment discharges 
or final judgments or determinations under paragraph (c)(1) of this 
section; or
    (D) Explain or provide information about the conditions or 
circumstances that precipitated that triggering event that demonstrate 
that it 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 Sec.  
668.174.
    (2) The Secretary considers a foreign public institution to be 
financially responsible if the institution--
    (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 Sec.  
668.174.

[[Page 37311]]

    (h) Audit opinions. 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 auditor expressed doubt about 
the continued existence of the institution as a going concern, unless 
the Secretary determines that a qualified or disclaimed opinion does 
not have a significant bearing on the institution's financial 
condition.
    (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 Sec.  
668.175, or the institution does not submit its financial and 
compliance audits by the date and in the manner required under Sec.  
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 
Sec.  668.13(d).
0
6. Section 668.172 is amended by adding paragraph (d) to read as 
follows:


Sec.  668.172  Financial ratios.

* * * * *
    (d) Accounting for operating leases. The Secretary calculates a 
composite score in accordance with ASU 2016-02, ASC 842 (Leases), but 
upon request by an institution the Secretary will also compute a second 
composite score using supplemental information provided by the 
institution that enables the composite score to be calculated excluding 
operating leases, and uses the higher of those two composite scores to 
determine, in part, whether the institution is financially responsible.
* * * * *
0
7. Section 668.175 is amended by revising paragraphs (a) through (d) 
and (f) and adding paragraph (h) to read as follows:


Sec.  668.175  Alternative standards and requirements.

    (a) General. An institution that is not financially responsible 
under the general standards and provisions in Sec.  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)(1)(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 financially 
responsible either because it does not satisfy one or more of the 
standards of financial responsibility under Sec.  668.171(b), (c) or 
(d), or because of an audit opinion described under Sec.  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.
    (d) Zone alternative. (1) A participating institution that is not 
financially responsible solely because the Secretary determines that 
its composite score under Sec.  668.172 is less than 1.5 may 
participate in the title IV, HEA programs as a financially responsible 
institution for no more than three consecutive years, beginning with 
the year in which the Secretary determines that the institution 
qualifies under this alternative.
    (i)(A) An institution qualifies initially under this alternative 
if, based on the institution's audited financial statement for its most 
recently completed fiscal year, the Secretary determines that its 
composite score is in the range from 1.0 to 1.4; and
    (B) An institution continues to qualify under this alternative if, 
based on the institution's audited financial statement for each of its 
subsequent two fiscal years, the Secretary determines that the 
institution's composite score is in the range from 1.0 to 1.4.
    (ii) An institution that qualified under this alternative for three 
consecutive years, or for one of those years, may not seek to qualify 
again under this alternative until the year after the institution 
achieves a composite score of at least 1.5, as determined by the 
Secretary.
    (2) Under the zone alternative, the Secretary--
    (i) Requires the institution to make disbursements to eligible 
students and parents under either the heightened cash monitoring or 
reimbursement payment method described in Sec.  668.162;
    (ii) Requires the institution to provide timely information 
regarding any of the following oversight and financial events--
    (A) Any adverse action, including a probation or similar action, 
taken against the institution by its accrediting agency;
    (B) Any event that causes the institution, or related entity as 
defined in Accounting Standards Codification (ASC) 850, to realize any 
liability that was noted as a contingent liability in the institution's 
or related entity's most recent audited financial statement;
    (C) Any violation by the institution of any loan agreement;
    (D) Any failure of the institution to make a payment in accordance 
with its debt obligations that results in a creditor filing suit to 
recover funds under those obligations; or
    (E) Any losses that are unusual in nature or infrequently occur, or 
both, as defined in accordance with Accounting Standards Update (ASU) 
No. 2015-01 and ASC 225;
    (iii) May require the institution to submit its financial statement 
and compliance audits earlier than the time specified under Sec.  
668.23(a)(4); and
    (iv) May require the institution to provide information about its 
current operations and future plans.
    (3) Under the zone alternative, the institution must--
    (i) For any oversight or financial event described under paragraph 
(d)(2)(ii) of this section, in accordance with established procedures, 
notify the Secretary no later than 10 days after that event occurs; and
    (ii) As part of its compliance audit, require its auditor to 
express an opinion on the institution's compliance with the 
requirements under the zone alternative, including the institution's 
administration of the payment method under which the institution 
received and disbursed title IV, HEA program funds.
    (4) If an institution fails to comply with the requirements under 
paragraph (d)(2) or (3) of this section, the Secretary may determine 
that the institution no longer qualifies under this alternative.
* * * * *

[[Page 37312]]

    (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 Sec.  668.171(b), its 
recalculated composite score under Sec.  668.171(e) is less than 1.0, 
it is subject to an action or event under Sec.  668.171(c) or (d) that 
has an adverse material effect on the institution as determined by the 
Secretary, or because of an audit opinion described in Sec.  
668.171(h); or
    (ii) The institution is not financially responsible because of a 
condition of past performance, as provided under Sec.  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) Submit 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;
    (ii) Demonstrate that it was current on its debt payments and has 
met all of its financial obligations, as required under Sec.  
668.171(b)(3), for its two most recent fiscal years; and
    (iii) Comply with the provisions under the zone alternative, as 
provided under paragraphs (d)(2) and (3) of this section.
    (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 Sec.  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; and
    (ii) May require one or more of the persons or entities that 
exercise substantial control over the institution, as determined under 
Sec.  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.
* * * * *
    (h) Financial protection. 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--
    (1) 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;
    (2) Provide cash for the amount required; or
    (3) 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 uses the funds to satisfy the debts and liabilities owed 
to the Secretary that are not otherwise paid directly by the 
institution, and provides to the institution any funds not used for 
this purpose 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.
* * * * *
0
8. Appendix A to subpart L is revised to read as follows:

