37242 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

1The 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. 

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. 

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 printto-PDF format allows the Department to 

electronically search and copy certain 

portions of your submissions. 

• 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.’’ 

• 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: 

Barbara.Hoblitzell@ed.gov or Annmarie 

Weisman at (202) 453–6712 or by email 

at: Annmarie.Weisman@ed.gov. For 

information related to False 

Certification Loan Discharge, and 

Closed School Loan Discharge, Brian 

Smith at (202) 453–7440 or by email at: 

Brian.Smith@ed.gov. For information 

regarding Financial Responsibility and 

Institutional Accountability, John 

Kolotos at (202) 453–7646 or by email 

at: John.Kolotos@ed.gov. For 

information regarding Recalculation of 

Subsidized Usage Periods and Interest 

Accrual, Ian Foss at (202) 377–3681 or 

by email at: Ian.Foss@ed.gov. 

If you use a telecommunications 

device for the deaf (TDD) or a text 

telephone (TTY), call the Federal Relay 

Service (FRS), toll free, at (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: 

• 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; 

• Encourage students to seek 

remedies from institutions that have 

committed acts or omissions that 

constitute misrepresentation and cause 

harm to the student; 

• Ensure that institutions rather than 

taxpayers bear the burden of billions of 

dollars 1 in losses from approvals of 

borrower defense to repayment 

discharges; 

• Enable institutions to respond to 

borrower defense to repayment claims 

and provide evidence to support their 

response; 

• Discourage institutions from 

committing fraud or other acts or 

omissions that constitute 

misrepresentation or from closing 

precipitously; 

• Enable the Department to properly 

evaluate institutional financial risk in 

order to protect students and taxpayers; 

• Provide students with additional 

time to qualify for a closed school loan 

discharge; 

• 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; 

• 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 


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2http://www.nber.org/papers/w17065.pdf. 

• 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 


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similar behavioral response from reliefseeking 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. 

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 factspecific 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 


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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 accreditorapproved 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 


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37246 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 § 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— 

• Establish a new Federal standard 

for borrower defenses to repayment 

submitted by borrowers with loans first 

disbursed on or after July 1, 2019; 

• Establish a process for the assertion 

and resolution of borrower defenses to 

repayment for loans first disbursed on 

or after July 1, 2019; 

• 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; 

• 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. 

• 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; 

• 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 

• 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— 

• 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 

• 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. 

• 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— 

• 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; 

• 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; 

• 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; 

• 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; 

• Prohibit guaranty agencies from 

capitalizing interest on a loan that is 

sold following the completion of loan 

rehabilitation; 

• 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 

• 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. 


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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 predispute 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 


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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/negreg-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 HawaiianServing 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 


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


daltland on DSKBBV9HB2PROD with PROPOSALS3
37250 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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— 

• Rescind specified provisions of the 

2016 final regulations, which have not 

yet become effective. 

• Amend § 668.41 to require schools 

that require students to accept predispute 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; 

• Amend § 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; 

• Amend § 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; 

• Amend § 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; 

• Amend § 668.172 to address 

changes to the accounting standards 

regarding leases; 

• Amend § 668.175 to expand the 

types of financial protection acceptable 

to the Secretary; 

• Amend §§ 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; 

• Amend §§ 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; 

• Amend § 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; 

• Amend § 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; 

• Amend § 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. 

• Amend § 685.212 to add borrower 

defense to repayment discharges to the 

discharge provisions listed in this 

section. 

• Amend § 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. 

• Amend § 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. 

• Amend § 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. 

• Amend § 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 §§ 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 


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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 § 668.91 and § 668.93 

has been redesignated as § 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 

(§ 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 § 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 

§ 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/factsheet-protecting-students-abusivecareer-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 


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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 longstanding 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, 

§ 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 

§ 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 § 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, § 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 § 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 

§ 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 

§ 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 


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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-jobperformance, 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 § 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 

§ 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 

§ 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 § 685.206(d)(5)(iii) sets forth 

that the Secretary may consider 

additional information when evaluating 

a claim. Proposed § 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 § 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 § 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 

§ 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 


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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 

§ 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 


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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’ 


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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 misrepresentationbased 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 § 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 

§ 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 

§ 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 


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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 nonexhaustive 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. 


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Borrower Defense—Judgments and 

Breach of Contract 

During the negotiations, the 

Department discussed using a nondefault, 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 nondefault, 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, nondefault 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 


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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 § 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 


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3The days listed may vary depending on the 

particular circumstances of each borrower’s 

situation. 

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: 

Collection action 

Number of 

days 3 for 

borrower 

response 

Tax Refund Offset proceedings ............................

under 34 CFR 30.33 ............. 65 

Salary Offset proceedings for 

Federal employees under 

34 CFR part 31 ................. 65 

Wage Garnishment proceedings ............................

under section 488A of the 

HEA ................................... 30 

Consumer Reporting proceedings ............................

under 31 U.S.C. 3711(f) ....... 30 

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 

(§§ 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 


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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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 § 685.206(d)(3). 

Proposed § 685.206(d)(10) provides 

that the determination of a borrower 

defense by the Department is final and 

not subject to appeal. 

Proposed § 685.212(k)(1) would add 

borrower defense discharges to the 

discharge provisions listed in § 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. 


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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-thejob-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 


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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 § 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 (§§ 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 § 685.309(c), unless the 

school received notice of the borrower’s 

defense during that period. 

Proposed Regulations: Proposed 

§ 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 § 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 § 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 §§ 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 § 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 § 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 


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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 (§§ 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 § 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 § 685.309(c). This 

three-year limit is derived from 

§§ 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 fiveyear 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 

(§§ 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 § 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 § 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 § 668.41(h). 

Proposed revisions to § 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 


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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 predispute 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 predispute 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 predispute 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 predispute 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 


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37266 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 (§§ 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 

§§ 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 §§ 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 §§ 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 §§ 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 

§ 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 § 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 


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proposed that a borrower who attended 

a closed school and who did not reenroll 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 

§§ 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 

§ 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 offcampus 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. 


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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 

§§ 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 authorizerapproved 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 teachout 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 

§ 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 


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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 

(§ 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 § 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 § 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 § 685.215(c) and (d) would 

update the procedures for applying for 

a false certification discharge. Proposed 

§ 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 § 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 § 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 § 685.215(a)(1)(i) 

because there is no longer a statutory 

basis for certifying the eligibility of nonhigh 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 


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37270 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 (§ 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 § 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 § 668.171(b) and 

appendix A or B to subpart L of the 

General Provisions regulations. Under 

those standards, an institution: 

• Must have a composite score of at 

least 1.5, based on its Equity, Primary 

Reserve, and Net Income ratios; 


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• Must have sufficient cash reserves 

to make required refunds; 

• 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 

• 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 § 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 § 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: 

• 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. 

• 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. 

• 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: 

• 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. 

• 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. 

• 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. 

• 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 

§ 668.28(c). 

• 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: 

• 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. 

• 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. 

• 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: 

• 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; 

• 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 

• 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. 

• 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 


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4See SEC Investor Bulletin: Trading Suspensions, 

available at www.sec.gov/answers/ 

tradingsuspension.htm. 