Appendix A to Subpart L of Part 668--Ratio Methodology for Propriety 
Institutions

Section 1: Ratio and Ratio Terms

Primary Reserve Ratio Adjusted Equity
    Total Expenses and Losses
Equity Ratio Modified Equity
    Modified Assets
Net Income Ratio Income Before Taxes
    Total Revenue and Gains

    Total Expenses and Losses excludes income tax, discontinued 
operations not classified as an operating expense or change in 
accounting principle and any losses on investments, post-employment 
and defined benefit pension plans and annuities. Any losses on 
investments would be the net loss for the investments. Total 
Expenses and Losses includes the nonservice component of net 
periodic pension and other post-employment plan expenses.

Modified Equity = (total owner's equity) - (intangible assets) - 
(unsecured related-party receivables)
Modified Assets = (total assets) - (intangible assets) - (unsecured 
related-party receivables)

    Income Before Taxes includes all revenues, gains, expenses and 
losses incurred by the school during the accounting period. Income 
before taxes does not include income taxes, discontinued operations 
not classified as an operating expense or changes in accounting 
principle.
    Total Revenues and Gains does not include positive income tax 
amounts, discontinued operations not classified as an operating 
gain, or change in accounting principle (investment gains should be 
recorded net of investment losses.
    * Unsecured related party receivables as required at 34 CFR 
668.23(d)
    ** The value of property, plant and equipment includes 
construction in progress and lease right-of-use assets, and is net 
of accumulated depreciation/amortization.
    *** All debt obtained for long-term purposes, not to exceed 
total net property, plant and equipment includes lease liabilities 
for lease right-of-use assets and the short-term portion of the 
debt, up to the amount of net property, plant and equipment. If an 
institution wishes to include the debt, including debt obtained 
through long-term lines of credit in total debt obtained for long-
term purposes, the institution must include a disclosure in the 
financial statements that the debt, including lines of credit 
exceeds twelve months and was used to fund capitalized assets (i.e. 
property, plant and equipment or capitalized expenditures per 
Generally Accepted Accounting Principles (GAAP)). The disclosures 
that must be presented for any debt to be used in adjusted equity 
include the issue date, term, nature of capitalized amounts and 
amounts capitalized. Institutions that do not include debt in total 
debt obtained for long-term purposes, including long-term lines of 
credit, do not need to provide any additional disclosures other than 
those required by GAAP. The debt obtained for long-term purposes 
will be limited to only those amounts disclosed in the financial 
statements that were used to fund capitalized assets. Any debt 
amount including long-term lines of credit used to fund operations 
must be excluded from debt obtained for long-term purposes.
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BILLING CODE 4000-01-C

0
9. Appendix B to subpart L is revised to read as follows:

Appendix B Subpart L of Part 668--Ratio Methodology for Private Non-
Profit Institutions

Section 1: Ratio and Ratio Terms

Primary Reserve Ratio Expendable Net Assets
    Total Expenses without Donor Restrictions and Losses without 
Donor Restrictions
Equity Ratio Modified Net Assets
    Modified Assets
Net Income Ratio Change in Net Assets without Donor Restrictions
    Total Revenue without Donor Restrictions and Gains without Donor 
Restrictions

Definitions

Expendable Net Assets = (net assets without donor restrictions) + 
(net assets with donor restrictions) - (net assets with donor 
restrictions: restricted in perpetuity) * - (annuities, term 
endowments and life income funds with donor restrictions) ** - 
(intangible assets) - (net property, plant and equipment) *** + 
(post-employment and defined benefit pension plan liabilities) + 
(all long-term debt obtained for long-term purposes, not to exceed 
total net property, plant and equipment) **** - (unsecured related 
party transactions) *****

    Total Expenses without Donor Restrictions and Losses without 
Donor Restrictions = All expenses and losses without donor 
restrictions from the Statement of Activities less any losses 
without donor restrictions on investments, post-employment and 
defined benefit pension plans and annuities. (For institutions that 
have defined benefit pension and other post-employment plans, total 
expenses include the nonservice component of net periodic pension 
and other post-employment plan expenses, and these expenses will be 
classified as non-operating. Consequently such expenses will be 
labeled non-operating or included with ``other changes--nonoperating 
changes--in net assets without donor restrictions'' when the 
Statement of Activities includes an operating measure).

Modified Net Assets = (net assets without donor restrictions) + (net 
assets with donor restrictions) - (intangible assets) - (unsecured 
related party receivables)
Modified Assets = (total assets) - (intangible assets) - (unsecured 
related party receivables)

    Change in net assets without donor restrictions is taken 
directly from the audited financial statements.
    Total Revenue without Donor Restriction and Gains without Donor 
Restrictions = total revenue (including amounts released from 
restriction) plus total gains. With regard to gains, investment 
returns are reported as a net amount (interest, dividends, 
unrealized and realized gains and losses net of external and direct 
internal investment expense). Institutions that separately report 
investment spending as operating revenue (e.g., spending from funds 
functioning as endowment) and remaining net investment return as a 
non-operating item, will need to aggregate these two amounts to 
determine if there is a net investment gain or a net investment loss 
(net investment gains are included with total gains).
    * Net assets with donor restrictions: Restricted in perpetuity 
is subtracted from total net assets. The amount of net assets with 
donor restrictions: Restricted in perpetuity is disclosed as a line 
item, part of line item, in a note, or part of a note in the 
financial statements.
    ** Annuities, term endowments and life income funds with donor 
restrictions is subtracted from total net assets. The amount of 
annuities, term endowments and life income funds with donor 
restrictions is disclosed in as a line item, part of line item, in a 
note, or part of a note in the financial statements.
    *** The value of property, plant and equipment includes 
construction in progress and lease right-of-use assets, and is net 
of accumulated depreciation/amortization.
    **** All Debt obtained for long-term purposes, not to exceed 
total net property, plant and equipment includes lease liabilities 
for lease right-of-use assets and the short-term portion of the 
debt, up to the amount of net property, plant and equipment. All 
Debt obtained for long-term purposes, not to exceed total net 
property, plant and equipment includes lease liabilities for lease 
right-of-use assets and the short-term portion of the debt, up to 
the amount of net property, plant and equipment. If an institution 
wishes to include the debt, including debt obtained through long-
term lines of credit in total debt obtained for long-term purposes, 
the institution must include a disclosure in the financial 
statements that the debt, including lines of credit exceeds twelve 
months and was used to fund capitalized assets (i.e., property, 
plant and equipment or capitalized expenditures per Generally 
Accepted Accounting Principles (GAAP)). The disclosures that must be 
presented for any debt to be included in expendable net assets 
include the issue date, term, nature of capitalized amounts and 
amounts capitalized. Institutions that do not include debt in total 
debt obtained for long-term purposes, including long-term lines of 
credit, do not need to provide any additional disclosures other than 
those required by GAAP. The debt obtained for long-term purposes 
will be limited to only those amounts disclosed in the financial 
statements that were used to fund capitalized assets. Any debt 
amount including long-term lines of credit used to fund operations 
must be excluded from debt obtained for long-term purposes.
    ***** Unsecured related party receivables as required at 34 CFR 
668.23(d).

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BILLING CODE 4000-01-C

[[Page 37323]]

PART 674--FEDERAL PERKINS LOAN PROGRAM

0
10. The authority citation for part 674 continues to read as follows:

    Authority:  20 U.S.C. 1070g, 1087aa-1087hh; Pub. L. 111-256, 124 
Stat. 2643; unless otherwise noted.

0
11. Section 674.33 is amended by:
0
a. Revising paragraph (g)(4).
0
b. In paragraph (g)(8)(i), removing the number ``120'' and adding, in 
its place, the number ``180''.
    The revision reads as follows:


Sec.  674.33  Repayment.

* * * * *
    (g) * * *
    (4) Borrower qualification for discharge. Except as provided in 
paragraph (g)(3) of this section, in order to qualify for discharge of 
an NDSL or Federal Perkins Loan, a borrower must submit to the holder 
of the loan a completed discharge application on a form approved by the 
Secretary, 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--
    (A) The borrower received the proceeds of a loan to attend a 
school;
    (B) The borrower did not complete the program of study at that 
school because the school closed while the student was enrolled, or the 
student withdrew from the school not more than 180 days before the 
school closed. The Secretary may extend the 180-day period if the 
Secretary determines that exceptional circumstances related to the 
school's closing justify an extension. Exceptional circumstances for 
this purpose may include, but are not limited to: Revocation or 
withdrawal by an accrediting agency of the school's institutional 
accreditation; or the State's revocation or withdrawal of the school's 
license to operate or to award academic credentials in the State;
    (C) The borrower did not complete and is not in the process of 
completing the program of study by transferring academic credit earned 
at the closed school to another school, or by any other comparable 
means; and
    (D) The school did not provide the borrower an opportunity to 
complete the program of study in which the borrower was enrolled 
through a teach-out plan approved by the school's accrediting agency 
and, if applicable, the school's State authorizing agency.
    (ii) [Reserved]
* * * * *

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

0
12. The authority citation for part 682 continues to read as follows:

    Authority:  20 U.S.C. 1071-1087-4, unless otherwise noted.


Sec.  682.202  [Amended]

0
13. Section 682.202 is amended in paragraph (b)(1) by removing the word 
``A'' before ``lender'' and adding in in place ``Except as provided in 
Sec.  682.405(b)(4), a''.
0
14. Section 682.402 is amended by:
0
a. Revising paragraph (d)(1)(i).
0
b. Revising paragraphs (d)(3) introductory text through (d)(3)(ii)(C).
0
c. Redesignating paragraphs (d)(3)(iii) and (iv) as paragraphs 
(d)(3)(iv) and (v).
0
d. Adding a new paragraph (d)(3)(iii).
0
e. Revising paragraph (d)(6)(ii)(B).
0
f. Revising the introductory text of paragraph (d)(6)(ii)(F).
0
g. In paragraph (d)(6)(ii)(F)(3), removing the number ``120'' and 
adding, in its place, the number ``180''.
0
h. In paragraph (d)(6)(ii)(F)(5), removing the words ``and sworn 
statement''.
0
i. Revising paragraphs (d)(6)(ii)(G) and (H).
0
j. Adding paragraph (d)(6)(ii)(J).
    The revisions and additions read as follows:


Sec.  682.402  Death, disability, closed school, false certification, 
unpaid refunds, and bankruptcy payments.