5 Id. 

6See, 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. 

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 § 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 

§ 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 § 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 exchangerelated 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 § 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. 

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 


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with a plan of the actions it intends to 

take to come into compliance with 

exchange requirements. 

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 nonFederal 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 

§ 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 nonFederal 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 


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reporting requirements in proposed 

paragraph (f), we adopt the timeframe 

currently in § 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 (§ 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 nonFederal 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 


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

§ 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 rightof-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 longterm 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 longterm 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 


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7Available at: www.gao.gov/products/GAO-17- 

555. 

8Available at: www2.ed.gov/about/offices/list/ 

oig/auditreports/fy2017/a09q0001.pdf. 

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 postemployment 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 longterm 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. 

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 longterm 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, postemployment 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 § 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 


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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 longterm 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 longterm 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 shortterm 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 longterm 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 longterm 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 


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without donor restrictions on 

investments, post-employment and 

defined benefit pension plans, and 

annuities. (For institutions that have 

defined benefit pension and other postemployment plans, total expenses 

include the nonservice component of 

net periodic pension and other postemployment plan expenses and these 

expenses will be classified as nonoperating. 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). 

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 postemployment and retirement liabilities 

for expendable net assets, it would be 

clearer to the community to use postemployment 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 


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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 longterm 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 longterm 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, postemployment 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 § 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 (§ 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 

§ 668.175, an institution that is not 

financially responsible under the 

general standards in § 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 

§ 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 § 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 § 668.23(a)(4), or (2) provide 

information about its current operations 

and future plans. 

Under the provisional certification 

alternative in § 668.175(f), an institution 

that is not financially responsible 


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37280 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

because it does not meet the general 

standards in § 668.171(b), or because of 

an audit opinion in § 668.171(d) or a 

condition of past performance in 

§ 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 § 668.171(c) 

one of the oversight and financial events 

that an institution currently reports to 

the Department under the zone 

alternative in § 668.175(d)(2)(ii)—any 

withdrawal of owner’s equity from the 

institution. 

We propose to remove § 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: 

• 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; 

• Provide cash for the amount 

required; or 

• 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 § 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 § 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 (§ 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 § 668.91. In addition to describing 

the procedures for issuing initial and 

final decisions, § 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 § 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, § 668.91(a)(3)(v) states that, 

in a termination action brought on the 

grounds that the institution is not 

financially responsible under 

§ 668.15(c)(1), the hearing official must 

find that termination is warranted 

unless the conditions in § 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 


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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 § 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 

§ 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 § 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 § 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 § 668.174(a), or a failure of 

a past performance condition for 

persons affiliated with an institution 

under § 668.174(b)(1), was not 

warranted. For the former, revised 

§ 668.91(a)(3)(v) would state that these 

circumstances would be consistent with 

the provisional certification and 

financial protection alternative in 

§ 668.175(f). For the latter, the 

circumstances would be those provided 

in § 668.174(b)(2). 

Reasons: The proposed changes to 

§ 668.91(a)(3)(iii) would update the 

regulations to reflect both the current 

language in § 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 

§ 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 § 668.175 require an 

institution in some instances to provide 

a letter of credit to be considered 

financially responsible. We propose to 

modify § 668.91(a)(3)(iii) to reflect that 

language as well as changes proposed to 

§ 668.175 by substituting the terms 

‘‘letter of credit or other financial 

protection’’ for ‘‘surety.’’ Thus, the 

proposed changes to § 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 

§ 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 

§ 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 

§ 668.174(a) or a failure of a past 

performance condition for persons 

affiliated with an institution under 

§ 668.174(b)(1) was not warranted. The 

changes would not add substantive new 

restrictions, but simply conform 

§ 668.91 to the substantive requirements 

already in current regulations. Thus, as 

revised, § 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 § 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 § 668.174(b)(2), or that the institution 

has accepted provisional certification 

and provided the financial protection 

required under § 668.175. 

This proposal is very similar to 

changes made to this section (previously 

designated as § 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 (§ 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 § 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 § 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 § 668.171(e) provides that the 

Secretary may take action under subpart 

G to limit or terminate the participation 


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of an institution if the Secretary 

determines that the institution is not 

financially responsible under § 668.171 

or § 668.175. 

Proposed Regulations: The Secretary 

proposes to amend § 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 

§ 668.13(c) is a type of limitation that 

may be the subject of a limitation 

proceeding under § 668.86. 

Reasons: The proposed change to 

§ 668.94 would clarify current policy 

and provide for a more complete set of 

limitations covered in § 668.94. The 

2016 final regulations included this 

same change to this regulation 

(previously designated as § 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 §§ 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 §§ 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 

§ 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 


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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 firstyear 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 fulltime 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 § 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 postemployment 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 


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9Exec. Order No. 12866, 58 FR 190 (October 4, 

1993). Regulatory Planning and Review. Available 

at: www.reginfo.gov/public/jsp/Utilities/EO_

12866.pdf. 

10Exec. 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. 

11Public 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. 

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 longterm 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 longterm 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. 

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 twofor-one requirements of E.O. 13771 do 

not apply. 

We have also reviewed these 

regulations under Executive Order 

13563, which supplements and 

explicitly reaffirms the principles, 

structures, and definitions governing 

regulatory review established in 

Executive Order 12866. To the extent 

permitted by law, Executive Order 

13563 requires that an agency— 

(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 


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12U.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 exercise of their governmental 

functions. 

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. 

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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37286 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 optin 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 


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

pdf/2016-25448.pdf. 

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, forprofit 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. 

TABLE 1—COMPARISON OF ALTERNATIVES

Topic Baseline Proposal Scenario 1 Scenario 2 

Closed school discharge eligibility window.120 days .................................. 180 days .................................. 150 days .................................. 120 days. 

Closed school discharge exclusions.Borrower completed teach-out 

or transferred credits.

School offered a teach-out 

plan.

School offered a teach-out 

plan.

Borrower completed teach-out 

or transferred credits. 

Borrower Defense claims accepted.Affirmative and defensive ........ Defensive only ......................... Affirmative and defensive ........ Defensive only. 

Party that adjudicates borrower 

defense claims.

Department .............................. Department .............................. State court or arbiter ............... Department. 

Standard for borrower defense 

claims.

Federal Standard ..................... Federal standard ..................... State laws ................................ State laws.

Borrower defense application 

process.

Application ............................... Select borrower defense in response to wage garnishment 

or similar actions.

Submit judgment from state 

court or similar using application.

Submit sworn attestation or 

application. 

Loans associated with BD 

claims.

Forbearance during adjudication Interest accrues.Forbearance not necessary ..... Forbearance not necessary ..... Forbearance during adjudication Interest accrues. 

Composite score calculation 

and timeline.

No FASB updates .................... Higher of current or FASB-updated score forever.Higher of current or FASB-updated score for 6 years, then 

FASB-updated score.

No FASB updates. 

Financial responsibility triggers Reporting that automatically 

results in surety request.

New reporting that may result 

in surety request.

New reporting that automatically results in surety request.None. 

Notification of mandatory arbitration and class action waivers.Prohibits mandatory arbitration 

clauses and class action 

waivers.

On website and entrance 

counseling.

On website, during entrance 

and exit counseling, and annually by email to students.

None. 

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 classaction 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 


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14https://ifap.ed.gov/dpcletters/GEN1514.html. 

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

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 


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15 34 CFR 602.24(c). 

16www.insidehighered.com/news/2017/11/13/ 

spate-recent-college-closures-has-some-seekinglong-predicted-consolidation-taking. 

17www.insidehighered.com/news/2018/04/09/ 

mount-ida-after-trying-merger-will-shut-down. 

18www.insidehighered.com/news/2018/04/23/ 

when-college-goes-under-everyone-suffers-mountidas-faculty-feels-particular-sense. 

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. 

Large numbers of small, private nonprofit 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. 

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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37290 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

19Students’ 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. 20 34 CFR 602.24(c). 

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. 

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 longerterm 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 teachout 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 


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

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 noncompletion 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 


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Table 2: Financial Responsibility Triggers 

0 

...... 

v 

()) 

J..l 

0 

u 

!II 

()) 

.j.J 

·ri 

!II 

0 

~ u 

'0 

()) 

.j.J 

Ill 

.-I 

6 

.-I 

Ill 

u 

&l 

Financial 

Responsibility 

Trigger 

Action or Event 

triggers 

Secretary 

decision and 

surety to 

Department 

Defense to 

repayment that 

does or could 

lead to an 

institution 

repaying 

government for 

discharges 

Lawsuits and 

Other Actions 

that does or 

could lead to 

institution 

paying a debt 

or incurring a 

liability 

Withdrawal of 

Owner's Equity 

at proprietary 

institutions 

!II Non-Title IV 

1:: Revenue 

~-~ ~ (90/10): fails 

b in most recent 

fC( fiscal year 

2016 Regulation Proposed Regulation Change Summary 

Actual or projected 

expenses incurred 

from a triggering 

event 

Department has 

received or 

adjudicated claims 

associated with the 

institution 

Actual expense 

incurred from a 

triggering event 

Department has 

discharged loans 

resulting from 

adjudicated claims 

Eliminates 

projected 

expenses 

• Changed from 

Discretionary 

to Mandatory 

• Reduced to 

actual 

discharges 

only 

• Final judgment in a • Final judgment in a Reduced to 

judicial judicial final 

proceeding, 

administrative 

proceeding or 

determination, or 

final settlement 

• Legal action 

brought by a 

Federal or State 

Authority pending 

for 120 days 

•Other lawsuits that 

have survived a 

motion for summary 

judgment or the 

time for such a 

motion has passed 

proceeding, 

administrative 

proceeding, or 

determination 

Excludes transfers Excludes transfers 

between institutions to affiliated 

with a common 

composite score 

At proprietary 

institutions 

entities included in 

composite score or 

to an owner 

At proprietary 

institutions 

judgments with 

public records 

Revised 

No Change 
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37293 


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Financial 

Responsibility 

Trigger 

Cohort Default 

Rates 

SEC or Exchange 

Actions 

regarding the 

institution's 

stock (Publicly 

Traded 

Institutions) 

Accreditor 

Actions -

Teach-Outs 

Gainful 

Employment 

Accreditor 

~ Actions -

~ probation, 

!II ~show-cause, or 

§ gother 

~ :.;:J & equivalent or 

~ ~ greater action 

2016 Regulation Proposed Regulation 

Two most recent Two most recent 

rates are 30 percent rates are 30 percent 

or above after any 

challenges or 

appeals 

• Warned SEC may 

suspend trading 

• Failed to file 

required report 

with SEC on-time 

• Notified of 

noncompliance with 

Stock exchange 

requirements 

• Stock delisted 

Accreditor requires 

institution to 

submit a teach-out 

plan for closing the 

institution, a 

branch, or 

additional location 

Programs one year 

away from losing 

their eligibility 

for title IV, HEA 

program funds due to 

GE metrics 

Accreditor takes 

action on 

institution 

or above after any 

challenges or 

appeals 

•Notified that SEC 

will suspend 

trading 

• Failed to file 

required report 

with SEC on-time 

and outside of a 

negotiated 

extension 

• Notified of 

noncompliance with 

Stock exchange 

requirements 

• Stock delisted 

Removed 

Removed 

Accreditor issues a 

show-cause order 

that, if not 

resolved, would 

result in the loss 

of institutional 

accreditation. 

Change Summary 

No Change 

Changed 

notification 

requirements 

from warning 

by the SEC, 

which a 

publicly 

traded company 

is not 

required to 

communicate to 

shareholders, 

to a 

notification 

by the SEC, 

about which a 

company must 

notify 

shareholders. 

Reduced 

liability 

Regulatory 

update 

Limits trigger 

to accreditor 

actions that 

could lead to 

loss of 

institutional 

accreditation 

and/or closure 

of the school 
37294 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

21Hourly wage data uses the Bureau of Labor 

Statistics, available at swww.bls.gov/ooh/ 

management/postsecondary-educationadministrators.thm. 

BILLING CODE 4000–01–C 

Some institutions may incur burden 

from the requirement to report any 

action or event described in § 668.171(e) 

within the specified number of days 

after the action or event occurs. As 

further explained in the Paperwork 

Reduction Act of 1995 section, the 

Department estimates the burden for 

reporting these events to the Secretary 

would be 720 hours annually for private 

schools and 2,274 hours for proprietary 

institutions for a total 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). 

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 


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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37295 

22www.fasb.org/jsp/FASB/Page/ 

LandingPage&cid=1175805317350. 

23SAS 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. 

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: 

• Lease Right-of-use Assets (VAR1); 

• Lease Right-of-use Liabilities 

(VAR2); 

• Net Assets With Donor Restrictions 

(VAR3); 

• Net Assets Without Donor 

Restrictions (VAR4); 

• Net Assets With Donor Restrictions: 

Restricted in Perpetuity (VAR5); 

• Post–employment and defined 

benefit pension plan liabilities (VAR6); 

• Loss for defined pension and other 

post-employment, investments and 

annuities (VAR7); 

• Investment Gains (VAR8); 

• Non-operating investment amount 

needed for separation of expenses 

(VAR9); 

• Annuities, term endowments and 

life funds not restricted in perpetuity 

(VAR10); 

• Construction in process (VAR11); 

and 

• 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) × 1 hour × 

$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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
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24Hourly wage data uses the Bureau of Labor 

Statistics, available at www.bls.gov/ooh/ 

management/postsecondary-educationadministrators.thm. 

25Hourly wage data uses the Bureau of Labor 

Statistics, available at www.bls.gov/ooh/ 

management/postsecondary-educationadministrators.thm. 

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.ll, 

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). 

3. Guaranty Agencies 

Guaranty agencies would incur onetime 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. 

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. 


daltland on DSKBBV9HB2PROD with PROPOSALS3
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26See 81 FR 76057 published November 1, 2016, 

available at ifap.ed.gov/fregisters/attachments/ 

FR110116.pdf. 

27See 83 FR 6468, available at www.gpo.gov/ 

fdsys/pkg/FR-2018-02-14/pdf/2018-03090.pdf. 

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 onetime 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 individuallygenerated 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

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. 


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28Federal 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. 