* * * * *
    (d) Closed school--(1) General. (i) The Secretary reimburses the 
holder of a loan received by a borrower on or after January 1, 1986, 
and discharges the borrower's obligation with respect to the loan in 
accordance with the provisions of paragraph (d) of this section, if the 
borrower (or the student for whom a parent received a PLUS loan) could 
not complete the program of study for which the loan was intended 
because the school at which the borrower (or student) was enrolled 
closed, or the borrower (or student) withdrew from the school not more 
than 180 days prior to the date 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: Revocation or withdrawal by an accrediting agency of the 
school's institutional accreditation, or revocation or withdrawal of 
the school's license to operate or to award academic credentials in the 
State.
* * * * *
    (3) Borrower qualification for discharge. Except as provided in 
paragraph (d)(8) of this section, in order to qualify for discharge of 
a loan under paragraph (d) of this section a borrower must submit to 
the holder of the loan a completed application on a form approved by 
the Secretary, 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 state--
    (i) Whether the borrower has made a claim with respect to the 
school's closing 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;
    (ii) That the borrower (or the student for whom a parent received a 
PLUS loan)--
    (A) Received, on or after January 1, 1986, the proceeds of any 
disbursement of a loan disbursed, in whole or in part, on or after 
January 1, 1986 to attend a school;
    (B) Did not complete the educational program at that school because 
the school closed while the student was enrolled or on an approved 
leave of absence in accordance with Sec.  668.22(d), or the student 
withdrew from the school not more than 180 days before the school 
closed; and
    (C) Did not complete the program of study by transferring academic 
credits or hours earned at the closed school to another school or by 
any other comparable means;
    (iii) The school did not provide the borrower an opportunity to 
complete the program of study through a teach-out plan approved by the 
school's accrediting agency and, if applicable, the school's State 
authorizing agency;
* * * * *
    (6) * * *
    (ii) * * *
    (B) If the guaranty agency determines that a school appears to have 
closed, it must, within 30 days of making that determination, notify 
all lenders participating in its program to suspend collection efforts 
against individuals with respect to loans made for attendance at the 
closed school, if the student to whom (or on whose behalf) a loan was 
made, appears to have been enrolled at the school on the closing date, 
or withdrew not more than 180 days prior to the date the school appears 
to have closed. Within 30 days after receiving confirmation of the date 
of a

[[Page 37324]]

school's closure from the Secretary, the agency must--
    (1) Notify all lenders participating in its program to mail a 
discharge application approved by the Secretary to all borrowers who 
may be eligible for a closed school discharge; and
    (2) Review the records of loans that it holds, identify the loans 
made to any borrower (or student) who appears to have been enrolled at 
the school on the school closure date or who withdrew not more than 180 
days prior to the closure date, and mail a discharge application to the 
borrower. The application informs the borrower of the procedures and 
eligibility criteria for obtaining a discharge.
* * * * *
    (F) If the guaranty agency determines that a borrower identified in 
paragraph (d)(6)(ii)(C) or (D) of this section does not qualify for a 
discharge, the agency must notify the borrower in writing of that 
determination, the reasons for the decision, and how the borrower may 
ask the Secretary to review the decision within 30 days after the date 
the agency--
* * * * *
    (G) Upon receipt of a closed school discharge claim filed by a 
lender, the agency must review the borrower's completed application in 
light of the information available from the records of the agency and 
from other sources, including other guaranty agencies, state 
authorities, and cognizant accrediting associations, and must take the 
following actions--
    (1) If the agency determines that the borrower satisfies the 
requirements for discharge under paragraph (d) of this section, it must 
pay the claim in accordance with Sec.  682.402(h) not later than 90 
days after the agency received the claim; or
    (2) If the agency determines that the borrower does not qualify for 
a discharge, the agency must, not later than 90 days after the agency 
received the claim, return the claim to the lender with an explanation 
of the reasons for its determination.
    (H) If a borrower fails to submit the completed application 
described in paragraph (d)(3) of this section within 60 days of being 
notified of that option, the lender or guaranty agency must resume 
collection and must be deemed to have exercised forbearance of payment 
of principal and interest from the date it suspended collection 
activity. The lender or guaranty agency may capitalize, in accordance 
with Sec.  682.202(b), any interest accrued and not paid during that 
period.
* * * * *
    (J)(1) Within 30 days after receiving the borrower's request for 
review of its decision that the borrower did not qualify for a 
discharge under paragraph (d)(6)(ii)(F) of this section, the agency 
must forward the borrower's discharge request and all relevant 
documentation to the Secretary.
    (2) After reviewing the documents provided by the agency, the 
Secretary notifies the agency and the borrower of the decision on the 
borrower's application for a discharge. If the Secretary determines 
that the borrower is not eligible for a discharge under paragraph (d) 
of this section, within 30 days after being informed of the Secretary's 
decision, the agency must take the actions described in paragraph 
(d)(6)(ii)(H) of this section, as applicable.
    (3) If the Secretary determines that the borrower meets the 
requirements for a discharge under paragraph (d) of this section, the 
agency must, within 30 days after being informed of the Secretary's 
decision, take the actions required under paragraphs (d)(6)(ii)(E) and 
(d)(6)(ii)(G)(1) of this section and the lender must take the actions 
described in paragraph (d)(7)(iv) of this section, as applicable.
* * * * *
0
15. Section 682.405 is amended by adding paragraph (b)(4)(ii) to read 
as follows:


Sec.  682.405   Loan rehabilitation agreement.