TABLE 5—ASSUMPTIONS FOR MAIN BUDGET ESTIMATE COMPARED TO PB2019 BASELINE

Cohort 

PB2019 baseline NPRM main 

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 ........................ ........................

Cohort 

PB2019 baseline NPRM main 

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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
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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. 

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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
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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

Scenario 

Estimated 

costs 

for cohorts 

2019–2028 

(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 welldocumented 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 


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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 teachout 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 teachouts 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 teachouts 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 


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29 studentaid.ed.gov/sa/about/data-center/school/ 

proprietary (extracted from eZ-Audit on June 30, 

2017) 

30U.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. 

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 use of mandatory pre-dispute arbitration clauses and potential increase in settlements between 

borrowers and institutions.

Not quantified. 

Reduced administrative burden related to processing defense to repayment applications ............................................................. Not quantified. 

Category Costs 

7% ..................... 3%. 

Cost of compliance with paperwork requirements ............................................................................................................................ 1.15 ................... 1.16. 

Changes in Department’s systems to collect relevant information and calculate revised composite score .................................... Not Quantified. 

Category Transfers 

7% ..................... 3%. 

Reduced defense to repayment discharges from the Federal Government to affected borrowers (partially borne by affected institutions, via reimbursements.$693.9 ............... $635.7. 

Reduced reimbursements of borrower defense claims from affected institutions to affected student borrowers, via the Federal 

government.

$223 .................. $205. 

Reduced closed school discharges from the Federal Government to affected borrowers .............................................................. $96.5 ................. $61.9. 

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. 

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: 

• Two-year IHEs, enrollment less 

than 500 FTE; and 

• 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

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 


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TABLE 8—SMALL INSTITUTIONS UNDER PROPOSED DEFINITION—Continued 

Level Type Small Total Percent 

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. 

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. 


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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 IVparticipating 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 §§ 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 § 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 predispute 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 

§ 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 × 2 events × 2 hours). We 

estimate that 379 proprietary 

institutions may have three events 

annually to report for a total burden of 

2,274 hours (379 institutions × 3 events 

× 2 hours). This total burden of 2,994 

hours will be assessed under OMB 

Control Number 1845–0022. 

Section 668.172 Financial Ratios. 

Requirements: Under § 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 × .25) will request the 

recalculation for 113 hours (450 

institutions × .25 hours). We estimate 

that 25% of the proprietary institutions 

474 (1,896 × .25) will request the 

recalculation for 119 hours (474 

institutions × .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 


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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 × 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 × 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 §§ 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 § 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 × 10 hours = 130). We 

estimate that it will take the 11 nonprofit guaranty agencies 10 hours for 

programming and testing to update their 

systems with this change for 110 hour 

burden increase (11 guaranty agencies × 

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 × 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 × 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 × .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 × .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 

§ 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 § 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 

§ 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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37306 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 

§ 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 predispute 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 § 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 × 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-educationadministrators.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

Regulatory section Information collection 

OMB control No. and estimated burden 

(change in burden) 

Estimated costs 

§ 668.41 .............................. Under the proposed regulatory language in 668.41(h) institutions that use predispute 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.

1845–0004; + 4,720 

hours.

$209,615. 

§ 668.171 ............................ Under the proposed regulatory language in 668.171(f) in 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.

1845–0022; + 2,994 

hours.

132,964. 

§ 668.172 ............................ Under the proposed regulatory language in 668.172(d) institutions must request a second calculation of the composite score from the Secretary to exclude operating leases.1845–0022; + 232 hours 10,303. 

Appendix A & B of 668 subpart L.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 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.

1845–0022; + 3,695 

hours.

164,095. 


daltland on DSKBBV9HB2PROD with PROPOSALS3
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37307 

COLLECTION OF INFORMATION—Continued 

Regulatory section Information collection 

OMB control No. and estimated burden 

(change in burden) 

Estimated costs 

§ 674.33, § 682.402, 

§ 685.2142.

Under the proposed regulations, the number of days that a borrower may 

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.

1845–0058; + 0 hours ..... 0. 

§ 682.402 ............................ Under proposed regulations in § 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.

1845–0020; + 410 ........... 18,208. 

§ 685.206 ............................ Under proposed § 685.206(d), a borrower defense claim related to a direct 

loan disbursed after July 1, 2019 would be evaluated under the proposed 

Federal standard. Under proposed § 685.206(d), a borrower defense must 

be submitted within three years from the date the borrower is no longer enrolled at the institution.

A new collection will be 

filed closer to the implementation of this requirement; + 0 hours.

0. 

§ 685.215 ............................ Under the proposed regulatory language in § 685.215, the application requirements for false certification discharges are amended to reflect the current 

practice of requiring a borrower to apply for the discharge using a completed application form instead of a sworn statement. The 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.

1845–0058; + 0 hours ..... 0. 

§ 685.304 ............................ Under proposed § 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. 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.

1845–0021; + 30,225 

hours (2,832 institutions 

+ 27,393 individual 

hours).

Inst. 125,769; Indiv. 

446,506, TOTAL 

$572,275. 

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: 

Control No. 

Total 

proposed 

burden 

hours 

Proposed 

change in 

burden 

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— 

• Deciding whether the proposed 

collections are necessary for the proper 

performance of our functions, including 

whether the information will have 

practical use; 

• Evaluating the accuracy of our 

estimate of the burden of the proposed 

collections, including the validity of our 

methodology and assumptions; 

• Enhancing the quality, usefulness, 

and clarity of the information we 

collect; and 

• 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. 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37308 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 

■ 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. 

■ 2. Section 668.41 is amended by: 

■ a. In paragraph (a), in the definition of 

‘‘Undergraduate students’’, adding the 

words ‘‘at or’’ before ‘‘below’’ and 

adding the word ‘‘level’’ after 

‘‘baccalaureate’’. 

■ b. In paragraph (c)(2) introductory 

text, removing the phrase ‘‘or (g)’’ and 

adding the phrase ‘‘(g), or (h)’’ in its 

place. 

■ c. Adding paragraph (h). 

The addition reads as follows: 

§ 668.41 Reporting and disclosure of 

information. 

* * * * * 

(h) Enrolled students, prospective 

students, and the public—disclosure of 

an institution’s use of pre-dispute 

arbitration agreements and/or class 

action waivers as a condition of 

enrollment for students receiving Title 

IV Federal student aid. 

(1) 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. 

* * * * * 

■ 3. Section 668.91 is amended by 

revising paragraphs (a)(3)(i) through (v) 

to read as follows: 

§ 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 § 668.14(b)(18), the 

hearing official also finds that 

termination of the institution’s 

participation is warranted; 

(ii) If, in a termination action against 

a third-party servicer, the hearing 

official finds that the servicer has 

violated the provisions of § 668.82(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 § 668.175(h), for a condition or 

event under § 668.15 or § 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 § 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; 


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Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 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 § 668.23(c)(3), 

if the hearing official finds that the 

institution or servicer failed to meet 

those requirements, the hearing official 

finds that the termination is warranted; 

(v)(A) In a termination action against 

an institution based on the grounds that 

the institution is not financially 

responsible under § 668.15(c)(1), the 

hearing official finds that the 

termination is warranted unless the 

institution demonstrates that all 

applicable conditions described in 

§ 668.15(d)(4) have been met; and 

(B) In a termination or limitation 

action against an institution based on 

the grounds that the institution is not 

financially responsible— 

(1) Upon proof of the conditions in 

§ 668.174(a), the hearing official finds 

that the limitation or termination is 

warranted unless the institution 

demonstrates that all the conditions in 

§ 668.175(f) have been met; and 

(2) Upon proof of the conditions in 

§ 668.174(b)(1), the hearing official finds 

that the limitation or termination is 

warranted unless the institution 

demonstrates that all applicable 

conditions described in § 668.174(b)(2) 

have been met; and 

* * * * * 

■ 4. Section 668.94 is amended by: 

■ a. Redesignating paragraphs (h) and (i) 

as paragraphs (i) and (j), respectively. 

■ b. Adding a new paragraph (h). 

The addition reads as follows: 

§ 668.94 Limitation. 

* * * * * 

(h) A change in the participation 

status of the institution from fully 

certified to participate to provisionally 

certified to participate under 

§ 668.13(c); 

* * * * * 

■ 5. Section 668.171 is revised to read 

as follows: 

§ 668.171 General. 

(a) Purpose. To begin and to continue 

to participate in any title IV, HEA 

program, an institution must 

demonstrate to the Secretary that it is 

financially responsible under the 

standards established in this subpart. As 

provided under section 498(c)(1) of the 

HEA, the Secretary determines whether 

an institution is financially responsible 

based on the institution’s ability to— 

(1) Provide the services described in 

its official publications and statements; 

(2) Meet all of its financial 

obligations; and 

(3) Provide the administrative 

resources necessary to comply with title 

IV, HEA program requirements. 

(b) General standards of financial 

responsibility. Except as provided under 

paragraphs (c), (d), and (h) of this 

section, the Secretary considers an 

institution to be financially responsible 

if the Secretary determines that— 

(1) The institution’s Equity, Primary 

Reserve, and Net Income ratios yield a 

composite score of at least 1.5, as 

provided under § 668.172 and 

appendices A and B to this subpart; 

(2) The institution has sufficient cash 

reserves to make required returns of 

unearned title IV, HEA program funds, 

as provided under § 668.173; 

(3) The institution is able to meet all 

of its financial obligations and provide 

the administrative resources necessary 

to comply with title IV, HEA program 

requirements. An institution is not 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 § 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 § 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 showcause 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 


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37310 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

revenue from sources other than title IV, 

HEA program funds, as provided under 

§ 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 

§ 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 nonprofit 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 § 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 § 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 § 668.174. 


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(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 

§ 668.175, or the institution does not 

submit its financial and compliance 

audits by the date and in the manner 

required under § 668.23, the Secretary 

may— 

(1) Initiate an action under subpart G 

of this part to fine the institution, or 

limit, suspend, or terminate the 

institution’s participation in the title IV, 

HEA programs; or 

(2) For an institution that is 

provisionally certified, take an action 

against the institution under the 

procedures established in § 668.13(d). 

■ 6. Section 668.172 is amended by 

adding paragraph (d) to read as follows: 

§ 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. 

* * * * * 

■ 7. Section 668.175 is amended by 

revising paragraphs (a) through (d) and 

(f) and adding paragraph (h) to read as 

follows: 

§ 668.175 Alternative standards and 

requirements. 

(a) General. An institution that is not 

financially responsible under the 

general standards and provisions in 

§ 668.171, may begin or continue to 

participate in the title IV, HEA programs 

by qualifying under an alternate 

standard set forth in this section. 

(b) Letter of credit or surety 

alternative for new institutions. A new 

institution that is not financially 

responsible solely because the Secretary 

determines that its composite score is 

less than 1.5, qualifies as a financially 

responsible institution by submitting an 

irrevocable letter of credit that is 

acceptable and payable to the Secretary, 

or providing other surety described 

under paragraph (h)(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 § 668.171(b), (c) or (d), or because 

of an audit opinion described under 

§ 668.171(h), qualifies as a financially 

responsible institution by submitting an 

irrevocable letter of credit that is 

acceptable and payable to the Secretary, 

or providing other financial protection 

described under paragraph (h) of this 

section, for an amount determined by 

the Secretary that is not less than onehalf 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 § 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 § 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 § 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. 

* * * * * 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37312 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

(f) Provisional certification 

alternative. (1) The Secretary may 

permit an institution that is not 

financially responsible to participate in 

the title IV, HEA programs under a 

provisional certification for no more 

than three consecutive years if— 

(i) The institution is not financially 

responsible because it does not satisfy 

the general standards under 

§ 668.171(b), its recalculated composite 

score under § 668.171(e) is less than 1.0, 

it is subject to an action or event under 

§ 668.171(c) or (d) that has an adverse 

material effect on the institution as 

determined by the Secretary, or because 

of an audit opinion described in 

§ 668.171(h); or 

(ii) The institution is not financially 

responsible because of a condition of 

past performance, as provided under 

§ 668.174(a), and the institution 

demonstrates to the Secretary that it has 

satisfied or resolved that condition; and 

(2) Under this alternative, the 

institution must— 

(i) 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 

§ 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 § 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 § 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. 

* * * * * 

■ 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 postemployment plan expenses. 

Modified Equity = (total owner’s equity) ¥ 

(intangible assets) ¥ (unsecured relatedparty 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 shortterm 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 longterm 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. 

BILLING CODE 4000–01–P 


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EP31JY18.007</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

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 c

elements required to compute the composite score. Each item in the Supplemental Schedule must have a reference to the Balance Sheet, St

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

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 Appl

amount in the Supplemental Schedule. The audit opinion letter must contain a paragraph that references the auditor's additional analysis of 

Supplemental Schedule. 

"Financial Responsibility Supplemental Schedule" 

Example location of number in the financial statements and/or notes - the number reference to sample numbers; however, could be more lin

statements and/or notes. 

Line Priman: Reserve Ratio: 

Adiusted Eauitv 

31 Balance Sheet- Total Equity Total equity 

Balance Sheet - Related party receivable, net and Receivable from Unsecured related party receivables and/or 

4, 10 affiliate, net and Related party note* other related party assets 

Property, plant and equipment, net -

8 Balance Sheet - Property, Plant and Equipment, net* including construction in progress 

9 Balance Sheet- Lease right-of-use asset* Lease right-ofuse asset 

II Balance Sheet - Goodwill* Intangible assets 

Post-employment and defined pension plan 

27 Balance Sheet- Post-employment and pension liability* liabilities 

20,24 Balance Sheet- Notes payable (both current and long-term)* Long-term debt- for long-term purposes 

Balance Sheet- Lease right-of-use assets liability (both current and 

17,25 long-term)* Lease right-of-use asset liability 

Balance Sheet- Line of Credit-for Long-Term Purposes (both current 

19,23 and long-term) and Line of credit note* Line of credit- for long-term purposes 

Statement of (Loss) Income - Total Operating Expenses, Interest 

40, 42, 44, Expense, Loss on Impairment of Assets and Loss on Disposal of 

45 Assets* Total Expenses and Losses: 

Egui!Y Ratio: 