* * * * *
    (b) * * *
    (4) * * *
    (ii) The purchase of a rehabilitated loan is not considered a 
borrower's entry into repayment or resumption of repayment for the 
purposes of interest capitalization under Sec.  682.202(b).
* * * * *
0
16. Section 682.410 is amended by revising paragraphs (b)(2) and (4) to 
read as follows:


Sec.  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 following the initial notice 
described in paragraph (b)(6)(ii) of this section, the borrower enters 
into 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 Sec.  682.200(b) (Satisfactory repayment arrangement), 
Sec.  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 Sec. Sec.  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.
* * * * *
    (4) Capitalization of unpaid interest. The guaranty agency must 
capitalize any unpaid interest due on the loan at the time the agency 
pays a default claim to the lender, but must not capitalize any unpaid 
interest thereafter.
* * * * *

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

0
17. The authority citation for part 685 continues to read as follows:

    Authority:  20 U.S.C. 1070g, 1087a, et seq., unless otherwise 
noted.

0
18. Section 685.200 is amended by adding paragraphs (f)(3)(v) and 
(f)(4)(iii) to read as follows:


Sec.  685.200  Borrower eligibility.

* * * * *
    (f) * * *
    (3) * * *
    (v) A borrower who receives a closed school, false certification, 
unpaid refund, or defense to repayment discharge that results in a 
remaining eligibility period greater than zero is not responsible for 
the interest that accrues on a Direct Subsidized Loan or on the portion 
of a Direct Consolidation Loan that repaid a Direct Subsidized Loan 
unless the borrower once again becomes responsible for the interest 
that accrues on a previously received Direct Subsidized Loan or on the 
portion of a Direct Consolidation Loan that repaid a Direct Subsidized 
Loan, for the life of

[[Page 37325]]

the loan, as described in paragraph (f)(3)(i) of this section.
    (4) * * *
    (iii) For a first-time borrower who receives a closed school, false 
certification, unpaid refund, or borrower defense discharge on a Direct 
Subsidized Loan or a portion of a Direct Consolidation Loan that is 
attributable to a Direct Subsidized Loan, the Subsidized Usage Period 
is reduced. If the Direct Subsidized Loan or a portion of a Direct 
Consolidation Loan that is attributable to a Direct Subsidized Loan is 
discharged in full, the Subsidized Usage Period of those loans is zero 
years. If the Direct Subsidized Loan or a portion of a Direct 
Consolidation Loan that is attributable to a Direct Subsidized Loan is 
discharged in part, the Subsidized Usage Period may be reduced if the 
discharge results in the inapplicability of paragraph (f)(4)(i) of this 
section.
* * * * *
0
19. Section 685.206 is amended by revising paragraph (c) and adding 
paragraph (d) to read as follows:


Sec.  685.206  Borrower responsibilities and defenses.

* * * * *
    (c)(1) In any proceeding to collect on a Direct Loan first 
disbursed prior to July 1, 2019, the borrower may assert as a borrower 
defense to repayment, any act or omission of the school attended by the 
student that would give rise to a cause of action against the school 
under applicable State law. These proceedings include, but are not 
limited to, the following:
    (i) Tax refund offset proceedings under 26 U.S.C. 6402(d), 31 
U.S.C. 3716 and 3720A.
    (ii) Wage garnishment proceedings under section 488A of the Act or 
under 31 U.S.C. 3720D and 34 CFR part 34.
    (iii) Salary offset proceedings for Federal employees under 34 CFR 
part 31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
    (iv) Consumer reporting proceedings under 31 U.S.C. 3711(e).
    (2) If a defense to repayment discharge is approved, the Secretary 
determines the amount of financial relief to be provided and notifies 
the borrower 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. The Secretary affords the borrower 
such further relief as the Secretary determines is appropriate under 
the circumstances. Further relief may include, but is not limited to, 
the following:
    (i) Reimbursing the borrower for amounts paid toward the loan 
voluntarily or through enforced collection.
    (ii) Determining that the borrower is not in default on the loan 
and is eligible to receive assistance under title IV of the Act.
    (iii) Updating reports to consumer reporting agencies to which the 
Secretary previously made adverse credit reports with regard to the 
borrower's Direct Loan.
    (3) The Secretary may initiate an appropriate proceeding to require 
the school whose act or omission resulted in an approved defense to 
repayment discharge on a Direct Loan to pay to the Secretary the amount 
of the loan to which the defense applies. The Secretary will not 
initiate such a proceeding more than three years after the last award 
year in which the student attended the school, unless the school 
received actual notice of the defense to repayment during that period.
    (d)(1) For purposes of this paragraph (d):
    (i) The term ``borrower'' includes the student who attended the 
institution or the student on whose behalf a parent borrowed.
    (ii) A borrower defense to repayment includes--
    (A) A defense to repayment of amounts owed to the Secretary on a 
Direct Loan; and
    (B) Any accompanying request for reimbursement of payments 
previously made to the Secretary on a Direct Loan.
    (iii) 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.
    (iv) The terms ``school'' and ``institution'' may be used 
interchangeably and include an eligible institution or school, its 
officers, directors, employees, representatives, and agents, or any 
institution or school, organization, or person with whom the eligible 
school or institution has an agreement to provide educational programs, 
marketing, advertising, recruiting, or admissions services.

Alternative A for Paragraph (d)(2)(Defensive)

    (2) In any proceeding to collect on a Direct Loan first disbursed 
on or after July 1, 2019, the borrower may assert a claim under this 
section. These proceedings include the following:
    (i) Tax refund offset proceedings under 26 U.S.C. 6402(d), 31 
U.S.C. 3716 and 3720A.
    (ii) Wage garnishment proceedings under section 488A of the Act or 
under 31 U.S.C. 3720D and 34 CFR part 34.
    (iii) Salary offset proceedings for Federal employees under 34 CFR 
part 31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
    (iv) Consumer reporting agency reporting proceedings under 31 
U.S.C. 3711(e).

Alternative B for Paragraph (d)(2) (Defensive and Affirmative)

    (2)(i) For loans first disbursed on or after July 1, 2019, a 
borrower may assert a claim under this section if the borrower 
establishes by a preponderance of the evidence that--
    (A) The institution at which the borrower enrolled acted with an 
intent to deceive, knowledge of the falsity of a misrepresentation, or 
a reckless disregard for the truth in making a misrepresentation of 
material fact, opinion, intention, or law upon which the borrower 
reasonably relied in deciding to obtain a Direct Loan to enroll or 
continue enrollment in a program at the institution; and
    (B) The borrower was financially harmed by the misrepresentation.
    (ii) In any proceeding to collect on a Direct Loan first disbursed 
on or after July 1, 2019, the borrower may assert a claim under this 
section. These proceedings include the following:
    (A) Tax refund offset proceedings under 26 U.S.C. 6402(d), 31 
U.S.C. 3716 and 3720A.
    (B) Wage garnishment proceedings under section 488A of the Act or 
under 31 U.S.C. 3720D and 34 CFR part 34.
    (C) Salary offset proceedings for Federal employees under 34 CFR 
part 31, 5 U.S.C. 5514, and 31 U.S.C. 3716.
    (D) Consumer reporting agency reporting proceedings under 31 U.S.C. 
3711(e).
    (3) To assert a borrower defense to repayment under this paragraph 
(d), 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 
application must--
    (i) Certify that the borrower received the proceeds of a loan, in 
whole or in part, to attend the named school;
    (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

[[Page 37326]]

or omission of the school 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 claim described in paragraph (d)(3)(iii) of this 
section;
    (v) State the amount of harm that the borrower alleges to have been 
caused by the school's action and supply any information relevant to 
assessing this allegation of harm, including information about whether 
the borrower failed to actively pursue employment in the field if the 
borrower is a recent graduate; 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 a related field; and 
whether the borrower failed to meet other requirements of or 
qualifications for a job in such field for reasons unrelated to the 
school's action underlying the borrower defense, such as the borrower's 
ability to pass a drug test, satisfy criminal history or 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 loan for which the 
defense to repayment application has been submitted, the institution 
may 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.
    (4) In the case of a Direct Consolidation Loan first disbursed on 
or after July 1, 2019, a borrower may assert a borrower defense under 
the standards in this paragraph (d) with respect to a loan that was 
repaid by the Direct Consolidation Loan.

Alternative A for Paragraphs (d)(5) Introductory Text and (d)(5)(i) and 
(ii) (Defensive)

    (5) The Secretary will approve the borrower's defense to repayment 
claim submitted under this paragraph (d) if the borrower in a 
collections proceeding, in the applicable timeframes for the 
proceeding, establishes by a preponderance of the evidence that--
    (i) The institution at which the student enrolled made a 
misrepresentation, upon which the borrower reasonably relied under the 
circumstances in deciding to obtain a Direct Loan, or a loan repaid by 
a Direct Consolidation Loan, for the student to enroll or continue 
enrollment in a program at the institution; and
    (ii) The borrower suffered financial harm as a result of the 
misrepresentation by the school.