Modified Eauitv 

31 Balance Sheet- Total Equity Total equity 

II Balance Sheet - Goodwill* Intangible assets 

Balance Sheet - Related party receivable, net and Receivable from Unsecured related party receivables and/or 

4, 10 affiliate, net and Related party note* other related party assets 

Modified Assets: 

EP31JY18.008</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

13 Balance Sheet - Total Assets Total assets 

11 Balance Sheet - Goodwill* Intangible assets 

Balance Sheet - Related party receivable, net and Receivable from Unsecured related party receivables and/or 

4,10 affiliate, net and Related party note* other related party assets 

Net Income Ratio: 

48 Statement of (Loss) Income- Net Income Before Income Taxes Income Before Taxes 

Statement of (Loss) Income - Total Revenue, Interest income and Other 

35,43,46 miscellaneous income* Total Revenues and Gains 

Lease right-of-use assets, net in place as of711/2019 included in Financial Statements as a result of ASU 2016-2 

Related Lease right-of-use assets liability for the above lease right-ofuse-assets as a result of ASU 2016-2 

* In the example the number came from the actual financial statements; however, the number could come from the notes. 

EP31JY18.009</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

SECTION 3: Example Financial Statement and Composite Score Calculation 

BALANCE SHEET 

Line Line 

Current Assets Revenue 

1 Cash and cash equivalents 790,000 33 Tuition and fees, net 

2 Accounts receivable, net 1,010,000 34 Clinic revenue 

3 Prepaid expenses 150,000 35 Total Revenue 

4 Related party receivable 130,000 Operating Expenses 5 Related party receivable, secured 200,000 36 Education expense 

6 Student loans receivable, net 1,330,000 37 General expense 

7 Total Current Assets 3,610,000 38 Occupancy expense 

8 Property, plant and equipment, net 7,000,000 39 Depreciation and Amortization 

9 Lease right-of-use assets, net 2,500,000 

10 Receivable from affiliate, net 1,000,000 40 Total Operating Expenses 

11 Goodwill 80,000 41 Operating Income (Loss) 

12 Deposits 20,000 Other Income (expense) 

13 Total Assets 14,210,000 42 Interest expense 

Current Liabilities 43 Interest income 

14 Accounts payable 350,000 44 Loss on impairment of assets 

15 Accrued expenses 500,000 45 Loss on disposal of assets 

16 Deferred revenue 650,000 46 Other miscellaneous income 17 Leases right-of-use assets liability 100,000 47 Total Other Income (Expense) 

18 Line of credit- operating 100,000 48 Net Income Before Income Taxes 

19 Line of credit - for long term purposes 75,000 49 Income taxes 

20 Note payable 400,000 50 Net Income (Loss) 

21 Total Current Liabilities 2,175,000 

22 Line of credit- operating 200,000 

23 Line of credit - for long term purposes 500,000 

24 Notes payable 5,000,000 25 Lease right-of-use asset liabilities 2,000,000 

26 Other liabilities 1,000,000 

27 Post-employment and pension liability 300,000 

28 Total Liabilities 11,175,000 

Equity 

29 Common stock 500,000 

30 Retained earnings 2,535,000 

31 Total Equity 3,035,000 

32 Total Liabilities and Equity 14,210,000 

EP31JY18.010</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

Calculating the Composite Score 

Primary Reserve Ratio = Adjusted Equity 

I Total Expenses and Losses 

Equity Ratio = Modified Equity 

I Modified assets 

Net Income Ratio = Income Before Taxes 

/Total Revenues and Gains 

Lines 

31-11-( 4+ 10)-(8+9)+27+(17+ 19+ 

20+23+24+25) 

40 +42 +44 +45 

31 -(4 +10) -11 

13 -(4 +10) -11 

48 

35 +43 +46 

Step 1: Calculate the strength factor score for each ratio by using the following algorithms: 

Primary Reserve strength factor score = 20 x the primary reserve ratio result 

Equity strength factor score = 6 x the equity ratio result 

Net Income strength factor score= 1 + (33.3 x net income ratio result) 

700,000 

5,900,000 

1,825,000 

13,000,000 

1,070,000 

6,970,000 

If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for that ratio is 3. If the strength factor score for any ratio is less than or equal to -1, the strength factor score for that ratio is -1 

Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three weighted s

Primary Reserve weighted score = 30% x the primary reserve strength factor score 

Equity weighted score = 40% x the equity strength factor score 

Net Income weighted score= 30% x the net income strength factor score 

Composite Score = the sum of all weighted scores 

Round the composite score to one digit after the decimal point to determine the final score 

RATIO 

Primary Reserve Ratio 

Equity Ratio 

Net Income Ratio 

TOTAL Composite Score- Rounded 

Ratio 

0.1186 0.1404 0.1535 

Strength 

Factor 

2.3729 

0.8423 

3.0000 

Weight Composite Scores 

30% 0.7119 

40% 0.3369 

30% 0.9000 

1.9488 

1.9 
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37317 

BILLING CODE 4000–01–C 

■ 9. Appendix B to subpart L is revised 

to read as follows: 

Appendix B Subpart L of Part 668— 

Ratio Methodology for Private NonProfit 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 longterm 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 postemployment 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 nonoperating 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 shortterm 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). 

BILLING CODE 4000–01–P 


daltland on DSKBBV9HB2PROD with PROPOSALS3

EP31JY18.011</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

SECTION 2: F" . lR, ------------ ---- "bilitv S ----- -- --------tal Schedule R, - ---- --------t ------dE -------- --

A Supplemental Schedule must be submitted as part of the required audited financial statements submission. The Supplemental Schedule 

elements required to compute the composite score. Each item in the Supplemental Schedule must have a reference to the Statement of Fin

Activities, Schedule of Natural to Functional Expenses, or Notes to the Financial Statements. The amount entered in the Supplemental Sch

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 instituti

the amount as NA (Not Applicable) and enter zero as the amount in the Supplemental Schedule. The audit opinion letter must contain a p

auditor's additional analysis of the financial responsibility Supplemental Schedule. 

"Financial Responsibility Supplemental Schedule" 

Example location of number in the financial statements and/or notes- the number reference to sample numbers; however, could be more 

statements and/or notes 

Primacy Reserve Ratio: 

Expendable Net Assets: 

31 Statement of Financial Position- Total Net Assets Total net assets 

Statement of Financial Position- Related party receivable and Related party note 

4 disclosure Unsecured related party receivable 

Statement of Financial Position -Contribution receivable, net and Related party Related party contribution receivable

NA note disclosure** with significant relationship 

8 Statement of Financial Position - Property, plant and equipment, net Property, plant and equipment, net 

9 Statement of Financial Position- Lease right-of-use assets, net Lease right-of-use asset, net 

10 Statement of Financial Position -Goodwill Intangible assets 

17 Statement of Financial Position- Post-employment and pension liabilities Post-employment and pension liabil

20 Statement of Financial Position- Note Payable* Long-term debt 

21 Statement of Financial Position- Lease right-of-use of asset liability Lease right-of-use asset liability 

22 Statement of Financial Position -Line of credit- for long-term purposes* Line of credit- for long-term purpos

25 Statement of Financial Position- Annuities** Annuities with donor restrictions 

26 Statement of Financial Position- Term Endowments** Term endowments with donor restri

27 Statement of Financial Position-s-Life Income Funds** Life income funds with donor restri

Net assets with donor restrictions: re

29 Statement of Financial Position --Perpetual Funds** perpetuity 

Total Expenses and Losses: 

EP31JY18.012</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

Statement of Activities- (Investment return appropriated for spending), Total 

Operating Expenses, Investments, net of annual spending gain (loss), Other 

(35), 43, components of net periodic pension costs, Pension-related changes other than net 

45, 46, 47, periodic pension, Change in value of split-interest agreements and Other gains 

48,49 (loss)* Total expenses without donor restrict

Statement of Activities - (Investment return appropriated for spending) and 

(35), 45 Investments, net of annual spending, gain (loss)* Net investment losses 

48 Statement of Activities- Change in value of split-interest agreements Change in value of split-interest agre

Pension -related changes other than n

47 Statement of Activities- Pension-related changes other than periodic pension* costs 

- Equity Ratio: 

Modified Net Assets: 

24 Statement of Financial Position - Net Assets without Donor Restrictions Net assets without donor restrictions 

30 Statement of Financial Position- Total Net Assets with Donor Restriction Net assets with donor restrictions 

10 Statement of Financial Position -Goodwill Intangible assets 

Statement of Financial Position -Related party receivable and Related party note 

4 disclosure Unsecured related party receivables 

Statement of Financial Position -Contribution receivable, net and Related party Related party contribution receivable

NA note disclosure** with significant relationship 

Modified Assets: 

12 Statement of Financial Position- Total assets Total assets 

10 Statement of Financial Position- Goodwill Intangible assets 

Statement of Financial Position- Related party receivables and Related party note 

4 disclosure Unsecured related party receivables 

Statement of Financial Position -Contribution receivable, net and Related party Related party contribution receivable

NA note disclosure** with significant relationship 

Net Income Ratio: 

Change in Net Assets Without Don

51 Statement of Activities- Change in Net Assets Without Donor Restrictions Restrictions 

Statement of Activities- (Net assets released from restriction), Total Operating 

38, (35), 50 Revenue and Other Additions and Sale of Fixed Assets, gains (losses) Total Revenues and Gains 

Lease right-of-use assets, net in place as of711/2019 included in Financial Statements as a result of ASU 2016-02 

Related Lease right-of-use liability for the above Lease right-ofuse assets as a result of ASU 2016-02 

*In the example the number came from the actual financial statements; however, the number could come from the notes of the financial 

statements. 

EP31JY18.013</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

SECTION3: ------- ----------- E le F 

-

------------

· 1 Stat, 

- ------------- t ------dC - ----- - ----te S - - --- Calculaf - ---- ----------

I STATEMENT OF FINANCIAL POSITION I I STATEMENT OF ACTIVITIE

Lin Lin 

e e 

1 Cash and cash equivalents 1,720,000 Changes in Net Assets Without Donor Restriction

2 Accounts receivable, net 6,000,000 Operating Revenue and Other Additions: 

3 Prepaid expenses 1,900,000 

4 Related party receivable 100,000 33 Tuition and fees, net 

5 Contributions receivable, net 2,000,000 34 Contributions 

6 Student loans receivable, net 8,000,000 

7 Investments 6,000,000 

Property, plant and 

35 Investment return appropriated for spending 

8 equipment, net 40,000,000 36 Auxiliary enterprises 

9 Lease right-of-use asset, net 10,000,000 

10 Goodwill 500,000 37 Net assets released from restriction 

11 Deposits 20,000 Total Operating Revenue and Other Additions 

12 Total Assets 76,240,000 38 

Operating Expenses and Other Deductions: 

13 Line of credit - short term 300,000 39 Education and research expenses 

14 Accounts payable 1,000,000 

15 Accrued expenses 3,500,000 40 Depreciation and Amortization 

16 Deferred revenue 650,000 

Post-employment and pension 41 Interest expense 

17 liability 6,600,000 18 Line of credit - operating 200,000 42 Auxiliary enterprises 

19 Other liabilities 1,000,000 43 Total Operating Expenses 

20 Notes payable 24,000,000 21 Lease right-of-use asset liability 10,000,000 44 Change in Net Assets from Operations 

Line of credit for long term Non-Operating Changes 

22 purposes 2,000,000 

23 Total Liabilities 49,250,000 45 Investments, net of annual spending, gain (loss) 

Net Assets without Donor 

24 Restrictions 15,190,000 46 Other components of net periodic pension costs 

Net Assets with Donor Pension-related changes other than net periodic pensi

Restrictions 47 costs 

25 Annuities 300,000 26 Term endowments 50,000 48 Change in value of split-interest agreements 

27 Life income funds 150,000 49 Other gains (losses) 

28 Other restricted by purpose and time 2,500,000 

EP31JY18.014</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

29 Restricted in perpetuity 8,800,000 

11,800,00 50 Sale of fixed assets, gains (losses) 

30 Total Net Assets with Donor Restrictions 0 

26,990,00 Total Non-Operating Changes 

31 Total Net Assets 0 

76,240,00 51 Change in Net Assets Without Donor Restrictions 

32 Total Liabilities and Net Assets 0 Change in Net Assets With Donor Restrictions 

52 Contributions 

53 Net assets released from restriction 

54 Change in Net Assets With Donor Restrictions 

Calculating the Composite Score 

Primary ReseiVe Ratio = Adjusted Equity 

I Total Expenses and Losses 

Equity Ratio = Modified Equity 

I Modified assets 

Net Income Ratio = Income Before Taxes 

Total Revenues and Gains 

55 Change in Net Assets 

56 I Net Assets, Beginning of Year 

31 Net Assets, End of Year 

Lines 

31-11-( 4+ 10)-(8+9)+27+(17+ 19+ 

20+23+24+25) 

40 +42 +44 +45 

31 -(4 +10) -11 

13 -(4+10)-11 

48 

35 +43 +46 

Step 1: Calculate the strength factor score for each ratio by using the following algorithms: 

Primary ReseiVe strength factor score = 10 x the primary reseiVe ratio result 

Equity strength factor score = 6 x the equity ratio result 

Negative net income ratio result: Net Income strength factor= 1 + (25 x net income ratio result) 

Positive net income ratio result: Net income strength factor= 1 +(50 x net income ratio result) 

Zero result for net income ratio: Net income strength factor= 1 

If the strength factor score for any ratio is greater than or equal to 3, the strength factor score for the ratio is 3. 

700,000 

5,900,000 

1,825,000 

13,000,000 

1,070,000 

6,970,000 
BILLING CODE 4000–01–C 


EP31JY18.015</GPH>daltland on DSKBBV9HB2PROD with PROPOSALS3

If the strength factor score for any ratio is less than or equal to -1, the strength factor score for the ratio is -1. 