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

    (5) The Secretary will approve the borrower's defense to repayment 
claim submitted under this paragraph (d) if--
    (i) In the case of an affirmative claim made by a borrower in 
repayment under paragraph (d)(2)(ii) of this section--
    (A) The borrower submits the claim to the Department within three 
years from the date the student is no longer enrolled at the 
institution; and
    (B) The Secretary finds that a preponderance of the evidence 
supports the approval of a borrower defense to repayment; or
    (ii) In the case of a defensive claim submitted by a borrower under 
paragraph (d)(2)(ii) of this section, the borrower in a collections 
proceeding, in the applicable timeframes for the proceeding, 
establishes by a preponderance of the evidence that--
    (A) The institution at which the student enrolled made a 
misrepresentation, upon which the borrower reasonably relied under the 
circumstances in deciding to obtain a Direct Loan, or a loan repaid by 
a Direct Consolidation Loan, for the student to enroll or continue 
enrollment in a program at the institution; and
    (B) The borrower suffered financial harm as a result of the 
misrepresentation by the school.
    (iii) The Secretary may also consider evidence otherwise in the 
possession of the Secretary, including from the Department's internal 
records or other relevant evidence obtained by the Secretary, provided 
that the Secretary permits the institution to review and respond to 
this evidence and to submit additional evidence.
    (iv) A ``misrepresentation'' is a statement, act, or omission by an 
eligible school to a borrower that is false, misleading, 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 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. Evidence 
that a misrepresentation described in paragraph (d)(5) of this section 
may have occurred includes:
    (A) Actual licensure passage rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (B) Actual employment rates materially different from those 
included in the institution's marketing materials, website, or other 
communications made to the student;
    (C) 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;
    (D) The inclusion in the institution's marketing materials, 
website, or other communication made to the student of specialized, 
programmatic, or institutional certifications, accreditation, or 
approvals not actually obtained, or the failure to remove within a 
reasonable period of time such certifications or approvals from 
marketing materials, website, or other communication when revoked or 
withdrawn;
    (E) 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;
    (F) 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 data for earnings in the same field as 
provided by an appropriate Federal agency that provides such data;
    (G) 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 the school does not fulfill following the enrollment of the 
borrower;
    (H) A representation regarding the amount of tuition and fees that 
the student would be charged for the program that is materially 
different in amount, method, or timing of payment from the actual 
tuition and fees charged to the student;
    (I) A representation that the institution, its courses, or programs 
are endorsed by vocational counselors, high schools, colleges, 
educational

[[Page 37327]]

organizations, employment agencies, members of a particular industry, 
students, former students, governmental officials, the United States 
armed forces, or other individuals or entities when the institution has 
no permission or is not otherwise authorized to use such an 
endorsement;
    (J) 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
    (K) A representation regarding the nature or extent of 
prerequisites for enrollment in a course or program offered by the 
institution that are 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.
    (v) Financial harm to the borrower has occurred when the borrower 
suffers monetary loss as a consequence of a misrepresentation described 
in paragraph (d)(5) of this section and defined in paragraph (d)(5)(iv) 
of this section. 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 as 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 includes the following 
circumstances:
    (A) Extended periods of unemployment upon graduating from the 
school's programs that are unrelated to national or local economic 
downturns or recessions;
    (B) 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;
    (C) The borrower's inability to secure employment in the field of 
study for which the institution expressly guaranteed employment; and
    (D) 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.
    (6) 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, unless the violation would 
otherwise constitute the basis for a successful borrower defense; or
    (ii) A claim that is not directly and clearly related to the making 
of the loan or the provision of educational services by the school 
including, but not limited to--
    (A) Personal injury;
    (B) Sexual harassment;
    (C) A violation of civil rights;
    (D) Slander or defamation;
    (E) Property damage;
    (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 section.
    (7) Upon receipt of a borrower's request for relief based on 
defense to repayment, the Department will notify the school of the 
pending request, provide a copy of the borrower's request and any 
supporting documents to the school, provide 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, and invite the school to respond and to submit 
evidence within the specified timeframe included in the notice. The 
borrower will receive a copy of the school's response and related 
evidence.
    (8)(i) The Secretary will provide the school the information that 
will be considered when determining whether to grant the borrower 
defense to repayment discharge and allow a reasonable opportunity to 
respond and submit additional evidence. This information may include--
    (A) The Department's internal records;
    (B) The borrower defense to repayment application and any 
supporting evidence submitted by the borrower;
    (C) The response and any supporting evidence submitted by the 
school; and
    (D) Any other relevant evidence obtained by the Secretary.
    (ii) After considering the borrower's application and evidence and 
any information or evidence provided by the school, 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 (d)(9) of 
this section.
    (9)(i) If the Secretary grants the borrower's request for relief 
based on defense to repayment, 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. In awarding relief, the Secretary 
shall consider any payments reported by the borrower pursuant to 
paragraph (d)(3)(iv) of this section.
    (ii) The Secretary affords the borrower such further relief as the 
Secretary determines is appropriate under the circumstances. Further 
relief includes, if applicable:
    (A) Reimbursing the borrower for amounts paid toward the loan 
voluntarily or through enforced collection;
    (B) Determining that the borrower is not in default on the loan and 
is eligible to receive assistance under title IV of the Act;
    (C) Eliminating or recalculating the subsidized usage period that 
is associated with the loan or loans discharged; and
    (D) Updating reports to consumer reporting agencies to which the 
Secretary previously made adverse credit reports with regard to the 
borrower's Direct Loan.
    (10) The determination of a borrower's defense to repayment by the 
Department included in the written decision referenced in paragraph 
(d)(9)

[[Page 37328]]

of this section is the final decision of the Department and is not 
subject to appeal.
    (11) 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 (c) or (d) of this section or under subpart 
G of this part. 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 statement required by the Secretary 
with respect to those representations and documents.
    (12)(i) Upon the grant of any relief under paragraph (c) or (d) 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 and for the same loan for which the 
discharge was granted under this section.
    (ii) The provisions of this paragraph (d)(12) apply notwithstanding 
any provision of State law that would otherwise restrict transfer of 
those rights by the borrower, limit or 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 (d)(12) limits or forecloses the 
borrower's right to pursue legal and equitable relief arising under 
applicable law against a party described in this paragraph (d)(12) 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.
    (13)(i) The Secretary may initiate an appropriate proceeding to 
require the school whose misrepresentation resulted in the borrower's 
successful borrower defense 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 (d)(13) 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 (d)(9) of this section. The 
Department will notify the school of the defense to repayment 
application.
    (iii) 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.
* * * * *
0
20. Section 685.212 is amended by adding paragraph (k) to read as 
follows:


Sec.  685.212  Discharge of loan obligation.