Step 2: Calculate the weighted score for each ratio and calculate the composite score by adding the three weighted scores 

Primary Reserve weighted score = 40% x the primary reserve strength factor score 

Equity weighted score = 40% x the equity strength factor score 

Net income weighted score = 20% x the net income strength factor score 

Composite Score = the sum of all weighted scores 

Round the composite score to one digit after the decimal point to determine the final score 

RATIO Ratio Factor C

PrimaryReserveRatio 0.1855 1.8553 40% 

Equity Ratio 0.3489 2.0933 40% 

NetlncomeRatio (0.0015) 0.9622 20% 

TOTAL Composite Score- Rounded 
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 37323 

PART 674—FEDERAL PERKINS LOAN 

PROGRAM 

■ 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. 

■ 11. Section 674.33 is amended by: 

■ a. Revising paragraph (g)(4). 

■ b. In paragraph (g)(8)(i), removing the 

number ‘‘120’’ and adding, in its place, 

the number ‘‘180’’. 

The revision reads as follows: 

§ 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 teachout 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 

■ 12. The authority citation for part 682 

continues to read as follows: 

Authority: 20 U.S.C. 1071–1087–4, unless 

otherwise noted. 

§ 682.202 [Amended] 

■ 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 

§ 682.405(b)(4), a’’. 

■ 14. Section 682.402 is amended by: 

■ a. Revising paragraph (d)(1)(i). 

■ b. Revising paragraphs (d)(3) 

introductory text through (d)(3)(ii)(C). 

■ c. Redesignating paragraphs (d)(3)(iii) 

and (iv) as paragraphs (d)(3)(iv) and (v). 

■ d. Adding a new paragraph (d)(3)(iii). 

■ e. Revising paragraph (d)(6)(ii)(B). 

■ f. Revising the introductory text of 

paragraph (d)(6)(ii)(F). 

■ g. In paragraph (d)(6)(ii)(F)(3), 

removing the number ‘‘120’’ and adding, 

in its place, the number ‘‘180’’. 

■ h. In paragraph (d)(6)(ii)(F)(5), 

removing the words ‘‘and sworn 

statement’’. 

■ i. Revising paragraphs (d)(6)(ii)(G) and 

(H). 

■ j. Adding paragraph (d)(6)(ii)(J). 

The revisions and additions read as 

follows: 

§ 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 § 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 teachout 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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37324 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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 § 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 

§ 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. 

* * * * * 

■ 15. Section 682.405 is amended by 

adding paragraph (b)(4)(ii) to read as 

follows: 

§ 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 § 682.202(b). 

* * * * * 

■ 16. Section 682.410 is amended by 

revising paragraphs (b)(2) and (4) to read 

as follows: 

§ 682.410 Fiscal, administrative, and 

enforcement requirements. 

* * * * * 

(b) * * * 

(2) Collection charges. (i) Whether or 

not provided for in the borrower’s 

promissory note and subject to any 

limitation on the amount of those costs 

in that note, the guaranty agency may 

charge a borrower an amount equal to 

the reasonable costs incurred by the 

agency in collecting a loan on which the 

agency has paid a default or bankruptcy 

claim unless, within the 60-day period 

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 § 682.200(b) (Satisfactory 

repayment arrangement), § 682.405, or 

paragraph (b)(5)(ii)(D) of this section. 

An acceptable repayment agreement 

constitutes a repayment arrangement or 

agreement on repayment terms 

satisfactory to the guaranty agency, 

under this section. 

(iii) The costs under this paragraph 

(b)(2) include, but are not limited to, all 

attorneys’ fees, collection agency 

charges, and court costs. Except as 

provided in §§ 682.401(b)(18)(i) and 

682.405(b)(1)(vi)(B), the amount charged 

a borrower must equal the lesser of— 

(A) The amount the same borrower 

would be charged for the cost of 

collection under the formula in 34 CFR 

30.60; or 

(B) The amount the same borrower 

would be charged for the cost of 

collection if the loan was held by the 

U.S. Department of Education. 

* * * * * 

(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 

■ 17. The authority citation for part 685 

continues to read as follows: 

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

unless otherwise noted. 

■ 18. Section 685.200 is amended by 

adding paragraphs (f)(3)(v) and (f)(4)(iii) 

to read as follows: 

§ 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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 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. 

* * * * * 

■ 19. Section 685.206 is amended by 

revising paragraph (c) and adding 

paragraph (d) to read as follows: 

§ 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 


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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 


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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) 


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37328 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

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. 

* * * * * 

■ 20. Section 685.212 is amended by 

adding paragraph (k) to read as follows: 

§ 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 § 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 § 685.206(c) or (d), 

respectively. 

(2) [Reserved] 

* * * * * 

■ 21. Section 685.214 is amended by: 

■ a. Revising paragraphs (c)(1) 

introductory text through (c)(1)(i)(C). 

■ b. Redesignating paragraphs (c)(1)(ii) 

and (iii) as paragraphs (c)(1)(iii) and (iv). 

■ c. Adding a new paragraph (c)(1)(ii). 

■ d. In paragraph (f)(1), removing the 

number ‘‘120’’ and adding, in its place, 

the number ‘‘180’’. 

■ 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: 

§ 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; 

* * * * * 

■ 22. Section 685.215 is amended by: 

■ a. Revising paragraph (a)(1)(i). 

■ b. Revising paragraphs (c) 

introductory text through (c)(1)(ii). 

■ c. Revising paragraphs (d)(1) through 

(3). 

The revisions read as follows: 

§ 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 


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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 

§ 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. 

* * * * * 

■ 23. Section 685.300 is amended by: 

■ a. Revising paragraph (b)(8). 

■ b. Removing the word ‘‘and’’ at the 

end of paragraph (b)(10). 

■ c. Redesignating paragraph (b)(11) as 

paragraph (b)(12). 

■ d. Adding a new paragraph (b)(11). 

The revision and addition read as 

follows: 

§ 685.300 Agreements between an eligible 

school and the Secretary for participation in 

the Direct Loan Program. 

* * * * * 

(b) * * * 

(8) Accept responsibility and financial 

liability stemming from its failure to 

perform its functions pursuant to the 

agreement; 

* * * * * 

(11) Accept responsibility and 

financial liability stemming from losses 

incurred by the Secretary for repayment 

of amounts discharged by the Secretary 

pursuant to §§ 685.206, 685.214, 

685.215, and 685.216; and 

* * * * * 

■ 24. Section 685.304 is amended by: 

■ a. Revising paragraphs (a)(3)(iii) and 

(a)(5). 

■ b. Removing the word ‘‘and’’ at the 

end of paragraph (a)(6)(xii). 

■ 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: 

§ 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 

§ 668.41(h)(2)(iii) of this chapter, or to 

sign a class action waiver, as defined in 

§ 668.41(h)(2)(i) and (ii) of this chapter, 

the school must provide a written 

description of the 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 

§ 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 § 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 

* * * * * 

■ 25. Section 685.308 is amended by 

revising paragraph (a) to read as follows: 

§ 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 § 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 


daltland on DSKBBV9HB2PROD with PROPOSALS3
37330 Federal Register / Vol. 83, No. 147 / Tuesday, July 31, 2018 / Proposed Rules 

in part, pursuant to §§ 685.206, 685.214, 

and 685.216. 

* * * * * 

[FR Doc. 2018–15823 Filed 7–25–18; 4:15 pm] 

BILLING CODE 4000–01–P 


daltland on DSKBBV9HB2PROD with PROPOSALS3