* * * * *
    (k) Borrower defenses. (1) If a borrower's application for a 
discharge of a loan based on a borrower defense is approved under Sec.  
685.206(c) or (d), the Secretary discharges the obligation of the 
borrower, in whole or in part, in accordance with the procedures 
described in Sec.  685.206(c) or (d), respectively.
    (2) [Reserved]
* * * * *
0
21. Section 685.214 is amended by:
0
 a. Revising paragraphs (c)(1) introductory text through (c)(1)(i)(C).
0
b. Redesignating paragraphs (c)(1)(ii) and (iii) as paragraphs 
(c)(1)(iii) and (iv).
0
c. Adding a new paragraph (c)(1)(ii).
0
d. In paragraph (f)(1), removing the number ``120'' and adding, in its 
place, the number ``180''.
0
 e. In paragraph (f)(4), removing the words ``the written request and 
sworn statement'' and adding, in their place, the words ``a completed 
application''.
    The revisions and addition read as follows:


Sec.  685.214   Closed school discharge.

* * * * *
    (c) Borrower qualifications for discharge. (1) In order to qualify 
for discharge of a loan under this section, a borrower must submit to 
the Secretary a completed application, 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 January 1, 1986 to attend a school;
    (B) Did not complete the program of study at that school because 
the school closed while the student was enrolled, or the student 
withdrew from the school not more than 180 days before 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, or 
revocation or withdrawal of the school's license to operate or to award 
academic credentials in the State; and
    (C) Did not complete the program of study by transferring academic 
credits or hours earned at the closed school to another school;
    (ii) Certify that the school did not provide the borrower an 
opportunity to complete the program of study in which the borrower was 
enrolled through a teach-out plan approved by the school's accrediting 
agency and, if applicable the school's State authorizing agency;
* * * * *
0
22. Section 685.215 is amended by:
0
a. Revising paragraph (a)(1)(i).
0
b. Revising paragraphs (c) introductory text through (c)(1)(ii).
0
c. Revising paragraphs (d)(1) through (3).
    The revisions read as follows:


Sec.  685.215   Discharge for false certification of student 
eligibility or unauthorized payment.

    (a) * * *
    (1) * * *
    (i) 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.
* * * * *
    (c) Borrower qualification for discharge. In order to qualify for 
discharge under this section, 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

[[Page 37329]]

must be true and made under penalty of perjury. In the application, the 
borrower must demonstrate to the satisfaction of the Secretary that the 
requirements in paragraphs (c)(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 Sec.  685.215(c)(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 submitted to the 
school a written attestation, under penalty of perjury, that the 
borrower had a high school diploma.
* * * * *
    (d) Discharge procedures. (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 (c) 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.
* * * * *
0
 23. Section 685.300 is amended by:
0
a. Revising paragraph (b)(8).
0
 b. Removing the word ``and'' at the end of paragraph (b)(10).
0
c. Redesignating paragraph (b)(11) as paragraph (b)(12).
0
d. Adding a new paragraph (b)(11).
    The revision and addition read as follows:


Sec.  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;
* * * * *
    (11) Accept responsibility and financial liability stemming from 
losses incurred by the Secretary for repayment of amounts discharged by 
the Secretary pursuant to Sec. Sec.  685.206, 685.214, 685.215, and 
685.216; and
* * * * *
0
24. Section 685.304 is amended by:
0
 a. Revising paragraphs (a)(3)(iii) and (a)(5).
0
b. Removing the word ``and'' at the end of paragraph (a)(6)(xii).
0
c. Redesignating paragraph (a)(6)(xiii) as paragraph (a)(6)(xvi) and 
adding paragraphs (a)(6)(xiii), (xiv), and (xv).
    The revision and additions read as follows:


Sec.  685.304   Counseling borrowers.

    (a) * * *
    (3) * * *
    (iii)(A) Online or by interactive electronic means, with the 
borrower acknowledging receipt of the information.
    (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) If the school requires borrowers to enter into a pre-dispute 
arbitration agreement, as defined in Sec.  668.41(h)(2)(iii) of this 
chapter, or to sign a class action waiver, as defined in Sec.  
668.41(h)(2)(i) and (ii) of this chapter, the school must provide a 
written description of the school's dispute resolution process that the 
borrower has agreed to pursue as a condition of enrollment, 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 Federal student loans or to the educational 
services for which the loans were provided;
    (xiv) If the school requires borrowers to enter into a pre-dispute 
arbitration agreement, as defined in Sec.  668.41(h)(2)(iii) of this 
chapter, to enroll in the institution, provides 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) If the school requires borrowers to sign a class-action 
waiver, as defined in Sec.  668.41(2)(h)(i) and (ii) of this chapter, 
to enroll in the institution, 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
* * * * *
0
25. Section 685.308 is amended by revising paragraph (a) to read as 
follows:


Sec.  685.308   Remedial actions.

    (a) 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 
Sec.  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

[[Page 37330]]

in part, pursuant to Sec. Sec.  685.206, 685.214, and 685.216.
* * * * *
[FR Doc. 2018-15823 Filed 7-25-18; 4:15 pm]
 BILLING CODE 4000-01-P


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